Erica Mannion - Investor Relations Jeff Rittichier - President and Chief Executive Officer Jikun Kim - Chief Financial Officer.

Jaeson Schmidt - Lake Street Capital Markets Lee Krowl - B. Riley FBR.

Ladies and gentlemen, thank you for standing by and welcome to the EMCORE Corporation Fiscal Second Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today’s call is being recorded.

At this time, I would like to turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead..

Thank you and good morning 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 the 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 future results, statements about plans, strategies, business prospects, changes in trends in the business and the markets in which we operate.

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

We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements and the business that are included in the company’s 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 the company’s Annual Report on Form 10-K and quarterly reports on Form 10-Q.

The company assumes 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.

In addition, references will be made during the call to non-GAAP financial measures, investors are encouraged to review these non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP financial measures included at the end of our earnings press release included as exhibit 99.1 to the Form 8-K we furnished to the SEC today.

These materials can also be accessed in the investor section of our website at www.emcore.com. With me today from EMCORE are Jeff Rittichier, President and Chief Executive Officer and Jikun Kim, Chief Financial Officer.

Jikun will review the financial results and Jeff will discuss business highlights and fiscal second quarter guidance before we open the call up to questions. Now, I will turn the call over to Jikun..

Thank you, Erica and good morning everyone. Today, I will focus my discussion on EMCORE’s FY ’18 Q2 financial results ending March 31, 2018. Consolidated revenue for the quarter came in at $18.6 million within our revised guidance range of $18 million to $19 million and below our initial guidance range of $21 million to $23 million.

The initial guidance range was provided on our FY ‘18 Q1 earnings call. EMCORE’s FY ’18 Q2 revenues were 43% lower year-over-year and 23% lower quarter-over-quarter.

As we discussed on our last earnings call in the most recent quarter revenues from our cable TV products were impacted by an inventory correction with our largest cable TV customer, when they consolidated their contract manufacturing capabilities into their own captive facility.

Relative to our initial guidance and expectations, the impact of this inventory correction was more acute than anticipated, resulting in our FY’18 Q2 revenues coming in below our initial guidance.

Although General Cable TV MSO capital expenditures showed consistent demand in the quarter, the portion of the MSO capital expenditures resulting in orders from our direct customers were received too late to ship before the end of Q2. These impacts were partially offset by the continued growth in our chips and navigation product lines.

In Q2 our non-cable TV revenues were at 35% of revenues and in Q1 non-cable TV revenues were at 25%. GAAP gross profits in Q2 were approximately $4.9 million or 26.6% of revenue, a decrease of 630 basis points quarter-over-quarter.

Gross margin performance in Q2 were driven by lower volumes which negatively impacted our manufacturing overhead absorption. Total GAAP operating expenses for R&D and SG&A were $8.9 million flat compared to the prior quarter and $0.4 million lower than the prior year. On a GAAP basis the consolidated operating loss for the quarter was $3.9 million.

Our non-GAAP operating loss from continuing operations after excluding certain adjustments all of which are set forth in the non-GAAP tables included in today's press release was at $2.2 million, a $2.8 million decline compared to the prior quarter. As a percent of revenue FY ‘18 Q 2 non-GAAP operating income was negative 12% of revenue.

Our non-GAAP pre-tax loss from continuing operations was at $2 million. Moving onto the balance sheet and cash flow statement. At the end of FY ’18 Q2 the company's cash and cash equivalents were approximately $65.5 million or an increase of $1.3 million quarter-over-quarter.

Regarding our working capital metrics, DSOs were at 63 days, down from 72 days in the prior quarter and up from 57 days in the prior year. Net inventory turns including non-current inventory was at 2.5 times. Capital expenditures in the quarter was 850,000 and depreciation in the quarter was $1.4 million. With that, I will turn the call over to Jeff..

Thanks, Jikun. And good morning, everyone. As Jikun highlighted, our cable TV market underperformed relative to our expectations. As we discussed on our last call, the primary direct cause of this headwind was an inventory buildup in one of our cable TV customers related to their transition from EMS to in-house manufacturing.

Our other major customers met or exceeded their forecasts confirming that the inventory situation was not the result of a downturn in MSO spending, but a straightforward yet painful inventory bubble. We set our second quarter guidance based on the customers forecast provided to us at the time.

