Victor Allgeier - TTC Group, IR Jeff Rittichier - Chief Executive Officer Mark Weinswig - Chief Financial Officer.

Dave Kang - B. Riley Gus Richard - Northland.

Good day, ladies and gentlemen. And welcome to the EMCORE Corporation Third Quarter 2015 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded.

I’d now like to introduce your host for today’s conference, Victor Allgeier, with TTC Group. You may begin..

Thank you, and good afternoon, everyone. Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934.

These forward-looking statements are largely based on our current expectations and projections about future events and trends affecting our business.

Such forward-looking statements include particular, projections about our future results, about our plans, strategies, business prospects, changes and trends in our business, and markets in which we operate.

Management cautions that these forward-looking statements relate to future events or future financial performance and are subject to business, economic and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements.

Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in our filings with the U.S.

Securities and Exchange Commission that are available on the SEC’s website located at www.sec.gov, including the sections entitled Risk Factors in our annual report on Form 10-K and our quarterly reports on Form 10-Q.

We assume no obligation to update any forward-looking statements to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation. With us today from EMCORE are Jeff Rittichier, Chief Executive Officer; and Mark Weinswig, Chief Financial Officer.

Mark will review the financial results and Jeff will discuss business highlights, before we open the call up to questions. I’ll now turn the call over to Mark..

Thank you, Vic, and good afternoon, everyone. Today, I’m going to focus my discussion on our third fiscal quarter operating results and our balance sheet. Please note that consistent with the prior quarter, today’s results include the effects of classifying our Telecom division and Photovoltaics segment as discontinued operations.

Therefore, the results we have released and we will discuss today are only for our Broadband Fiber Optics division. Consolidated revenue for our third fiscal quarter totaled $21.2 million, which is an increase of $2.1 million or 11% over the prior quarter.

The strong results were due to the continued momentum in Cable TV from numerous customers and strength in our components and Specialty Photonics product lines. Our Q2 2015 revenue guidance was $19 million to $21 million. Jeff will discuss the outlook for the business later in the call.

Broadband Fiber Optics gross margin was 36.3%, a 2.8 percentage point increase from the prior quarter, primarily due to higher revenue, lower unfavorable variances and reserves, and better factory utilization and absorption of the fixed costs as a percentage of revenue.

We did see favorable product mix in the quarter, which contributed to our gross margins being higher than expected. While we are implementing new strategies that should improve our operating model in future quarter, those activities could lead to some additional costs in the couple of quarters, as Jeff will describe further.

Broadband Fiber Optics segment, over the past four years, we’ve seen a significant improvement in the results and outlook. In general, after more than two years of tough times, we believe that the Cable TV Optical Network Infrastructure business is seeing improving market trends.

Looking forward, EMCORE is currently seeing significant design activity for new design and prospects giving us some confidence and additional opportunity. Total operating expenses for R&D and SG&A were $6.8 million, down $1.2 million from the prior quarter.

The decrease was primarily due lower stock-compensation and lower compensation costs associated with the transaction and transition. On a GAAP basis, the consolidated net income for the third quarter was $2.4 million, which includes approximately $2 million of net income from discontinued operations.

Our GAAP net income from continued operations was approximately $0.5 million or $1.4 million from the prior quarter, primarily from higher gross profits and lower SG&A expenses.

Our non-GAAP net income from continuing operation, after excluding certain adjustments, all of which are set forth in the non-GAAP tables, included in today’s release, was $1.3 million of income versus being roughly breakeven in the prior quarter. The significant improvement was due to higher revenues and gross profits, and lower corporate costs.

Please note that we have included additional information regarding amortization, stock comp and other items in today’s release to provide further clarity on our results. Moving on to the balance sheet, at the end of June, the company’s cash and cash equivalents balance was $114 million.

The reduction in cash from March was due to the purchase of $45 million stock related to the Dutch Auction tender offer which concluded in June. EMCORE purchased 6.9 million shares in mid-June.

As a result, we expect our share count to fall significantly in the fourth quarter as only about 15% of the full impact of the buyback was realized in the third quarter for income statement purposes. Therefore, our share count in September should be approximately 26 million to 26.5 million shares.

As discussed last quarter, we received $15.7 million in cash proceeds in April 2015 from the paydown of the promissory note relating to the Telecom sale. Regarding our working capital metrics, DSO’s improved to approximately 60 days below our typical range of 65 to 70 days, due to more linear shipments throughout the quarter.

