Erica Mannion - Sapphire Investor Relations Jeff Rittichier - President and CEO Jikun Kim - CFO.

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

Ladies and gentlemen, thank you for standing by and welcome to the EMCORE Corporation Fiscal Fourth Quarter and Full Year 2018 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..

Good morning. Before we begin, I 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 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, levels 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 SEC, the US Securities and Exchange Commission that are available on the 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 statement 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 this 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 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 Investors 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 first quarter guidance before we open the call up for 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 FY18 Q4 and full year financial results ending September 30, 2018.

Consolidated revenue for the quarter came in at $25.2 million more than $3.2 million above the midpoint of our initial guidance range of $21 million to $23 million provided on our third quarter earnings call and at the upper end of our revised guidance range of $24.2 million to $25.2 million provided in October.

Driving the revenue upside in the quarter was larger than expected Cable TV order related to our L-EML product line, which we received late in the fourth quarter.

Coupled with the expected return to normalized customer inventory levels of our legacy Cable TV products and the completion of the Long-Term Navigation Supply Agreement, revenues grew 42% sequentially.

In Q4, our Cable TV revenues were 71% of revenues and our non-Cable TV revenues were 29% of revenues, Chips were 10%, Satcom video and wireless revenues approximately 9% and Navigation was at 10% of revenues.

All over end markets grew sequentially in the quarter with Cable TV driving the largest upside within the broadband market and Chips and Navigation products growing in line with expectations. GAAP gross profits in Q4 were approximately $4.4 million or 17.5% of revenue, up from 6.8% in the prior quarter.

The sequential increase in gross margin was largely driven by a number of unique events in the third quarter, which did not repeat themselves in the fourth quarter, offset by additional E&O charges due to accelerating adoption of our L-EML products, incremental long-term inventory impairments as well as expedite charges related to sourcing of raw materials for the L-EML order, which I referenced earlier.

Taken together, these expenses totaled approximately $1.5 million or 6% of sales.

Pro forma for these expenses, our gross margins would have been 23.5% in the quarter within the -- within our expectations as we continue to increase chip capacity and transition to L-EML based transmitters which in the near-term carry a lower than overall corporate average gross margins.

The GAAP operating expenses for R&D and SG&A were $10 million, $0.9 million higher than the prior quarter and $1.1 million higher than the prior year. In Q4, we continued to increase our R&D investments in navigation products, while SG&A was primarily impacted by an increase in consulting and litigation related expenses.

On a GAAP basis, the consolidated operating loss for the fourth quarter was $5.6 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 into this press release was $3.3 million, a $3.4 million increase compared to the prior quarter, principally driven by top-line growth and improved gross margin performance.

As a percent of revenue, Q4 FY18 non-GAAP operating income was a negative 13.9%. Our non-GAAP pre-tax loss from continuing operations was $3.3 million.

Moving on to the balance sheet and cash flow statements, at the end of Q4 FY18, the company’s cash and cash equivalents including restricted cash were approximately $63.2 million or a decrease of $2.3 million quarter-over-quarter. Regarding our working capital metrics, DSOs were 82 days, an increase compared to 61 days in the prior quarter.

Net inventory turns including non-current inventory was at 2.7 times, capital expenditures in the quarter was $2.8 million and depreciation in the quarter was $1.5 million.

For the full year FY18, consolidated revenues totaled $85.6 million, which is 30% lower than the prior year, driven primarily by Cable TV inventory correction, which impacted our performance throughout the year.

GAAP gross profits in FY18 were $18.5 million or 21.6% of revenues, a decrease of 13 percentage points over the prior year as a result of factory and reloading, product mix shift in various unique items, which we have discussed during the year. Total GAAP operating expenses was $36.8 million, approximately $2 million higher than the prior year.

R&D investments increased $2.8 million year-over-year, driven by investments in new navigation products. SG&A decreased approximately $0.8 million driven by a reduction in annual performance bonuses, offset by higher bad debt and legal expenses.

On a GAAP basis, the consolidated pre-tax loss for 2018 was $17.9 million, compared to an income of $8.4 million in the prior year.

Our non-GAAP pre-tax loss from continuing operations after excluding certain adjustments, which are set forth in our non-GAAP tables included in today’s press release, was $11.3 million, compared to an income of $14.3 million in the prior year.

Our non-GAAP EPS for 2018 was a loss of $0.41 compared to earnings of $0.52 in the final year -- in the prior year. Finally before I turn the call over to Jeff this morning, the company announced that I would be resigning to tend to some personal obligations.