It's important to note however that forecasts are not purchase orders and as we later learned those initial forecasts proved to be bullish relative to how aggressively our customer was working to reduce inventory levels. In our February call, we estimated that it would take our customer approximately two quarters to work through this overhang.

Based on our latest discussions, we believe the size of the overall inventory overhang remains inline with our understanding in February. However, predicting the exact slope of the recovery down to the month remains outside of our normal forecast window.

Somewhat offsetting the inventory headwinds however is the potential for new product introductions with the same customer which would use a different part from EMCORE versus the ones that are currently in inventory. Logically every new product sale pushes the inventory burn down out to the right.

Consequently there is a strong likelihood or near term variability in forecast and purchase orders as inventory is worked through and potential new products are introduced at the same time.

We believe the third quarter represents a trough in demand from this customer and that the slope and sustainability of any ramp will be predicated on our customers product mix for the next several quarters.

It's also important to note that we have a terrific relationship with this customer and we're working together in a positive, productive process to meet both of our operational goals.

A secondary contribution to our second quarter order shortfall and unrelated to the inventory issues we discussed, the second quarter also experienced timing problems with orders for certain products and cable TV customers.

While overall demand continues to be strong a portion of the orders were received too late to ship before the end of the second quarter. The product mix in these orders was substantially different than the forecast and outside of our normal lead times for purchased assemblies.

As we look to the third quarter, we expect the demand strength to continue and we placed additional inventory in assembly to better take advantage of any upside. Beyond these customer specific issues, we continue to see solid demand in the cable TV transmission market as a whole.

Demand for linear optics space, DOCSIS 3.1 remains on solid footing, while the number of Linear EML design wins increases. There are now five LEML transmitter designs in the market, up from two in 2017 and the total volume of LEML sales through Q2 is a 130% of what we saw in all fiscal ‘17.

In addition, we're expecting at least two more design wins in FY ’18. Outside of cable TV, Satcom product line showed it's normally lumpiness and was down quarter-over-quarter. On the DAS wireless side of things sampling activity and project engagements have been robust. Moving onto the chip market.

In the second quarter we continue to see strong demand for 2.5G PON products within China. Our chip revenue was above plan in the quarter and we expect additional growth in the PON market in the third quarter. Our third quarter outlook for this market is limited more by third party testing capacity than our internal fab capacity.

However, we expect to have this bottleneck resolved in the beginning of the fourth quarter. Although we don't sell chips directly to ZTE, our supply chain checks have shown us a few places where we could see some headwinds with our customer’s customers. We have factored this into our forecast for Q3 and we'll be monitoring the situation closely.

Finally, within the navigation market production levels for our products remains unplanned with a growing backlog of programs. Most importantly, we delivered our first EN-300 Inertial Measurement units to a major customer who will begin flight testing very soon. This customer described the first test results as a game changer.

We also completed an important milestone in a new program which will deliver hardware in the fourth fiscal quarter. As we – sorry, we are continuing to work through the voluminous paperwork for the MTS-B program long-term agreement.

While this is a frustrating situation relative to finalizing commercial agreements, there are no items of contention in the discussions which would stand in a way of finishing the agreement. On the business development side navigation. We continue to be encouraged by the major customers that are pulling this into ever more important programs.

Our business development funnel has never been stronger. Now turning to the outlook for the business. For the third fiscal quarter given the continued inventory overhang I highlighted earlier, we expect revenue to be in the range of $17 million to $19 million.

Fundamentally, a deeper downturn in cable TV will be largely offset by growth in chips and navigation. Overall, we're executing well in the areas that we can control and are working to hold down expenses as we work through the cable TV inventory headwind.

I'm encouraged by our progress in navigation and chips enabling us to build a stronger and larger company over the long-term. Now I will turn the call over to the operator and open it up for questions.

Operator?.

Thank you, sir. [Operator Instructions] We'll go first to Jaeson Schmidt of Lake Street Capital Markets..

Hey, guys. Thanks for taking my questions. Just first housekeeping one.

Can you provide the revenue breakdown for the March quarter?.

Sure, Jason. This is Jikun. So broadband was 74% and cable TV portion of that broadband was 65% of the 74%. So don't - multiply the two, but it is 65% versus 74%. The chips were 16% and NAV was 11%..

Okay. Perfect. And then just given the inventory issue at your largest customer that's create some pretty substantial headwinds for you guys.

Do you think there has been any significant market share shifts in the industry?.

This is Jeff. No, I don't. We certainly - you know, actually when you take a look at Linear EMLs for example on top of the current situation with you know, normal transmitters and corporate DFB lasers, we're actually increasing our share as a percentage of the overall head-in op expense. So no that has nothing to do with anything.

It's strictly a bubble..

Okay. And then the last one for me and I'll pass it along. Just looking at the navigation business. Jeff, can you talk about sort of the size of the customer engagement pipeline and how that's tracked over the past three months.

How we think - we should be thinking about the size of that opportunity potentially has changed over the past three months?.

First of all you know, getting to the punch line, the size of the opportunity is larger than you know, we would have talked about a few months ago. You know, we've been asked to bid on larger programs, even than the last time we talked. We're working through you know, the abnormally challenging contractual issues with the bidding process.

But in fact, things have been going very, very well there. You know, unfortunately I can't give out individual numbers for the size of these contracts.

But as I pointed out before you know, this is year is going to be a pretty large percentage growth that leads to larger absolute growth and just in terms of dollars in fiscal ‘19 and we still see that situation holding up very well..

Okay. Thanks a lot..

[Operator Instructions] We'll go next to Dave King of B. Riley FBR..

Hey, guys. This is Lee Krowl filling in for Dave King. Thanks for taking my questions. First I just wanted to maybe if we could get a little bit more detail. You guys mentioned ZTE is an indirect customer and that was reflected in your guidance.

Is there - is it a material you know, direct, indirect customer, I guess you guys took the numbers out of your revenue number, but maybe a little more detail on that front?.

Yeah. This is Jeff. The - you know, obviously it's very easy for us to pick out you know, where we would have exposure directly, in some cases you actually have to look two layers down to get the full picture of where there might be exposure, its not even our customers customer’s customer, its their customer.

And so I think the only thing I could say at this point beyond you know, the prepared comments is we're aware of two places with one part where you know, depending on exactly how things go you know, we could see a little bit of a hit this quarter, but again beyond that we don't see anything else.

So for example over around the PON side, we don't believe we've got any exposure all the way through the supply chain. It's somewhere else..

Okay. And then just handing off on PON. You mentioned you had some third party test capacity issues. Is there a CapEx requirement tied to removing that bottleneck? And then I guess just curious kind of on product generations. You mentioned 2.5G PON is strong right now, but it seems like there's also a growing trend of 10G PON as well.

Maybe just your thoughts on how 2.5 hands off to 10G?.

Sure. There's not a CapEx number tied to relieving the bottleneck. Essentially what it is, it’s just a supply agreement that's put in place with - some amount of it is just a prepay, right. So it doesn't hit the P&L, it just shows up on the balance sheet and that's all been dealt with. So no issues there.

As far as transition from 2.5G to 10, what we see is sort of a lumpy demand for 10G parts, detectors and ultimately lasers.

You know, as the - as the networks are deployed in 10G you see the OLP optics you know, being required first and then the much larger numbers of ONU optics you know, that actually live inside of the apartments or homes come later. So I would just say it's very, very early innings.

You know, in China price drives an awful lot of decisions are cost as they look at going all the way through the supply chain. And I think that 10G is not going to really take over from 2.5 for quite some time, just because its you know, a fair bit more expensive, it's probably more than four times, it's expensive..

Got it. And then last one to the extent maybe it's changed since the last call. But you guys didn't rule out potentially investing in the future in Remote 5.

Any updated thoughts on that front?.

No, I wouldn't say we've got any updated thoughts, there is nothing that we can share. You know, there is a bunch of discussions between us and our customers.

You know, again, at this stage of the game I would only point out that the volumes are so small you know, you're talking about really field trials and primarily with only MSO and again it's into the low thousands of nodes, that it's not – would move the needle even if we decided to do something. But we are continuing to have those discussions.

We're looking at different options on the engineering front, as far as how to satisfy those demands. The strategy technically dovetails with the things that we're doing over in the chip business. So we're continuing to work there. But I wouldn't describe it as having a material economic impact in the near future.

So you know, there's not a lot to say today about it..

Got it. Thanks for the update..

And we have no further questions. I would like to turn the call back over to our CEO Jeff Rittichier for any additional or closing comments..

In closing, I simply like to thank all of you for your time this morning and your interest in EMCORE. And we look forward to speaking with you soon..

Thank you. That does conclude our conference for today. We thank you for your participation. You may now disconnect..