Inventory turns was 3.2 times. Overall, for the third quarter, the Broadband Fiber Optics’ financial results showed continued strength. As a result of improved manufacturing efficiencies, lower reserves and higher operating performance, EMCORE realized significantly higher gross margins and strong overall financial result.

Gross margins of 36% for the Broadband business were the highest levels the company has realized in the past five years. And more importantly, EMCORE’s continuing operations are profitable on both the GAAP and non-GAAP basis, and we generate cash from operations.

Our corporate costs are out significantly primarily due to the completion of the divestiture-related transition activities. We continue to perform related work and activities associate with the integrating the division that we have sold albeit at significantly lower levels.

We expect our G&A levels to be relatively flat over the next couple of quarters. We continue to see significantly higher than average legal-related cost associated with prior divestitures. We believe that those costs will be reduced beginning next calendar year.

Currently, those costs are running at more than $500,000 per quarter and could increase in future quarters.

Turning to our operating model, as we discussed last quarter, our goal is to be at a breakeven level on a non-GAAP basis, excluding the items we noted earlier, an $18 million to $19 million per quarter revenue run rate, depending on product mix and the timing of certain spending.

During the third fiscal quarter on $21 million of revenue, we realized $1.3 million of non-GAAP net income. In summary, we were very happy with the financial results. With that, I will turn the call over to Jeff, who has got his reflections on the company's strategic and operating initiatives and provide revenue guidance for the fourth quarter.

Jeff?.

Thanks Mark. First of all, I’d like to take a moment to thank the entire EMCORE team for executing our plan so well this quarter and for producing such outstanding financial results. As Mark stated, our consolidated revenue for the third fiscal quarter totaled $21.2 million which was an increase of $2.1 million or 11% over the prior quarter.

The strong results were due to both continued momentum in cable television from numerous customers and strength in both our optoelectronic components and specialty photonics product lines. Our Q3 ‘15 revenue guidance was $19 million to $21 million. So these results exceeded our guidance and expectations nicely.

Our gross margins of 36.3% are the highest levels the company has realized in at least past five years, reflecting improvements not just in volume but in operating efficiency. Most importantly, EMCORE continuing operations were profitable on both the GAAP and non-GAAP basis, generating positive cash flow from operations.

Now, let me direct my remaining comments toward some high level points about the company and then about the broadband fiber optics business.

As I stated last quarter in our call, our business going forward includes three areas, optical components and transmitters for cable television infrastructure, optoelectronic components as well as video and specialty products, okay.

Because of increased demands for bandwidth from both consumers and businesses, we’ve continued to see strong demand for our cable television transmission products and we expect this trend to continue. If we examine the MSO CapEx levels, we’re seeing that spending has been robust.

For example and as a percentage of revenue, one of the major MSOs just announced their quarterly total CapEx was 21.3% compared with 19.6% in the previous quarter and 21.7% last year. This is significantly above their historical rates of 14.5%.

As in the case of another major MSO, they've also shown relative sequential increase in infrastructure spending in the quarter, outpacing customer premise equipment CPE spending as well.

With spending directed more toward optical infrastructure equipment as opposed to those in set-top boxes, the overall environment with the MSOs has strengthened EMCORE’s cable television business.

As the industry migrates to the new DOCSIS 3.1 technology in calendar ‘16, we will expect to see the normal sorts of product change activity, such as inventory reductions on older product by our customers even though the overall trends for spending are positive and strong.

The industry remains very competitive and our customers, the OEMs, continue to consolidate as evidenced by the recent Aurora Pace-Arris merger.

I thank the entire EMCORE team in my opening remarks for our strong performance because I do believe we’re now starting to see the results of the changes that we are making in our sales, marketing, engineering and operations groups.

We've improved inventory turns, cycle times shipment linearity and several of other important internal operating metrics that give us confidence that we’re driving waste out of our business. I had also mentioned in our previous two calls that EMCORE will be focusing its efforts on operational excellence.

And this quarter's results reflect the early results of those efforts. Over the past seven months, we trained 100% of the company's professional staff to the Six Sigma White Belt level and have placed nearly a third of the company's professional staff into Green Belt training.

Within a year or so, we’ll expect between 15% to 20% of our professional organization will actually be certified as Six Sigma Black Belts. What this really means is that EMCORE will be able to permanently improve our processes and drive waste out of every phase of the business from sales to operations.

Additionally, we’ve installed the comprehensive management system from top to bottom that’s improved our operational focus and execution. As a team, EMCORE is simply performing better right now.

We’ve strengthened our senior management team with the addition of Dave Wojciechowski as the VP of Sales and Shane Mortazavi as VP of Global Assembly Operations and have completed other changes in responsibility in our senior team that we expect to streamline our processes.

