Victor Allgeier - IR, TTC Group Mark Weinswig - CFO Jeffrey Rittichier - President and CEO.

David Kang - B. Riley & Co..

Good day, ladies and gentlemen, and welcome to the EMCORE Corporation Fourth Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's conference, Mr.

Vick Allgeier. Sir, 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 in particular projections about our future results, about our plans, strategies, business prospects, changes and trends in our business, and the 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 Web-site 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, Vick, and good afternoon everyone. Today I'm going to focus my discussion on our fourth fiscal quarter operating results and our balance sheet. Please note that consistent with the prior quarters, today's results include the effects of classifying our Telecom and Photovoltaics segments 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 fourth fiscal quarter totaled $23 million, which is an increase of $1.8 million or roughly 9% over the prior quarter.

The strong results were due to continued strength in our components and specialty photonics product lines. Our Q4 2015 revenue guidance was $22 million to $24 million. Jeff will discuss the outlook for the business later in the call.

Broadband Fiber Optics gross margin was 41.1%, a 4.8 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.

These items coupled with a favorable product mix in the quarter helped lead to our gross margins being on the high side.

While we are implementing new strategies that should improve our operating model in the future periods, those activities will lead to some additional costs in the next couple of quarters, as we discussed in the prior quarter, and will take some time to realize. As a result, we would expect our gross margins to be in the mid 30s for the first quarter.

In the Broadband Cable TV segment, over the past five quarters we have seen a significant improvement in the results and outlook. In general, after tough times in 2012 and 2013, the Cable TV Optical Network Infrastructure business has seen improving market trends.

Looking forward, EMCORE is seeing robust activity for new design and prospects that should lead to additional revenue opportunities in the future. In the Chip Level Device products, our revenues have grown significantly from two years ago. This quarter we reached more than $4 million, the highest level yet achieved.

Jeff will discuss the outlook for this product line later in the call. Total operating expenses for R&D and SG&A were $8.2 million, up $1.4 million from the prior quarter. The increase is primarily due to higher compensation costs associated with new hires and additional sales related expenses in addition to costs associated with our year-end work.

In SG&A, we expensed more than $800,000 associated with our arbitration activities and we expect similar levels in Q1 of 2016. We expect to see a significant reduction thereafter. On a GAAP basis, the consolidated net income for the fourth quarter was $1.5 million, which includes the $0.1 million of net income from discontinued operations.

Our GAAP income from continuing operations was $1.4 million, a $0.9 million improvement from the prior quarter, primarily from higher gross profits and lower SG&A expenses.

Our non-GAAP 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 $2.7 million of income versus $2 million in the prior quarter. The significant improvement was due to higher revenues and gross profits, partially offset by higher operating expenses.

Please note that we have included additional information regarding amortization, stock comp, legal related costs and other items in today's release to provide further clarity on our results. Moving on to the balance sheet, at the end of September, the Company's cash and cash equivalents balance and restricted cash was roughly $112 million.

The reduction in the cash balance from the June quarter was due to pay-down of certain liabilities and investments in working capital from higher revenue. Regarding our working capital metrics, DSOs were at 68 days, with our typical range of 65 to 70 days, due to linear shipments throughout the quarter, partially offset by the Chinese holiday.

Inventory turns was 3.2 times. Overall, for the fourth quarter, the Broadband Fiber Optics' financial results showed continued strength. As a result of improved manufacturing efficiencies and increased revenues, EMCORE realized significantly higher gross margins and strong overall financial results.

Most importantly, EMCORE's continuing operations were profitable on both the GAAP and non-GAAP basis. On the operating expense area, as we've discussed previously, we saw significant increase in expenses in Q4 due to higher headcount and sales and marketing related activities, and additional costs for the arbitration and other corporate activities.

We expect our SG&A levels to increase in the December quarter and then to decrease beginning in calendar year 2016. Turning to our operating model, our goal is to be at breakeven level on a non-GAAP basis, excluding the items we noted earlier, at $20 million per quarter of revenue, depending on product mix and the timing of certain spending.

