Ladies and gentlemen, thank you for standing by, and welcome to the EMCORE Corporation Fiscal Fourth Quarter and Full Year 2019 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'd like to turn the call over to Erica Mannion. Ma'am, 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 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 and trends in the business and in the market 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 achievement 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 website located at www.sec.gov, including the section entitled Risk Factors in the company's annual report on Form 10-K.

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 this call to non-GAAP financial measures, which we believe provide meaningful supplemental information to both management and investors. The non-GAAP measures reflect the Company's core ongoing operating performance and facilitate comparisons across reporting periods.

Investors are encouraged to review these non-GAAP measures, as well as explanation and reconciliation of these measures to the most comparable GAAP 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 yesterday.

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 Tom Minichiello, Chief Financial Officer.

Jeff will begin with the review of the fourth quarter and the business highlights, and Tom will review the financial results before opening the call up for questions. Now, I will turn the call over to Jeff..

Thank you, Erica, and good morning, everyone. First of all, I'd like to introduce Tom Minichiello to all of you as our Chief Financial Officer. Tom’s strong technical skill, his ability to communicate, and his roll up your sleeves and get to work style are already having an impact on the Company, improving our financial discipline.

Having introduced Tom, I'll move on to discuss our Q4 results, the status of our profitability and cash flow initiatives that we announced on our last call, as well as provide guidance for the current quarter, and our plan to reach profitability. Revenue for the fourth quarter came in at $24.3 million, just above the high end of our guidance range.

More importantly, the continued strength in demand for EMCORE's Aerospace and Defense products, combined with a full quarter’s contribution from the SDI acquisition, resulted in nearly 60% of revenue coming from Aerospace and Defense. Cable television was approximately 34% of revenue and chips and wireless were about 6% combined.

As expected, cable TV MSO spending remained soft in the fourth fiscal quarter, while our share remained high and unchanged. Within the chip market, demand levels remain muted, given the ongoing trade disputes with China and the 25% import tariffs.

We believe that this trade dispute will not end anytime soon, nor will the after effects of decisions to exclude U.S. made chips for new design wins.

As discussed last quarter, given the uncertainty around mid to long-term demand within this market, we’ve chosen to exit many of the lower margin products earlier than planned and focus our efforts on the smaller subset of higher margin products aimed at 25G applications.

Within the EMCORE Aerospace and Defense product lines, which include navigation products across both facilities, and Defense Optoelectronics, formerly Satcom, customer demand and new program wins remain strong. We were especially pleased with the progress we made in the fourth quarter related to the integration of SDI.

It nominally reached EBITDA neutral in Q4, a quarter ahead of schedule. This is the first full quarter of contribution, and the business continues to meet our expectations. Customer demand remains strong while operational initiatives are on pace to improve margins and drive synergies with Alhambra.

In the fourth quarters, we continued to build prototype FOG IMUs, inertial measurement units, for completely new targeting platform that will be first introduced on the F/A-18 strike fighter and is planned to be introduced on to other important systems thereafter.

Our customer is very pleased with the performance of the unit and look forward to moving on to flight testing as soon as possible. Additionally, EN-300 production units have shipped into additional programs with flight testing starting as soon as our customers can execute.

Within Defense Optoelectronics, demand remains strong as applications for these products moved beyond their roots in satellite ground station to Navy ships, radar systems and similar application, significantly expanding the market opportunities that we see.

The project to modernize FAA control towers continues as planned with the first shipments of these products beginning in the December quarter. We've also been awarded new orders for specialized chips, such as our lithium niobate IOCs for the Aerospace and Defense market, and see this as an excellent growth opportunity going forward.

Moving on to our cash and profitability improvement initiatives, in our last call, we outlined four major actions that we're taking to reduce the breakeven point for our legacy Alhambra products. I'll now give you an update on the status of these efforts. First of all, we announced that we would move to an EMS model for manufacturing.