I’ve enjoyed my time here at EMCORE working with a quality team and being part of the transformation the company is undertaking. With that, I will turn the call over Jeff..

Thanks, Jikun. First of all, on behalf of all of us here at EMCORE, it’s been a sincere pleasure working with you. We truly appreciate the numerous contributions you’ve made to the company, while it’s unfortunate to see you go, we wish you all the best.

Turning to our fourth quarter results as Jikun highlighted, we experienced significant strength in the Cable TV market, driven by both the increasing adoption of our L-EML based solutions and the resumption of orders from one of our Cable TV customers, who was working through an inventory overhang throughout much of fiscal 2018.

Our L-EML product line continues to perform beyond expectations with record volumes of L-EML transmitter shipped in the quarter, including production shipments of all seven of the L-EML design wins that we previously announced. This is an important milestone for EMCORE, as it further validates the competitive advantage that the L-EML provides.

By enabling substantially higher transmission efficiency versus legacy DFB solutions, our L-EML transmitters give MSOs a cost effective powerful tool to break bottlenecks in their networks without ripping up and replacing their existing linear based infrastructure.

To this end, in the fourth quarter, we received a sizable L-EML order which was well above our customer's original forecast. While we do not expect this level of activity to repeat in the first quarter, we're encouraged by the overall pace at which the industry is moving to this technology.

Independent of the ramp in L-EML, in the fourth quarter, we also began to see resumption in normal ordering patterns for our legacy DFB products. With the inventory overhang now exhausted, we expect demand for these products to serve as a baseline to Cable TV product revenue as our customers transition to L-EML solutions.

Outside of cable, as Jikun mentioned, our other broadband products grew quarter-over-quarter with Satcom driving the increase. Our development work within the wireless DAS market is continuing on plan.

And while project engagements remain robust, our expectations for production revenue continues to be a late 2019 to 2020 event with 5G deployments move beyond trial phase. Moving on to the chip market. In the fourth quarter, we continued to experience sequential growth driven by increased demand in 2.5 GPON products within China.

We see this growth trend accelerating substantially in the fourth quarter with strengthening demand in both PON and non-PON related products driving the increase.

Finally, within the navigation market, on the production front, in the fourth quarter, we completed the four year sole source supply agreement with Raytheon providing us with fixed volume commitments through fiscal 2022.

As we discussed previously, beyond the improved visibility this contract provides, we view it as a further validation of the competitive strength of our technology and our ability to win share in this market.

On the new program side of our navigation business, we recently announced two new contracts which together demonstrate our two-pronged approach for further penetrating the navigation market.

EMCORE’s primary strategy is to provide superior CSWaP solutions, which is Cost, Size, Weight and Power for existing sockets with form, fit and function replacement for competition legacy products.

In the case to the product announcement that we made for the EN-1000, EMCORE is targeting a legacy product with a total available market of nearly 10,000 navigation grade units. Our patented technology creates a compelling alternative for customers, eliminating the need for them to source navigation equipment from competitors.

Another key portion of our strategy is to use common technical building blocks from our sockets business to design custom solution for next generation navigation systems. This is significant as it not only represents an opportunity to enter new programs but it also allows EMCORE to expand our already advanced technical capabilities.

For the second program we recently announced, we're leveraging technology developed for the EMCORE-Orion series of Fiber Optic Gyro-Based Micro Inertial Navigation systems which is capable of delivering standalone aircraft grade navigator performance at one-third the size of legacy or competing systems.

The CSWaP benefits of this solution are an industry-first in this class of IMU and demonstrate EMCORE’s ability to provide truly differentiated solutions in the market.

As we’ve discussed previously, given the long qualification, design and product lifetimes in the navigation business, it’s useful to think of each program as a layer over a technical foundation, each new program as revenue over many years compared to their commercial counterparts.

EMCORE continues to build layer-upon-layer on its technical and production foundation, which in turn creates meaningful growth opportunities as individual production programs take hold. It’s easy to see why we’re excited about EMCORE’s prospects in navigation.

Now turning to the outlook for our business, I’d like to address some big picture components for the year going forward before discussing the outlook for Q1. Approximately a year ago, I stated that Remote 5 would not have any measurable impact on our Cable TV products in FY18, nor was it likely to have a meaningful impact in FY19.

With the benefit of hindsight, we can see our prediction about Remote 5 in FY18 was correct. I would like to take this opportunity to reaffirm that we see no meaningful impact to our business from Remote 5 in FY19.

On the contrary, we’ve seen growing requests for a second generation L-EML in our new 1.8 gigahertz transmitter products, both of which are currently in development. Linear optics has a long future ahead of it.