During the fourth fiscal quarter, on $23 million of revenue we realized $2.7 million of non-GAAP income from continuing operations. In summary, we were very happy with the financial results. Now looking back at the full year, we met a few significant financial goals in fiscal year 2015 that deserve some recognition.

First, revenue increased 27% from the prior year to $82 million, the highest level achieved for the broadband business since 2008. Second, gross margins increased more than 13 percentage points to over 35%, one of the highest levels achieved for the broadband business.

And third, the operating loss improved by more than $20 million over the prior year. While we were not profitable on a continuing basis for the full year, these were close to record results. Finally, with the improved results and large cash position, the Board of Directors is continuing to review options to enhance shareholder value.

In that vein, as we announced in today's release, the Board of Directors continues to evaluate the Company's cash needs. At this time, the Company expects to approve a cash dividend or distribution to shareholders, with the timing and amount to be determined in a few months following completion of a review.

With that, I will turn the call over to Jeff who will discuss his reflections on the Company's strategic and operating initiatives and provide the revenue guidance for the first quarter.

Jeff?.

Thank you, Mark. To begin, I'd like to take a moment to thank the entire EMCORE team for a record quarter. A lot of hard work has been done over the past year and it is especially rewarding when we can see the result of such efforts reflected in the financials.

As Mark stated, the highlight of the quarter was that our Broadband Fiber Optics gross margin grew to 41.1%, a 4.8% increase from the prior quarter. This improvement was driven by higher revenue, lower unfavorable variances and reserves and better factory utilization as well as the absorption of the fixed cost as a percentage of revenue.

At $23.0 million, the midpoint of our range, our revenue increased $1.8 million or 9% over the prior quarter. Again, these results were due to continuous strength in our component as well as our specialty photonics product lines.

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

Now let me direct my comments toward the Company and then about the Broadband Fiber Optics business which includes our cable television, high frequency, specialty and telecom chip product lines.

As we described back in August, the cable television transmission product business remain strong but consolidation at the MSO and OEM levels has caused a bit of turbulence and some buildup of inventory that is currently winding itself down.

When viewed against a backdrop of MSO spending which is uniformly high, we expect any softness to be short-lived, although the relative percentages of CapEx spend can shift between optical infrastructure and customer premises equipment, and as a result be unpredictable.

Even though we saw just such a swing between Q3 and Q4, orders for our product did not reflect this, resulting in a small buildup of inventory in the channel. We have already seen signs that this situation is resolving itself and our customers are telling us that their fundamentals are strong.

As the industry migrates to the new DOCSIS 3.1 technology in calendar year 2016, we will expect to see the normal sort of product change activity in the first half of the year, such as inventory reductions on older products by our customers. These are usual and customary and have been figured into our planning cycle.

The industry remains very competitive and our customers, the OEMs, continue to consolidate as evidenced by the recent Aurora-Pace-ARRIS announcement and some activity in the MSO space. In Cable Television, we achieved significant design wins over the quarter with leading equipment OEMs which incorporate our new linear EML.

These transmitters are now nearing production and are in qualification trials with the MSOs, as we expected. The successful commercialization of this technology represents new opportunity for our Cable Television business over the next few years.

Outside of Cable Television, we've seen strength in our merchant chip business but are mindful of the strong competitive pressure developing in the GPON market. Supply of GPON chips have nearly reached demand as of this time and we expect that this will drive our consolidated margins toward the mid 30s going forward.

I would also point out that nearly 30% of our chip business this year is expected to be from outside of the GPON application in areas where we can add greater value. EMCORE's fab continues to grow in output, but we fully intend to become a broad-based supplier of chip level products to the entire telecom industry as well as the GPON chips.

All these products will be able to take advantage of additional improvements that we are making in operating efficiency as we add operating leverage into the chip fab operations through our automation initiatives, and these are simulation test and sort functions, and see the benefit of those projects reflected in reduced costs and improved yields.