This initiative is designed to eliminate the under-absorption up from our Chinese operation, remove tariffs, reduce working capital requirements and improve margins. We projected that this would take three quarters to complete from its inception. This is currently on schedule to finish at approximately the end of the March quarter.

Customer qualification samples are being built and submitted for qualification approval as they become available. The gating activity on this actually is largely driven by the number of hours that these qualification samples must operate before passing qualification criteria.

During this transition period, we must keep the Beijing facility operating in parallel to ensure that we can ship product without negatively impacting revenue. In late October, we announced that Hytera was purchasing all of the manufacturing equipment from our Chinese facility, which will result in a positive cash impact of at least $5.5 million.

It's also important to note that moving EMS enables a variable cost model where we pay a landed cost for the finished product that includes Hytera’s markup. Preliminarily, we believe that at current cable TV volumes, we should expect to see an improvement of about 2% to the consolidated gross margin from these cost reductions.

In addition to these cost improvements, we will also eliminate the under-absorption that we see during weak quarters. For reference, typical under-absorption at EA has been about $500,000 a quarter, or about another 2% of gross margin at the consolidated level.

We view this partnership with Hytera as crucial to the long-term success in manufacturing commercial cable television and wireless products. Secondly, we stated that we would reduce our fab operations to a single shift to reduce fab under-absorption as we emphasize our higher margin chip products. This was completed in fiscal Q4.

However, we are still continuing to analyze how we can reduce fab expenses further from these levels. Thirdly, we stated that we would reduce the size of the cable TV organization. This was completed in Q4. However, as with the fab, we're investigating additional actions that we can take to drive expenses downward.

Fourth, we're looking to accelerate the operating synergies between our two U.S. facilities to maximize cost savings and our opportunities. First among these is the implementation of our legacy ERP system in Concord, which will eliminate redundant staff and accounting and supply chain.

Secondly, we are ahead of plan for consolidating suppliers and reducing material costs across facilities. Finally, the integration of our manufacturing team is showing us where additional savings can be realized through the use of common production processes.

These activities will manifest themselves as cost savings as they're completed over the next few quarters. While we're encouraged by the progress we're making on these four initiatives, we're also acutely aware of the need to drive additional changes to the business to accelerate our return to cash flow generation and profitability.

Before discussing the outlook for next quarter, I'd like to discuss the changes inside of EMCORE at a macro level. Less than five years ago, cable television was 90% of EMCORE's revenue and carried 90% of the Company's assets and costs.

Today, cable television is roughly a third of revenue, dictating that management make deep structural changes that eliminate at least the same percentage of costs from the business. These structural changes imply the elimination of buildings, fixed assets with an inventory as well as the personnel to do the work.

Simultaneously, we're challenged to build a highly specialized set of these same asset types to grow our Aerospace and Defense business. We've had a lot of moving pieces on our chessboard over the past few years, but this was necessary to fundamentally transform our business.

For the December quarter, the major MSOs have indicated that their capital expenditures will increase from calendar Q3. However, we remain cautious as to the timing and slope of the rebound and expect only modest improvement in cable TV demand in the near-term.

With demand for cable TV products now reset to new lower levels exiting fiscal ‘19, we're just a few months away from the transition to be a variable cost producer of cable TV products. This will have an important positive impact on gross margins.

We accomplished the same transition in Defense Optoelectronics about two years ago, and now manufacture these products in a U.S. facility that is qualified to build ITAR products. This leaves us with captive wafer fabrication and navigation assembly in our U.S. operations.

These are jobs that are highly specialized, technically challenging and are well-matched to a more expensive workforce. Consequently, the combination of operating initiatives and continued topline growth should allow us to drive a marked improvement in financial performance in the coming quarters.

As we look forward into the coming fiscal year and based on the latest comments from the MSOs, we expect the cable TV spending will improve somewhat from the depressed 2019 levels. Our latest channel checks have not revealed any excess inventory that could create an overhang that would depress demand further.