The strengthened team is prepared to take EMCORE forward toward comprehensive operational excellence. Furthermore, we’ve augmented our advanced development team with several extremely accomplished technologists and are returning the company to its position as a leading innovator in optoelectronics.

While the company's quarterly results were excellent, we got lots of opportunity ahead of us to drive waste of our manufacturing operations using Six Sigma and Lean principles as well as to take advantage of and extend our tactical leadership position.

Over the quarter, we’ve achieved several significant design wins with the leading equipment OEMs which incorporates our new high performance linear components. These devices completed qualification on schedule last quarter and have virtually unmanaged specifications as standalone devices.

The successful commercialization of this technology represents an important new opportunity for our Cable Television business over the next few years.

Outside of Cable Television, we’ve seen excellent growth in our merchant chip business and have secured commitments for increased demand from telecom module manufacturers across several different product applications.

We are ramping quickly in both DFB and APD chips for the fast-growing Chinese GPON market and have received commitments from our customers for strong demand in this segment. We are adding additional capacity in our fab to meet this demand and the demands for other high-performance chips, targeted at additional telecom applications.

EMCORE staff has been one of the bright spots in the company’s strong performance and we expect to see additional improvements in operating efficiencies as we add operating leverage into the chip fab or singulation area through new automation initiatives and see the benefit of those projects reflected in both reduced costs and improved yields.

Additionally, we are planning on investing significant capital in the fab itself to improve both the cost and the cycle times of our fab operations. It’s safe to say that going forward, EMCORE will be more chip centric in its strategy and in its operations.

We plan to leverage these strong capabilities in indium phosphide phosphate and especially aluminum-based compounds to create differentiation in our product and act barriers to entry against our competitors.

EMCORE was one of the pioneers in this industry and I’m looking forward to making it return to its roots in innovation in optical semiconductors.

Even with the strength of our Cable TV, chip products, we retained good prospects for our video and specialty products, leveraging what is largely the same core technology as our Cable Television product line.

We are meeting market demands for relatively small niches in aerospace, satellite communications and industrial markets with these unique long lifecycle and high gross margin products. During the June quarter, we also shipped additional product units of our Fiber Optics [telescopes] [ph] to a third customer.

As we complete our first strategic planning process over the next month, we'll expect to see some changes in which product lines we emphasize going forward and should be able to discuss this with you at the end of our fourth quarter.

Already, we are in the process of moving several of the Satcom and video manufacturing operations to EMS assembly and test in order to improve our margins and reduce the scope of our internal U.S. manufacturing.

Furthermore, we are also working to source more assemblies, which are currently build at EMCORE China for EMS suppliers where make and buy decisions are favorable to these sorts of actions.

EMCORE’s Chinese operations are also been focused on places in the manufacturing process and supply chain, where we add the most value and wafer commodity production. We expect to strengthen EMCORE China’s team and insert automation and yield improvement projects, which are already being developed through our Six Sigma Green Belt programs.

The team has done a superb job deploying our Six Sigma programs in China and we are already starting to see results.

As Mark indicated, we’ve nearly completed our strategic alignment with the closing of the NeoPhotonics transaction and have returned cash to our shareholders over the past quarter through the successful completion of our share repurchase.

In addition to these strategic milestones, we’ve also made significant improvements in the way that we manage and execute in this business and I’m looking forward to completing my first strategic planning cycle in mid-September.

I’m also looking forward to updating all of you on our plan for FY ’16 and its initiatives after the close of the fiscal year. Turning to guidance for the fourth quarter of fiscal 2015, our revenue expectation is in the range of $22 million to $24 million.

Overall the trends in Cable Television are strong and at the same time, we are cognizant of the expected inventory reductions to our customers and the upcoming product changes in our customer base. We continue to right size our cost structure and work to improve our margins and we expect our non-GAAP earnings and cash flow to remain strong.

I would point out that we are involved with an ICC arbitration with Sumitomo that has to run its course and we will expect to see unusually high legal expense in the fourth quarter and into Q1 of FY ’16. We may also incur some additional charges in the movement of our product lines to EMS.

In summary, my team’s ahead of plan and I'm thrilled to see that we are creating opportunities for investment in our major product lines that offer the opportunity for improved growth going forward.

In closing, once more I’d like to thank the EMCORE team for their efforts this quarter and state that I’m looking forward to updating you all in early November at the close of our fiscal year. With that, I will now turn the call over to Q&A..

Thank you. [Operator Instructions] Our first question comes from the line of Dave Kang with B. Riley. Your line is open. Please go ahead..

Thank you. Good afternoon..

Hey Dave..

Hi. First of all, just a clarification regarding -- I think I heard you say legal costs were about $0.5 million.

Was that in the $6.8 million in OpEx?.

Yes, it was. Our operating expenses were more than $500,000 in the quarter relating to some of the legal issues that we have outstanding..

And sounds like it’s going to kind of stay at that level this quarter and maybe kind of come down little bit in first quarter.

Is that bout right?.

The comments of both Jeff and my section, we do expect these legal expenses to remain high throughout this calendar year and then in mid, it would start to decrease beginning in next calendar year, in calendar year 2016..

Got it. And then gross margin, 36% is very impressive.

Now is this sustainable or would there be any kind of one-time stuff or just…?.

Obviously I will let Jeff kind of talk about one or two of the business areas. But from the perspective of, in terms of the gross margins, as we noted in today’s discussion, we did see some positive trends and positive product mix in the quarter. As we’ve discussed before, we think that for us gross margins in the mid-30s is a good level.

So obviously, we came in a little bit north of that. There are some opportunities for additional margin in future quarters. But if you can take a little bit of investment, I will let Jeff kind of describe some of the things that we’re doing right now to look forward to higher gross margins in the future..

Yes. Hey, Dave..

Hi..

One of the nice benefits that we get from this growing chip business is that when you take a look at the total number of devices rolling out of both wafer fab and chip fab, as they over absorb overhead and bring down our standards that also helps our cable television product line as well.

So you’re seeing not just the impact of the growth in telecom chips, but that reflection in improved margins and cable television. I will also say that our cycle times are coming down across the board and that is a good sign from a standpoint of all of the other things that matter.

You really can’t bring down cycle times unless your yields are improving and you have other aspects of your operation under control. So yes, we had good mix, but we are also doing the right things as well. So as Mark said, we’ve got a little bit of investments to make, but we’ve got reason to be cautiously optimistic..

Got it.

And then speaking of the chip business, what was it? I think it was about 1.5 last quarter or the previous quarter?.

Yes. In the prior quarter, in our March quarter we did about 1.5 million and we did see that number ramp up to a little bit more than $2 million in the quarter..

$2 million, wow, impressive. So how big can this business go? I mean, I guess, you’re ramping capacity, so it sounds like you used to have a lot of capacity but not anymore.

So how big can this business get to?.

Well, it’s an interesting question, Dave. What we’re doing is actually ramping a couple of let’s just call it major product lines. One of them is obviously to serve our Chinese GPON customers, but we are also doing some things in high performance telecom modules. I am just not at liberty to talk about..

Yes, okay..

So what you are going to see is EMCORE producing the combination of very high volume chips and also very high value-added chips. And the short answer is that we think that this can be a very material part of our business and we are putting a lot of effort into growing it. And it’s not just GPON, it’s some of the other areas as well..

Right.

Now your module customers, I mean they typically go through annual price reduction, do you guys go through the same or similar annual reduction, or it is more like a biannual, how does it work?.

It depends on the customer. In some cases, you got guys that are going to do yearly negotiation. In other cases, you will look at it quarterly. If there are particularly tough bids, we even get customers that will come back to us for a substantial chunk of production and they want some sort of price relief on.

So it really depends on the customer and there is no simple answer to it, but it’s -- if you caught it quarterly to semiannually date, you would be good enough..

Got it.

Now the fact that this is Chinese GPON rather than US GPON, are you giving up a little bit of a pricing to get Chinese business?.

Well, the Chinese are very, very aggressive in their pricing. I would say that we’re able to price at market, which is obviously producing favorable results. We really don’t see a huge amount of GPON business in the US. The deep fiber stuff is really greenfield builds and RF over Glass, which is a different architecture.

And we are now qualified to start shipping some product into those applications as well. That happened right at the end of the quarter. And so we’ve got a couple months to start to understand what our share of that will look like, but we’ve got again some reasons to be optimistic about our ability to compete there as well..

Got it. And the last question is regarding your $140 million cash, I am only asking because a lot of investors are asking me. So what’s your plan with your cash? Will it be acquisitive or maybe pay special dividend or….

So you’ve got the Strategic Alternatives Committee and Steve Becker and Gerry Fine and Steve Domenik are members of that group and as well as myself. And we are looking at a lot of different opportunities. Of course, we have to be mindful of the 382 issues and box of the NOLs. We also have this Sumitomo situation sort of hanging over us at this point.

And while we believe they will prevail, you got to be cautious with the cash until you know that that’s behind you. So I wouldn’t say that there is anything imminent as far as actions from the Strategic Alternatives Committee, but we meet regularly and depending on what the Board sees as the opportunities, we may or may not take actions earlier.

But yes, you are right, Dave, I mean, you could do some sort of special dividend, return of capital. There is limits again on another buyback from a standpoint of the number of shares that we can repurchase before trigger loss of some of the NOLs and it’s a pretty complex team that we are constantly reviewing.

And that’s the best answer I can give you..

Sure. Appreciate it.

Just one more on speaking of NOL, so has the value of NOLs changed because of the Dutch auction and how much is it right now?.

Yes. We did our last analysis back in time of filing our last 10-K, Dave. And we had more than almost $400 million worth of NOLs at that time. Obviously at that time, we have had -- we’ve done two significant transactions of divestitures. So as we get to the end of this year, we will be finalizing our figures in terms of NOLs.

But I would say that the good news is that we do still have a significant amount of NOLs that we can use to offset income from continuing operations..

Got it. Thank you. Good job..

[Operator Instructions] And our next question comes from the line of Gus Richard with Northland. Your line is open. Please go ahead..

Yes. Thanks for taking the question. In terms of the gross margin in the quarter you had three factors that helped them. One was lower reserves mix and then better absorption.

Could you sort of size the relative impact of those three things on gross margin in the quarter?.

Yes. Gus, thank you for the question. So just to give some perspective, I mean, we have start seeing lower reserves overall for the business just because of the increase in the overall outlook. And what we’ve been seeing over the last few quarter in terms of any potential access and obsolete.

On the absorption area and favorable variances from our manufacturing, with the increase in our volume, we’ve be able to ship out more products, have much more backlogs, we can more linearly produce product and ship it out. That’s also been a favorable factor.

The third item, which is the product mix, that’s the one that obviously it’s a little bit harder to control from our perspective. It really depends on the customers, the timing of when we get orders, which products were she getting in for.

So in terms of our target model, we do still continue to believe that in the mid 30s is closer to kind of where our target margins are at this time. Obviously, Jeff talked about a lot of potential opportunities to increase our margins going forward.

But I would say that we have conceived the product mix, Gus, give us a little bit of favorable trend this quarter, and obviously hopefully that Board is quite happy by the results..

Got it. Thanks.

And then when you’re going to be outsourcing some of your assistance business too, as far as from the assemblies in order to help your margins? Over what period of time will that take place and the incremental cost for making those things happen, does that flow through the R&D line or SG&A or how should I think about that?.

Hey, Gus. This is Jeff. The best way to think of it at this point is that its going to flow through R&D and potentially a little bit through manufacturing engineering, which could get picked up in product margin a little bit.

As far as any other charges with respect to E&O or transfer of inventory, it’s little too early in the game to give you specific guidance in that area.

I think the important point that I’d like you to takeaway is that, what we’re really doing with manufacturing is taking a look at the entire value chain and deciding where we EMCORE can add value and only concentrate on those areas.

So its not that there is a specific -- I did mentioned, Satcom and video, but we’re looking at a broader set of questions strategically from an operations perspective and you should expect to see some movement in that regard, which will communicate after the end of the fiscal year.

But we’ll expect that to be, obviously, a net positive, but we wouldn’t be doing it..

Got it.

And then, finally for me, your inventory was up just a little bit and I’m just sort of wondering how to think about that line going forward on the balance sheet? Will you have as more flow through your fab? You have the increased, have to hold more inventory for your customers and sort of how are you managing that as you ramp up these new products, et cetera, and why more on the chip business?.

Yes. Gus, thanks for the question. We’ve actually seen some positive trends in our inventory turns over last few quarters. Jeff talked a little bit about last quarter, a little bit on this quarter in terms of utilizing lean manufacturing techniques and other types of strategy that we have not really implemented before.

And as a result, as you know, we do believe that that coupled with just different manufacturing strategies going forward. We will start to be able to see our inventory turns continue to increase and have fewer amounts of investments in inventory, which is obviously our goal. So, we actually think that we should have positive trends going forward..

Okay. Got it. All right. Thank you so much and nice quarter..

Thanks, Gus..

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back over to management for any closing remarks..

Yeah. In closing, I’d like to say, thank you to everybody that’s been on the call and all of the investment community for their support and interest, as we started to make the big changes in EMCORE, which hopefully will make it a far more attractive investment going forward. Thank you very much for your time..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day..