Additionally, we are starting to install new equipment to modernize our fab and improve its productivity. Along with the strength in our Cable TV and chip products, we've also seen good progress in market adoption for our specialty products, including our Fiber Optic Gyro product line.

Leveraging what is largely the same core technology as our Cable Television products, we've made significant inroads into the defense business and are getting traction from multiple Tier 1 customers. We hope to significantly increase the revenue from these unique, long-lifecycle and high gross margin products in FY 2016.

I thanked my team in my opening remarks for our strong performance because I believe we are continuing to see the results of the changes that we are making across the board in our operations.

We continue to improve in our internal metrics for key product lines such as inventory turns, cycle times and several other important internal operating metrics, which give us the confidence that we are continuing to drive efficiency throughout the business.

As I've said before, Six Sigma will be a key discipline that EMCORE will continue to embrace throughout the organization. Over the past year, we have completed the first session of Green Belt training in both Alhambra and our Chinese facilities and have nearly 20 Green Belt projects either in process or completed.

We've begun planning for our first round of Black Belt training to begin right after the beginning of the calendar year, and expect greater impact from these highly trained individuals on the Company and its results.

While this quarter's results were excellent, we've got lots of opportunity ahead of us to drive waste out of our manufacturing operations using these Six Sigma and Lean principles as well as to take advantage of and extend our technological leadership.

Aside from the Six Sigma program that I've described, we have started the transformation of our manufacturing processes to improve operating leverage, cycle times, yield and overall product cost.

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

Outside of these products, we are actively outsourcing more assemblies from EMCORE China to EMS suppliers when make-or-buy decisions are favorable to these actions. Our first automation project is expected to be up and running in Alhambra in Q2 even as process automation is simultaneously being introduced into EMCORE's Asian manufacturing facilities.

EMCORE's Asian operations have already been strengthened with the addition of its first automation team and was actually the first of our facilities to complete our Six Sigma Green Belt program.

We expected to strengthen EMCORE China's team and insert automation and yield improvement projects which are already being developed through the Green Belt projects. The team has done a superb job of deploying these programs. Turning to the legal side, we continue to work through the ICC arbitration proceeding that we've described before.

We expect to see unusually high legal expenses in the first quarter of FY 2016. After that time, our legal expenses will ramp down substantially. Turning to guidance, for the first quarter of fiscal 2016 ending December 31, our revenue expectation is in the range of $22 million to $24 million.

Overall, the trends in CATV are solid, even with some short-term turbulence, with respect to inventory and upcoming product changes in our customer base. We are developing a roadmap of actions necessary to reduce our breakeven point and transform semi-fixed manufacturing expense to variable product cost.

On the Board of Directors front, we announced today that Rex Jackson will be joining EMCORE's Board of Directors. Rex has extensive senior management and executive experience in both corporate finance and legal functions having served as Chief Financial Officer and General Counsel for several public and private companies.

Most recently, he held key positions at JDS Uniphase. We're extremely pleased to have Rex join our team. In addition, Steve Becker resigned from EMCORE's Board today. On behalf of EMCORE and its shareholders, I want to thank Steve for his service to the Company and wish him well in all of his future endeavors.

In closing, I'd like to thank the EMCORE team one more time for their efforts this quarter and state that I'm looking forward to updating all of you in early February after the close of Q1. With that, I will turn the call over to Q&A..

[Operator Instructions] Our first question comes from the line of Dave Kang with B. Riley. Your line is now open..

First question regarding your laser chip business, is the majority still coming from China GPON activities?.

Yes, Dave, the majority of the business is currently still GPON..

And then can you just talk about the duration of the cycle? I'm hearing some conflicting reports. Some are saying maybe 2016, some are saying it can be as long as about two years.

What do you see from your side?.

Our most recent information actually comes from last week where we sat down with all of our major customers, had two of our executives over in China, and we certainly see strong trend through the year and into 2017, and what it appears that will happen is that GPON will migrate to a 10G-EPON sort of format.

So it's more of a transition than an abrupt cliff, as near as we can tell right now..

Now is it all three Chinese carriers are involved in these GPON activities or is it maybe just maybe a couple and then maybe another one will kind of join next year, can you just go over that dynamics?.

Sure. It appears that it's pretty much everybody. Again, a lot of this is being underwritten by the Chinese government. It is an important government initiative to build out an entire broadband infrastructure in China.

And so it's not just – even the Chinese service providers, if you take a look at who's who of equipment and component manufacturers, they are all involved. I mean you see that the ZTEs, the Huaweis, and then a whole infrastructure of supply chain underneath them are geared to support this initiative..

Okay. And then let's talk about the U.S. market opportunities. I mean in recent days we heard from AT&T, Verizon, Google, they are all trying to expand their FTTx footprint.

Can you just go over opportunities with these guys, with the domestic players?.

I think outside of current cable television, we certainly have some activity, but it's far too early for us to describe that. Historically, the Company had a presence in BPON, and so to the extent that similar sorts of opportunities exist, we have products and technology that's readymade for it.

But other than that, Dave, I really can't comment on those particular activities right now..

Got it. Fair enough. And then going to, switching over to Cable TV, so you talked about some inventory buildup that seems to be kind of working itself out right now. So looking at your midpoint of the guide, I mean I'm assuming maybe Cable TV will be down a little bit sequentially and then your Phosphide chip business will be up a little bit.

What about beyond that? I mean can this Cable TV segment kind of drop off materially in the maybe March or June quarter because of all these consolidation activities or can we still kind of expect maybe 19 million to 20 million type of level over the next couple of quarters and then kind of go from there with DOCSIS 3.1 being the catalyst?.

I think it's a little bit difficult to project in the short term, Dave, where things are going to shake out, again because we – from a revenue perspective, because between our customers we sell different things to different people. So even a small change in who wins what MSO deal can have an impact. So we're a little reluctant to talk about that.

I think as you go forward into the second half of the year, we see uniformly strong signs across the board from not just the MSOs that we talk to, and we do talk to everybody, but also from the OEMs as well. So I think what you're going to see from us is not just the strategy of continuing to try to maintain share.

Where we currently have had strength, we are looking to leverage some of this new technology out of the fab and go into some places where we currently have a lower share and take some share away from others. So, again, this LEML is a great example of that sort of an opportunity..

Got it.

And then lastly on the arbitration with Sumitomo, anything you can share with us, any kind of milestones, and when are the rulings expected to be given?.

I'll tell you what, the reality is that the panel doesn't have an obligation to decide in a specific timeframe. And so that makes it tough to give you a date certain. We have certainly worked through all of the issues.

I don't think any of us were surprised at all during the proceedings in terms of feedback that we got from council or from reading the transcripts ourselves. And so, as is typically the case with these ICC proceedings, there are really nothing in the way of courtroom theatrics or drama.

So you know, Dave, I guess I'd say I hope we find out sometime in the next maybe best case at the end of Q1, maybe end of Q2, but the guys are going to decide, the panel will decide when they are good and ready..

So if the panel doesn't have any kind of time restrictions, then why do we think that legal expenses will drop off materially after the December quarter, after first quarter?.

Sure. Because we know when – so basically with the proceeding done, both sides file a post-closing brief and then have the opportunity to respond approximately a month later with a brief again half that size. So, at that point, there is no more new expense from the lawyers, it just goes to the panel and they decide when they're going to decide..

Got it. All right, thank you..

[Operator Instructions] I'm showing no further questions at this time. I would like to turn the conference back over to management for any closing comments..

Again, I'd just like to thank all of you for your time today and your interest in EMCORE. We're certainly proud of the work we've done over the past quarter, but you're only as good as your next quarter's results, so on to the next bit of challenges. But we look forward to updating you in early February and have a fantastic holiday.

Thank you very much..

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..