Furthermore, we continue to see only spotty evidence of Remote PHY field trials and do not see this as a major threat over the next year. We do see additional activity, pointing to the adoption of Remote PHY shelf products, which we are well-positioned to provide. Cable TV demand should be stronger in calendar ‘20 than it was in ‘19.

Our Aerospace and Defense products are also positioned for growth in the coming year. The Quartz MEMS navigation products from our Concord facility are seeing strong demand in the U.S. This product will be bolstered in Q2 by the release of non-ITAR versions of SDI500 inertial measurement unit for sale outside the U.S. market.

We also expect that the Boeing 777X, which contain five SDI300 IMUs in each aircraft, will start production this year. We are working on getting design into several important new weapon systems that we can't discuss yet and are excited to see that our Concord products have larger market opportunities than we expected.

For example, our SDG 7000 navigates drill heads in high temperature oil and gas application while our QRF family is used to stabilize a variety of industrial products.

Our farm products have been growing at nearly 100% compounded annual growth rate over the past five years, growing from about $800,000 in revenue to nearly $14 million last year, reaching an important inflection point. We have five major product development programs, which we’ll launch into production this year.

Although these drove R&D and material expense to high levels in Q4, we expect that this will taper off by Q2. These products span applications ranging from munitions guidance to primary navigation of aircraft.

We look forward to seeing flight testing commence in the near future on multiple programs, but investors need to understand that we don't control the timing of these key milestones.

Our Defense Optoelectronics product business also continues to perform well and is expected to move the FAA control tower program into production beginning this quarter, and complete over the next two years.

We continue to see strong orders for our shipboard high frequency products and expect to field advanced satellite communication systems using new Q&V bands for low Earth orbit satellites. This ability in Aerospace and Defense represents a stark contrast to cable television. Our Defense Optoelectronic products are currently booked out several quarters.

Concord has orders that arrive in multi-quarter or yearly purchase amounts and has the majority of its year booked by Q1. Our FOG products booked in the same quarterly or yearly chunks as well. In FY20, Aerospace and Defense will become an even larger and more important part of the Company and will offer better predictability at the same time.

Before I move on to revenue guidance for Q1, I'd like to the question of what it will take for us to reach breakeven. Given that Q3 will be the first quarter in which we realize the savings from the EMS transition and break out of the usual seasonal cable TV weakness, Q3 is our target for breakeven on an adjusted EBITDA basis.

Depending on mix, we will need to hit a top-line in the $30 million range with gross margins approaching 30%, while maintaining good operational and expense discipline. Tom is going to expand on the margin and OpEx point in his comments. But on the revenue side of things, we'll need an additional $6 million in revenue from the Q4 numbers.

Given seasonal variations in cable television, we would still expect to see about $2 million of that come from cable television, about $3 million from Aerospace and Defense products and the remaining $1 million from non-cable TV broadband.

Consistent with this view, we expect revenues to be in the range of $25 million to $27 million in fiscal Q1, reflecting continued strength in our Aerospace and Defense markets with stable demand for broadband products. With that, I will turn the call over to Tom..

Thanks, Jeff. And good morning, everyone. Let me provide some added color on our results for the fiscal fourth quarter. Revenue was $24.3 million, an increase of $7.1 million or 41%, when compared to the $17.2 million in 3Q. The sequential increase was driven by a $5.8 million increase in our reported revenue for SDI.

4Q was our first full quarter reporting SDI's results, as compared to 3Q, when it only included the last 3 weeks of June. The balance of the sequential increase was primarily driven by a rebound in our cable TV revenue from the historically low level the quarter before.

Over the past several years, EMCORE has been working to diversify its end market exposure to align our reporting with the strategic focus and in the manner in which we are now operating the business. We plan to report two segments starting in fiscal 2020.