We spend a great deal of time talking with OEMs and MSOs about the state-of-the-market, its economic drivers, as well as technical developments, which affects the larger cable television business. With that said, it seems the production deployments of DOCSIS 3.1 equipment are moving forward according to plan.

We will certainly be vigilant about the state of demand in the industry. But outside of normal seasonal swings, we see a solid FY19 in Cable TV. The Satcom market also looks to be robust and despite any lumpiness in orders should outperform FY18 nicely.

Our order backlog is currently strong and several important programs are in the funnel with good prospects. Our chip products should also experience substantial growth this year, due to a broader product line, more efficient supply chain and expansion of our chip making capabilities.

Margin should improve substantially over the next four quarters as the product mix becomes more favorable. For the navigation market, in FY19, we are expecting substantial growth as well, for the reason that I already described. We entered FY19 with nearly 140% of our entire FY18 revenue result already in backlog.

Operationally, we’re making substantial improvements in our US operation to improve the capacity and efficiency of our navigation product assembly facilities.

We expect to continue the modernization of our wafer fab equipment and physical plan to improve our ability to build advanced 25G products and beyond, as well as chip level products across multiple material systems. We embarked on a general campus upgrade that was long overdue and we’ll complete this in phases over the next two years or so.

I would also like to point out that we’ll continue to optimize the geographic footprint of our EMS supply chain to increase the leverage that we have with suppliers and to minify -- minimize any tariff impacts. As you all know, the tariff situation is fluid.

But given what we know today, we do not expect a material impact from these changes in the short-term and feel that we have a solid strategy for staying ahead of the issue. Finally, I'd like to comment on the outlook for the first fiscal quarter.

Taking into consideration the unusually large L-EML play which occurred in the fourth quarter, we expect revenue to be in the range of $23 million to $25 million. Essentially, we're expecting growth in all three of our non-Cable TV products to help offset a more normalized demand environment within the Cable TV market.

Now, I will turn the call over to the operator to open up for questions.

Operator?.

Thank you. [Operator Instructions]. We will now take our first question from Jaeson Schmidt of Lake Street Capital Markets. Please go ahead. .

Jeff, just want to start with the Cab TV business, it sounds like you guys have increasing confidence going into fiscal '19.

So is it fair to say that visibility has significantly improved over the past three months and you have confidence that this inventory correction at your large customer is finally over?.

Hi, Jaeson. Yes, I would say that's true, although I’d also point out that in terms of the actual meaning of the term visibility, I mean, I think we -- recall it correctly when we said that we would be past that roughly the middle of Q4. So I don't think there were any surprises there other than the initial discovery of the inventory at EMS.

But yes, we see a solid FY19 as far as the number of links go and I don't see any headwinds right now..

Okay, that's helpful.

And then if you remind us commenting your thoughts on the CommScope-ARRIS acquisition and how that would impact you guys?.

Sure. CommScope was an EMCORE customer back in FY16 for RFoG units until they sold the business in roughly the summer of '16 to ADTRAN.

So since that time CommScope has sort of reverted back to its traditional product mix and they actually don't have any head end equipment at all that they sell in the fiber optic business, nor do they have anything over on the Axis over in the -- on the CPE side. So we don't see any overlap at all in the product lines.

We've got some conversations scheduled what ARRIS, as it is right now, we won’t have any impact on ordering or product roadmaps or anything else..

Okay, that makes sense. And the last one from me and I'll jump back in the queue.

What percentage of revenue in September was from your L-EML portfolio? And if we look towards the end of fiscal ‘19 or calendar ‘19, what do you think that percentage will be?.

Jikun, do you have that number?.

No, we can go and get that for you, Jaeson. .

Okay. .

Yes, it’s certainly well above 50%. I think if we take a look at FY19 L-EML revenues as a percentage of all of Cable TV could be somewhere between 60% and 80%. So the whole revenue picture has changed pretty dramatically. .

Thank you. Our next question is from Tim Savageaux of Northland Capital Markets. Please go ahead..

Hi, good morning.

Hi, can you hear me?.

Good morning, Tim. Yes..

Great. A couple of questions. And I really want to focus on gross margin to start with and the implications of L-EML and the rest of the mix. Last time you were around this level -- revenue level, your gross margins were above 30% and you called out some specific items impacting margins in the quarter.

It sounds like you've got some positive mix dynamics heading into fiscal Q1 with Cable TV coming back a bit and the rest of the product line growing. But in general, I’d say if you can give us some qualitative guidance on the direction of gross margins? It seems like they should be heading up from here.

And any sort of targets there with regard to where overall current levels of OpEx are and I guess when you expect the business to breakeven?.

Sure, I'll tackle the first part and we'll see if we get to what you need. There have been a series of transition costs as you can imagine with the movement to L-EML being as aggressive as it has been.

We pointed in the past to inventories that we needed to write-down because as L-EML takes up a larger portion of our Cable TV business, necessarily some of the DFB inventory has to go into excess even if it's not obsolete. So some parts of that we end up getting back later, although the timing on that is sort of indeterminate.

It also affected the amount, the value if you will of long-term inventories, Jikun pointed out, because the L-EML offers virtually equivalent performance in many respects to externally modulated transmitters.

So we had to take some write-downs on the modulator inventory because of that and we're taking some very aggressive steps to try to make sure that doesn't happen again, so no guarantees. So the first group of things I would call transition costs in a big technology shift, and I think we have most of those behind us.

The second part, as Jikun pointed out, in the quarter a little unusual was that we incurred substantial expedite charges to bring in a very large order for one of our customers and it was well within lead time, I think on average it was we turn these things around in six weeks which is a very difficult thing to do.

But we got some expedite charges because of that. Third factor which also we expect to see improving through the year is what's called the gross margin mix. The L-EML products are rapidly improving the gross margin and this is just sort of normal with getting up the manufacturing experience curve.

We see the continued improvement in the chip business as well as navigation. And some of these things actually have a -- can have a short-term negative impact in the form of cap variances.

If you go overall standard because you become more efficient, it can affect the value of inventory sometimes in a way that's harmful in the short-term to gross margin. But again, those are non-cash charges.

So it's perhaps not quite as important but it's something that we are actively trying to manage through without hitting the P&L like we did this quarter. And I think going forward we've got some better knobs to turn to keep that down. So the final point is volume sensitivity.

In the fourth quarter, we came -- we’ve put most of the issues regarding under absorption of fixed costs behind us and I think at this level we're going to be able to turn additional volume into greater gross profit.

So all of those things combine to produce a trend which sets us back towards some of those historic margins depending on exactly what the mix looks like in Q3 and Q4, we could get there, but we'll have to see what the reality of the mix is versus a long range crystal ball view.

But there's nothing fundamentally at work here that should cause us to have continued low margins. We just got to manage our way through what has been a very, very big technical transition in product mix. So hopefully that helps answer the question..

It does, it helps a lot actually.

And just my overall -- it was -- to the extent that you expect to grow sequentially throughout the year and given the step down in cable and then likely step back up, that seems highly likely with OpEx around current levels, you -- I mean you can see margins getting back up toward those historic levels to re-attain profitability.

So that math all works. And I guess one potential driver for that, you mentioned backlog commentary in the navigation business being up 140% over last year's revenue.

Yes, I wonder if you can give us a little more color on what your kind of expectations are, sort of lead times project wise to add to that in fiscal ‘19? Or how we should think about that business, the rate of growth there given the lead times involved in some of these projects or you've just announced a bunch of them but can we see that backlog increasing throughout the year as well as revenues shipped on that backlog?.

Yes. We're very excited about navigation. The interesting thing about it is so different from cable is that when we think about how the quarter is going to go forward, virtually 100% of the navigation product that we plan on shipping or billing in the case of some of the NRE, so all got to begin by the beginning of the quarter.

So where cable has been highly unpredictable, once you get the programs in navigation they become highly predictable, provided that we can execute well on some of the developments that the customer side of things keeps pace, because of course they could slow down or/and that’s going to slow down.

They can have their own delays which can prevent us from shipping if you will or billing non-recurring engineering. But overall I think prospect for increasing the backlog in navigation look good.

Our new Hawkeye products are receiving terrific reviews with customers actually have solved long standing spec limitations that existed with the original product. And we are actively out pushing them all over the world.

I'd also point out that there are some significant activities going on with some of our newer products, the IMUs, the EN-150 and EN-300 which we will expect to announce some time in the next few months. But navigation is a big bet for us. It's one of the reasons why we run R&D heavy in the organization. But it's all organic growth at this point.

And we see in fact huge absolute numbers just because FY18 was relatively small I think 7 million in change. But on a percentage basis easily hit triple-digits and maybe more within this year. But overall we're really happy with the navigation business and expect it to be a major growth driver both in this year and beyond. .

Got it. And one more for me and I'll pass it along and that’s over on the chip side of the business. It looks like the revenues were flat sequentially there, although your anecdotal commentary spoke to some acceleration on the GPON side. I don't know if you were kind of focused on your on Q1 or forward-looking in those comments.

And you also mentioned strength in some other areas of the laser chip business besides GPON.

So I’m wondering if you could kind of go back to that acceleration commentary kind of where that focus was from a product and timing standpoint and also talk about some of those other product categories within the chip business?.

Sure. So the difference between Q3 and Q4, it was about flat, it was a little bit up but some times the product mix shifts around a little bit underneath this quarter-to-quarter. And for example if there's a bigger mix of gain shift, you tend to see a bigger revenue rise because they're much more expensive devices.

But we are broadening the product line as we talked about going from Q4 to Q1, the products outside of GPON, more 10G stuff is actually starting to ship, we're seeing a broader range of wavelengths, the bunch of 1490 stuff. We have a lot of new part EML's sampling.

So the -- some of the applications are PON samp, they're going to be 10G PON as well as 2.5G but they're also products that are outside of the traditional PON space, more things going on over with telecom devices. And I can't really talk about the specifics of what those are because they’re competition sensitive.

But what we're going to expect to see is far less reliance as we exit the year on GPON compared to where we are right now. We're sampling 25G detectors, we expect to be sampling 25G lasers here in the next quarter or two and you'll get lots of people interested in the things that we're building..

[Operator Instructions] We will now take our next question from Dave Kang of B. Riley, FBR. Please go ahead..

Great. This is actually Lee Krowl on for Dave Kang. Thanks for taking my questions. Just a couple of expense and spending questions first off. Just kind of curious on the trend of R&D through fiscal '19, you obviously have a lot of different opportunities out ahead of you.

But just curious if the R&D trend is up through the whole year? And then also just specifically on navigation, whether the R&D and expenses are associated with current products or if you're kind of investing ahead of positioning yourself for competing for new contracts?.

Jikun, you want that one?.

Yes, sure. So in general the R&D expenditures will continue to be elevated closer to the fourth quarter levels for FY19 trending up as we go through the year.

The R&D investments are -- obviously we invest across all of our product lines, navigation does seem to have a primary focus here with newer products and all of the new to be determined and to be announced products on the NAV side. The chip investments are substantial and we continue to make investments in those..

On the more qualitative side though, I will say that -- so there's a fair bit of R&D going on in navigation right now. And a significant fraction of it is being absorbed in R&D contracts which already contracts exist. So it's an outsized group right now. We expect as revenue grows and as we capture some new programs, it's going to gradually ease down.

But I wouldn't expect to see a big move in the current fiscal year. .

Got it, and then just handing off to some of the commentary on CapEx additions to kind of meet the near-term demand.

Does CapEx also trend up through the year, or is there a level of investment that you have to tackle near-term and then maybe it tails off or flattens in the back half?.

Yes, so last year FY18, we spent I believe $6.6 million in CapEx with $2.8 million of it in the fourth quarter. We do anticipate elevated levels of CapEx spending in ‘19, probably commensurate with more the $2.8 million levels versus the lower levels we saw in the earlier quarters.

So a lot of that is upgrades to add capacity to our navigation business as well as upgrade our wafer fab factory. .

The other piece is that the campus here in Alhambra has not had an upgrade to make it more efficient, I mean it's really chopped up and it's sort of an inefficient place. And one of the things we felt we needed to tackle was in conjunction with, call it, a more efficient manufacturing space. There’s also just a general set of upgrades on the campus.

And so that's also contributing. We're trying to keep that at a modest peak. As I said it's going to be a modest rate. We're going to be doing this over a period of two years, that, that piece of it. .

Okay. And then you guys did provide a fair amount of outlook color for 2019. But I was just curious if maybe you wanted a commentary on revenue mix exiting the year. I know it's been a major effort of yours for revenue diversification.

So I was curious if you want to take a shot at maybe the mix as some of these new projects come online?.

Yes, it’s a bit of a crystal ball sort of exercise. If we had to guess probably 30% to 40% would be non-Cable TV, maybe a little bit more but I think that's a reasonable range given what we're seeing. If we're over 40%, then we we've really done an outstanding job.

I mean when you consider that in FY17 Cable TV was 100 out of 122, you really start to see the changes that have been made here in terms of the product mix. .

It appears there are no further questions at this time. I would now like to turn the call back to our host for any additional or closing remarks. .

Thank you. In closing I'd like to thank all of you for your time this morning and your interest in EMCORE. I'd also make -- like to make a final announcement. Our best wishes for Jikun and a final thank you, as well as to our employees and Board of Directors for their hard work and commitment that they make to the Company. Thank you very much..

This concludes today's call. Thank you for your participation. You may now disconnect..