Aerospace and Defense, which will consist of our navigation product lines and Defense Optoelectronics and broadband, which will include cable TVs, chips, and wireless.

As a part of this strategic alignment and as a result of continuing softness in the broadband market, some of the cable TV related actions we have taken to date resulted in charges recognized in 4Q. We reduced the size of our Alhambra based cable TV team, including reducing capacity of the wafer fab to one shift.

These actions resulted in a 4Q charge of 400,000 and are expected to result in annual savings of approximately $3 million.

Additionally, in light of recent trends that have resulted in cable TV revenues flattening out at significantly lower levels than originally forecasted, our year-end review resulted in a non-cash $4.7 million write-down of cable TV inventory, consisting predominantly of components that were either in excess of the now lower expected demand, or that often no longer align with today's networks.

Total charges associated with the transmission of our cable TV operation netted to $4.8 million in 4Q, contributing to the GAAP net loss of $15 million or $0.52 per share, compared to $10.5 million and $0.37 per share in 3Q. Now moving on to the rest of the operating results on a non-GAAP basis, gross margin was 19% in 4Q, compared to 23% in 3Q.

About two-thirds of the lower 4Q gross margin was due to startup production yields related to our navigation products. The remaining one-third was a result of year-end physical inventory adjustments.

On a go-forward basis, stripping out the year-end physical inventory adjustment and the startup yields as we ramp up navigation production, we should see further gross margin expansion, including 1% from the full quarter impact of the cable television reductions in Alhambra, and the additional 2% we expect from the move to a variable EMS model.

With just these improvements, we move closer to 30%, before considering other factors such as revenue growth, and better fixed cost absorption. Non-GAAP operating expenses increased $3.3 million to $12.4 million in 4Q compared to $9.1 million in 3Q.

About $2 million of the increase was attributable to the full quarter of SDI, while $800,000 was due to R&D project costs for our FOG product lines, and about $500,000 was a result of higher professional service fees related primarily to the SDI acquisition.

Going forward, removing the nonrecurring SDI expenses and some of the additional project costs, as well as accounting for the full quarter impact of the cable television reductions, we would expect a non-GAAP OpEx reduction of around $1 million.

Now back to the fourth quarter, while sequential quarter revenue increased, the lower gross margin and higher OpEx resulted in a non-GAAP operating loss of $7.7 million compared to $5.1 million the quarter before. Non-GAAP net loss and EPS was $7.7 million and $0.27 per share in 4Q compared to $5 million and $0.18 per share in 3Q.

Adjusted EBITDA was negative $5.7 million in 4Q compared to negative $3.3 million in 3Q. Turning to the balance sheet, cash totaled $22 million at September 30, 2019, compared to $20.7 million at June 30th. Net of short-term borrowings of $5.5 million, our cash used during 4Q was $4.2 million of which $4 million was used to fund operating activities.

Going forward, there are several cash related items that I'd like to bring to your attention. In October, we made a $4.4 million payment as a result of an arbitration ruling on the Phoenix litigation matter, the details of which were outlined in our 8-K filing in June.

The accounting charge for this payment was recognized in the third quarter GAAP results. Regarding the equipment sales to Hytera, we have already begun shipments and received our first payment of $1.9 million in October. The total sale is approximately $5.5 million.

We expect to receive the bulk of the remaining cash of $3.6 million during the first half of calendar 2020. Our SDI acquisition included a 100,000 square-foot facility in Concord, California.

We're currently marketing the building with the intention of entering into a sale leaseback arrangement from which we would anticipate receiving net cash proceeds in excess of $10 million. So, with that, we'd like to now open up the call for your questions..

[Operator Instructions] Our first question comes from Jaeson Schmidt with Lake Street Capital Markets..

Hey, guys. Thanks for taking my questions. I just wanted to start with the cable business and trying to reconcile some of your comments, Jeff.

I know historically, December is seasonally weak, but just given the depressed quarters you've seen in June and September, could the cable TV business actually grow in December?.

Yes, I think it can. What you tend to see is almost a sawtooth pattern with the bottom of the sawtooth being in the March quarter, and the top of the sawtooth being in the calendar Q4. So, yes, I think we'll see an uptick in the current quarter. We're just being cautious about projecting big rebound in that business.

But, MSOs are spending more money, we see it..

And sticking with that business, have you seen any significant changes from a pricing standpoint?.

Oh, no, not at all. I mean, as a matter of fact, even without trying to give away too much, we see a movement toward more premium products in the network as opposed to some of the legacy DSPs that have been around for a very long time. And this price premium is actually better from a price performance standpoint.

But, no, there's really no pricing erosion to speak of..

Okay. And the last one for me and I'll jump back into queue. Can you just discuss why you're seeing so much success in the Aerospace and Defense business? Why you've won some of these programs? And I guess relatedly, I know when you initially made the SDI purchase, you guys were thinking sort of 10% growth for that business.

Now that you've had another quarter of it under your belt, is that still sort of the ballpark target?.

Sure. So, the defense business in general is interesting. It's a completely different animal than the way cable television works. The good news is once you get projects going, they take a very long time to stop. The challenge is some of the delays and other projects, other reasons why funding gets delayed to be maddening to deal with.

As I pointed out to someone before, the FAA control tower project started in 2011. We were awarded the design win in 2015, and then saw four years of successive push-outs. So, some of it is just being a little bit patient.

But, the reality is, we're among the very few people that can supply these high frequency links between say the radar systems in an airport and the control towers which have these large digital displays.

It really -- the Defense Optoelectronics success largely is driven by our ability to handle this linear/analog set of radio signals over fiber, just better than anybody else. I mean, we're the only guys to do this that have their own fab.

So, as we take a look at the common things with FAA control tower with the shipboard replacement of high frequency lengths, big waveguides, it all plays into our wheelhouse in this central, linear technology. And I think, that's the reason why it's driving some success there.

As far as the FOG projects go, we've been working for a very long time to get more sophisticated projects complete. Tom alluded to some costs that we incurred to try to get some things into production.

We're already seeing the benefits in the current quarter of some of the breakthroughs that we’ve had that are going to enable us to start shipping these things in larger volumes. So, it's really been a very carefully orchestrated effort to take advantage of our ability to manufacture these things.

And we believe, we're doing it in a way that that our competitors are going to have a hard time matching. And the competitors are chiefly Honeywell and Northrop Grumman. Finally, on the SDI side, the interesting thing about the Quartz MEMS projects or products is that that company originally was more driven toward automotive.

And as those opportunities dried up and were lost to CMOS, SDI kept getting pushed into higher and higher end applications. And now, we're seeing, as we get into the market that there's even more demand than we thought.

So, for example, one of the problems has been that the vast majority of SDI products had ITAR restrictions, making them require very stringent export licenses to even get into NATO countries over in Europe. We're now producing -- or starting to produce units that do not have that ITAR requirement.

They have the more -- the less stringent EAR licensing requirements that go through the commerce department where everything is more streamlined. So, the point is, it's going to be easier for our customers in Europe, major non-NATO allies over in Asia to buy our products than ever before. So, it's a combination of factors.

But that's a good thing, because it implies that there's strength across the Defense Opto, the Concord products as well as the FOG business in Alhambra. So, long winded answer to a good question..

Thank you. Our next question comes from Tim Savageaux with Northland Capital Markets..

First question for me is in terms of the business breakdown for the quarter. You mentioned defense products had 60% of total revenue. I imagine that might include some reclassification relative to your prior reporting.

I think, you mentioned the standalone EMCORE, and correct me if I'm wrong, on the defense side, coming in at $14 million, and you called out the SDI? So, I guess, it seems like you might have moved some stuff over from the Satcom area or not, or did you see just an incredible amount of strength in the defense business and organic import to get to that 60% of total in the quarter? Maybe just kind of clarify that, then I’ll go from there..

No. You're exactly right. As we've taken a look at what Satcom really is, that business is migrated from being a ground station business. It was originally the ground station equipment that the MSOs would buy for their head-end. So, when you take a look at the major programs that are running in that business.

They are virtually 100% defense related other than the nickel and dime level, product requests that will come in through distributors. And so, because they address common applications with common customers, Raytheon is our largest customer in that business area.

We put them in with the other Aerospace and Defense projects because -- or other products because of the commonality with the end user base..

So, beyond that you'd say that both on the SDI and on the FOG front that business develops kind of in line with your expectations, both in the September quarter and heading forward?.

Yes, absolutely. If anything, I think, the SDI opportunities were a little eye opening. While we knew as we were doing due diligence that ITAR was a significant hurdle to selling over in Europe, what we didn't understand was how straightforward it would be to resolve that problem.

And in fact, we've done that -- we've already submitted a request to the Department of State, which controls the ITAR licenses for these new products to begin moving them over into the Commerce Department with the EAR restrictions, which are far simpler to get licenses for basically with NATO countries. It’s very straightforward.

It only takes a couple of weeks. And this matches what our customers in Europe want. They don't want to deal with ITAR unless they absolutely have to..

If I can follow-up, Tom, to focus on the gross margins. I think, you mentioned a couple of factors driving some downside. I guess, what would be the baseline there when you mentioned one-third and two-thirds. It sounds like both of those factors ought to dissipate pretty quickly.

I imagine this obviously physically inventory should be done in the current quarter. But, is that relative to the prior quarter where you might have expected where you kind of had to look at in the high 20s versus the ‘19.

So, how do I -- what's my baseline for that comparison? And it sounds like you're saying you can, with the removal of those factors and some continued revenue growth, you can put on something on the order of 1,000 basis points of gross margin through your fiscal Q3? I just want to reiterate that’s the guide..

Yes. Good morning, Tim. So, if you look at the recent history here, you'll see on a non-GAAP basis, which we've now provided in the information we included in our press release yesterday, you'll see a relatively consistent sort of 23% through a lot of different changes in the business.

In the fourth quarter, we were lower at ‘19 for the reasons I mentioned, we had this year-end adjustment due to physical inventory. And then, we are -- we have the typical yield issues regarding the new products in the FOG area. Right? So, we're already seeing improvement on the yields as we are ramping up production.

And just bridging you from 3Q to 4Q, it was those two items.

But, as we look forward, if you add back to physical inventory adjustment, which is not a repeatable thing, and the improvement in the yields, and you're back to 23, and then you tack on the actions that we're now taking in our cable TV business to streamline and improve profitability there, right, you got the information that I gave in the prepared remarks about 2 percentage points of gross margin improvement on the outsourcing to an EMS model.

And then, we also did the reduction here in Alhambra. And that's another point. So, now, you're moving up into the 26%, 27% range. And that's before revenue growth and fixed cost absorption and down the road some other items like synergies with the Concord and other cost reduction.

So, we’re marching towards 30% when you consider that walk down that I just gave you..

That was immensely helpful. Thank you. And I just want to close with -- I just want to make sure I heard correctly sort of the late comment. You're selling the Alhambra facility for $10 million? I that what you said? I just want to make sure I got that..

No. It’s Concord, Tim..

Okay. Concord facility, right. The newly acquired facility..

Yes..

Okay. Got it.

And what's the timing on that?.

Well, we've had -- we marketed it starting in the beginning of the quarter. We've had good interest and have multiple offers. And we're in the middle of negotiating and just leave it at that for now..

Thank you..

Thank you. [Operator Instructions] Our next question comes from Dave King with B. Riley FBR. .

Thank you. Good morning. Yes, I too have some questions on gross margin as well. So, regarding our fiscal first quarter, I know you didn't talk about it. But, should we be thinking about of course margin as back to 23%, 24% or should we add a couple more points because of the Alhambra reduction and EMS.

So, maybe mid 20s, how should we think about gross margin for first quarter?.

Yes. I think, you're thinking about it, Dave, because the full implementation of the outsourced model is another quarter away. So, sort of middle fiscal 2020. But, your thoughts here in the way you phrase the question are the right way to think about it in terms of timing..

Got it.

And then, similarly on OpEx, how should we think about office going forward? Can you talk about the leverage? I think, it was around $12 million last fiscal quarter?.

Correct, yes. So, we were at $12.4 million in the fourth quarter on a non-GAAP OpEx basis. And like I said, we're looking at some non-repeatable items related to the SDI acquisition. And we had the reductions here in Alhambra related to the cable TV transition.

Remember, those reductions of around $3 million annualized; we’re about half in cost of goods sold on the margin side, and the other half coming on the OpEx side. We did have some of that benefit already in the fourth quarter for about a third of it. So, you going forward will see the full quarter impact of that.

So, think about it as somewhere in the 5% to 10% reduction, or like I said in the prepared remarks, about $1 million lower, there is other -- a lot of other pieces of the OpEx that are moving parts up and down. But, I think that's a good way to think about it..

And then, when you get to around $30 million in fiscal third quarter with 30% gross margin.

Should we expect OpEx to be kind of around that $12 million or so -- $11 million to $12 million, or can you talk about the variability?.

That's probably a good range and a good way to think about it..

Yes. The only other thing, we’ll expect to see a little bit less in project costs, material costs for new projects as these things taper off in beginning Q2 with the launch of new stuff into manufacturing. So, you don't see the engineering material that has been going into it starting in Q4..

Got it. And my last question is on cable TV, Jeff.

How should we think about cable TV, or what should our expectations be? It sounds like it's kind of bottoming at $8 million, where could the peak be and by when?.

Well, this is a $64,000 question. First of all, to directly answer your point, we've got evidence that it did bottom and that we're moving back up. We're a little cautious on the ramp, just because of being bitten so badly with the way that things went down.

I mean, the MSOs did not spend anywhere near as much as they said they would in the beginning of the year. Right? So we're taking this all with a grain of salt.

And it's also important to note that when we do get guidance from the MSOs, and you talk about infrastructure, it's not even a perfect proxy for what we sell, because there are other parts of the system, things like the Cable Modem Termination System, the CCAPs [ph] that go in.

And so just because everybody's doing well with those, doesn’t mean it's a great quarter for transport. So, you’ve just got to take a little bit of grain of salt with this. But all that said, we've gone in pretty carefully look at the various channels, one of our major customers uses distributors, one does not.

And we don't see an overhang like the one -- there was there was a bit of an overhang last year. And so, I think we're going to see a decent uptick into calendar ‘20. When you take a look at the comments that the MSOs have made, they’ve said that they're going to spend in a more linear pattern than they did in ‘19.

What does that translate to in absolute dollars, again, visibility is really limited at this point. I will say that as we look at the current quarter, we've seen evidence of a decent uptick.

We're wary about going much further because the March quarter for all the new shareholders is always a seasonally weak quarter, because at least a third, maybe as much as half the country, you can't do installs in the winter, right, just because of weather.

So, it's going to be better days, we just can't put our hands on exactly how much until we hear what the MSOs are going to project as far as their capital spend goes. And we’ll expect to see some of that information next month..

Thank you. I'm currently showing no further questions in the queue. And I would like to turn the call back over to Jeff Rittichier, CEO, for closing remarks..

In closing, I'd like to thank all of you for waking up early, especially the West Coast folks and your interest in EMCORE. I'd also like to acknowledge our employees and thank them for their hard work and commitment. It's really been a team effort to try to get back to profitability. And we look forward to challenge of completing the job.

Thank you very much. And we'll talk to you all soon..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect..