Erica Mannion - Investor Relations, Sapphire Investor Relations, LLC Timothy Jenks - President, Chief Executive Officer, Director and Chairman Raymond Wallin - Senior Vice President and Chief Financial Officer.

Alex Henderson - Needham Victor Chu - Raymond James Jorge Rivas - Craig-Hallum Capital Group Dave Kang - B. Riley.

Good day, and welcome to the NeoPhotonics third quarter 2014 conference call. This call is being webcast live on the NeoPhotonics Event Calendar webpage at www.neophotonics.com. This call is the property of NeoPhotonics and any recording, reproduction or transmission of this call without the express written consent of NeoPhotonics is prohibited.

You may listen to a webcast replay of this call by visiting the Event Calendar page of the NeoPhotonics website. I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations, Investor Relations for NeoPhotonics..

Good afternoon. Thank you for joining us to discuss NeoPhotonics' operating results for the third quarter of 2014 as well as the company's outlook for the fourth quarter. With me today are Tim Jenks, Chairman and CEO; and Ray Wallin, Chief Financial Officer. Tim will begin with a review of the third quarter results.

Ray will provide a financial update including results for the third quarter and the outlook for the fourth quarter of 2014. And then, we will open up the call for questions. All material contained in the webcast is the sole property and copyright of NeoPhotonics Corporation, with all rights reserved.

Certain statements in this conference call, which are not historical facts, may be considered forward-looking statements that involve risks and uncertainties.

Forward-looking statements include statements regarding business results, future levels of sales and profitability, subsequent events, product and technology development, future customer demand, inventory levels and economic and industry projections.

Various factors could cause actual results to differ materially from what is set forth in such forward-looking statements.

Some of the factors that could cause affect the company's results have been set forth in our press release dated November 10, 2014, and will also be described in detail in the company's SEC filings, including but not limited to, our Annual Report on Form 10-K for the year ended December 31, 2013, which we filed on June 4, 2014, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, which we filed on August 8, 2014, and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, which we anticipate filing shortly.

Listeners who do not have a copy of our third quarter 2014 earnings press release may obtain a copy of the press release by visiting the company's website. Now, I will turn the call over to CEO, Tim Jenks..

Thank you for joining us today. As I start, let me remind you of our view of what we want to accomplish over the next several quarters. On revenue, we will be focused on high growth areas, such as 100 gigabit per second product, while at the same time pruning products that are not contributing to profitability.

On expenses and cost of goods, we will continue to reduce. We are also putting extreme focus on strengthening our balance sheet.

While it will not always be a straight line of improvement in part due to seasonality aspects of our business, you should expect to be able to track our progress by how we execute on 100G, expanding gross margins, tightening expenses by balance sheet strengthening.

We're pleased to announce that we achieved record quarterly revenue of $81.6 million for the third quarter, which came in at the high-end of our updated outlook range of $80 million to $82 million, and represents a 5.3% increase over the prior quarter and a 6.2% increase over our third quarter of 2013.

We significantly expanded gross margins in the quarter, recording a non-GAAP gross margin of 26.5% in the high-end of our updated outlook range of 25% to 27%, and which reflects a 5.7 percentage point sequential increase.

We also decreased operating expenses in the period by $2.2 million, excluding restructuring charges and amortization expenses, which drove profitability in the quarter on a non-GAAP basis with non-GAAP earnings per share of $0.04 per diluted share.

In our 2Q call and subsequently in our updated guidance, we affirmed our commitment to build NeoPhotonics as a company with sustaining profitability. We believe our Q3 results show the progress we have made thus far towards this goal.

Third quarter revenue attributable to our Speed and Agility product group was approximately 74% of our total revenue, and was up $4.4 million from the prior quarter and up $7.4 million on a year-over-year basis.

Of this, revenue from our High Speed products that is 100G and some 40G was $37.1 million or 45.5% of total revenue in the third quarter of 2014, which is a 30.8% increase over the third quarter of 2013.

Our Access product group was strong at approximately 20.5% of total revenue, which was up $0.6 million over the prior quarter and down $1 million on a year-over-year basis. We remain excited about the pace of 100 gig adoption and the dynamics in our end-markets.

100 gig deployments were a significant contributor in Q3, as we saw strong demand across all of our 100 gig products with strong shipments following.

While we're pleased to see the 100 gig China opportunity materialize in volume this quarter, we also saw continued strength in shipments of 100 gig coherent systems by North American and European network equipment vendors.

That said, we remain cautious of inferring that these demand cycles will continue directly through the first quarter, as we typically see a seasonal decline in orders from China towards the end of the fourth quarter and into the first quarter, due to yearend activities and then the Chinese New Year holiday.

Related to the industry's ongoing transition from 100 gig clients CFP to CFP2 modules, we're encouraged by customer demand for our 100 gig CFP2 products and are having commenced production and shipments of these products in the third quarter.

We believe volume of shipments are on track to ramp in the first and second quarters of 2015, as the momentum of CFP2 adoption is accelerating. With respect to the micro-ITLA segment of tunable lasers, we're encouraged by increases in demand. We expect this to be a growth area for us in the quarters ahead.

In addition to our internally developed micro-ITLA solution, we are very excited to have announced that we will add EMCORE's narrow linewidth tunable products to our portfolio, which will expand the size and breadth of the micro-ITLA market opportunity ahead of us.

Our high-power photonic integrated DFB, or distributed feedback, array laser is ideally suited for emerging metro and intra-datacenter applications for intermediate distances at 100 gig and 400 gig.

For compact size, low electrical power consumption and the ability to integrate with other functions such as indium phosphide based coherent modulators are critical. And EMCORE's extremely narrow linewidth external cavity laser is ideally suited for advanced modulation formats and long distances at even higher speeds of 400 gig and above.

The combination of these technologies will allow us to provide customers with a full product suite that more completely serves the entire coherent market. As noted in our prior conference call, we expect to announce EMCORE transaction close by early January. Moving on to the Access market.

We continue to see strength over the near-term, as a result of growth in China LTE backhaul and FTTX. We view LTE backhaul as a growth area that gives strength to this product group, whereas we view the FTTX segment as a mature market. Shifting to the operations of the business.

As we discussed during our second quarter call, we initiated restructuring and cost reduction plan with a goal of accelerating our path to profitability, by reducing total operating expenses and product costs in the company.

The focus of this restructuring plan was primarily to decrease our corporate and business operating expenses, including reduced R&D spending, to drive manufacturing efficiencies and to map further manufacturing and facility efficiencies over time.

We made considerable progress with our restructuring actions in the third quarter and we will continue to implement further actions over the next few quarters. As a result of the actions taken in the third quarter, we saw several benefits in our operating results.

Beginning with gross margins in the quarter, we saw a 5.8 percentage point increase, and Ray will detail this shortly.

Similarly, as I noted earlier, our operating expenses, excluding the restructuring charges we recorded in the third quarter, were down $2.2 million sequentially, which is in line with our guidance of approximately $2.5 million per quarter savings from our restructuring, including both operation expense reductions and reductions to cost of good sold.

We achieved $81.6 million of revenue and positive non-GAAP EPS of $0.04, in line with our stated breakeven level of $80 million to $85 million. While our goal of reaching sustained profitability is not yet complete, we have confidence that actions we are taking put us squarely on the path to sustain profitability.

In addition, with the announced EMCORE acquisition, we will not be acquiring manufacturing facilities, real estate obligations or assembly operations. Therefore, we believe our current breakeven level of approximately $85 million will hold post-acquisition in integration of the EMCORE business.

We are continuing to grow revenues, as we introduce new products in strategic areas, including micro-ITLA, CFP2, Multicast Switch and new coherent receivers and transmitters for 100G and above networks, and each of these contributes to our gross margin dollars. Our focus is profitable growth for these new products.

And as we have said in prior calls, we are pruning lower margin or loss products. The announced EMCORE transaction is expected to provide further topline growth. In this area too, we will focus on profitable areas and future growth strategic products.

As a result, we do not expect 2015 revenues to reflect the sum of EMCORE telecom products with ours rather we will grow the segments that can contribute to our path to profitability.

We renegotiate prices with our customers during our fourth quarter, which generally causes revenue and margin to be slightly lower in Q4, and then to have full impact of ASP declines in Q1. However, as I have said, we are committed to our path to profitability.

We expect to manage our expenses tightly and to continue to operate, so as to strengthen our balance sheet. We were profitable in Q3 on a non-GAAP basis. We generated cash from operations and we are working to further align management compensation with shareholders by linking their compensation to profitability and stock appreciation.

Wrapping up, while we continue to take the long view on the market opportunities ahead of us by investing in next-generation products to serve the growing adoption of coherent networks and the use of high-speed modules on the client side, we remain vigilant of our cost structure to ensure we execute on our path to sustain profitability in the coming quarters.

I'll now turn the call over to Ray Wallin, our Chief Financial Officer, to run through the quarter in greater detail.

Ray?.

Thank you, Tim, and good afternoon. I will start with a review of the financial results for the third quarter ended September 30, 2014, and conclude with our outlook for the fourth quarter of 2014.

For the third quarter of 2014, revenue was $81.6 million, an increase of 5.3% from the second quarter of 2014 and an increase of 6.2% from the year-ago period. We had two 10% or greater customers in the third quarter of 2014.

Ciena comprised approximately 17% of our total revenue compared to 13% in the second quarter; and Huawei Technologies comprised approximately 35% of our total revenue compared to 39% in the second quarter.

Geographically, our revenue mix for the third quarter was 25% in Americas compared to 20% in the second quarter; 50% in China compared to 54% in the prior quarter; 5% in Japan, which is flat with the prior quarter; and 20% in the rest of the world compared to 21% in the prior quarter.

Note these figures are based on shipment destination and not end-use destination. Our gross margin for the third quarter of 2014 was 24.6%, an increase of 5.8 percentage point sequentially from the 18.8% reported for the second quarter of 2014 and an increase of 0.9 percentage points from the third quarter of 2013.

And non-GAAP gross margin for the third quarter was 26.5%, ahead of our updated outlook of 25% to 27%, and represents an increase of 5.7 percentage points versus the previous quarter's non-GAAP gross margin of 20.8% and a decrease of 1 percentage point from the prior-year period.

As a result of the profit improvement actions initiated in the third quarter, and as Tim noted, we saw several benefits in our operating results. Now, beginning with gross margins. In the quarter we saw a 5.8 percentage point sequential increase and a 4.5 percentage point increase compared to the first quarter of 2014.

Now sequentially, our margin increase was due to improvements in product mix, ongoing manufacturing process improvements and related cost reductions, along with the restructuring actions we took in the quarter.

Now, given the dilutive gross margin issues we experienced, related to product transitions as well as above-average inventory write-downs in the second quarter, a cleaner comparison maybe to the first quarter of 2014.

And relative to the first quarter, our third quarter margins increased 6.3 percentage points, mainly due to manufacturing process improvement and related cost reductions as well as the restructuring actions we completed in the quarter.

As we have stated on our previous calls, holding variables such as product mix and volumes constant, we typically experienced between 1 percentage and 2 percentage points of gross margin improvement for quarter on manufacturing process improvements alone, which reflects the increases we saw from the first quarter to the third.

The increase in gross margin from the previous quarter was primarily due to a mix shift to higher margin products, including certain 100G products as well as the reduction in overall manufacturing cost, in particular lower inventory write-downs somewhat offset by restructuring charges impacting cost of good sold.

Moving on to operating expenses, and excluding the restructuring charges we recorded in the third quarter, operating expenses were down $2.2 million sequentially, which is in line with our guidance of quarterly savings from our restructuring activity, as these activities largely took place during the third quarter, and thus we did not have the benefit of having a full quarter at these new lower operating expense levels.

As a company, we are committed to our path to profitability. So as a result, we anticipate some additional restructuring charges, as we proceed to the next few quarters. Now, SG&A spending for the third quarter was $9.8 million or 12% of revenue, down from $11.8 million or 15.2% of revenue in the second quarter.

Of this, G&A expenses in the third quarter were $6.7 million or 8.2% of revenue, down from $8.2 million or 10.6% of revenue in the prior quarter. Our research and development expenses were $11.8 million or 14.5% of revenue, which was down from $12.1 million or 15.6% of revenue in the prior quarter.

Operating loss for the third quarter of 2014 was $2.4 million or 3% of revenue compared to an operating loss of $5.8 million or 7.5% of revenue for the second quarter of 2014, and an operating loss of $8.5 million or 11.1% of revenue for the prior-year quarter.

While our effective tax rate for the third quarter reflects the impact of income taxes related to our non-U.S. operations, we expect that our full year effective tax rate will be approximately 9%.

Also reflected in our operating results was a foreign exchange gain of $1.8 million, including other income expense net of approximately $0.06 per share benefit, due to weakness in the Japanese yen as against the U.S.

dollar, in relation to certain transactions with our subsidiary in Japan; and due to the recent changes in quantitative easing announced in Japan, we anticipate continued weakness in yen, in relation to the U.S. dollar. Our net loss for the third quarter of 2014 was $1.9 million compared with a net loss of $6.8 million in the second quarter of 2014.

And diluted loss per share for the third quarter of 2014 was $0.06, which is significantly lower than the loss of $0.21 per share in the prior quarter, and is also lower than the diluted net loss of $0.30 per share in the third quarter of 2013.

Non-GAAP net income for the third quarter of 2014 was $1.3 million as compared to a net loss of $7.5 million in the second quarter of 2014 and a net loss of $3.2 million in the third quarter of 2013.

And non-GAAP diluted earnings per share for the third quarter of 2014 was $0.04 as compared to a loss of $0.24 per share in preceding quarter and a loss of $0.10 per share in the year-ago period.

And adjusted EBITDA reflected earnings of $7.3 million in the third quarter of 2014, an increase from the loss of $2.6 million in the second quarter and improved from the adjusted EBITDA earnings of $1.9 million in the third quarter of 2013. Now, turning to the balance sheet.

Cash, cash equivalents and restricted cash and investments was $57.9 million at September 30, 2014, up from $54.4 million at June 30, 2014. And total debt at September 30, 2014, was $46.3 million, a net decrease of approximately $2.1 million from the second quarter of 2014.

Our improved cash position was driven by $8.9 million of cash provided by operating activities in the third quarter of 2014. Our accounts receivable remain essentially unchanged in the third quarter, finishing at $79.2 million. And days sales outstanding were 87 days at the end of the third quarter compared to which was flat as of the second quarter.

And our ending accounts receivable balances reflected improved collections in the quarter, even while revenues increased by $4.1 million compared to the preceding quarter.

And net inventory decreased approximately $5.2 million during the third quarter to $58.8 million, while days of inventory on hand decreased to 86 days from 94 days in the second quarter, as we achieved manufacturing efficiencies on higher revenue.

Our capital expenditures totaled $3.2 million in the third quarter, down from $3.8 million in the prior quarter, and we expect our capital expenditures to be in the range of $1.5 million to $2.5 million per quarter over the next two quarter.

In third quarter depreciation and amortization was $6 million, up slightly from $5.9 million in the prior quarter. Now, moving on to our outlook for the fourth quarter of 2014.

Please recall that we negotiate prices with our customers during our fourth quarter, which generally causes revenue and margins to be slightly lower in the fourth quarter, and then to have full impact in the first quarter of the following year.

Now, given this background, we anticipate revenue for the fourth quarter ending December 31, 2014, to be in the range of $74 million to $80 million. And gross margin is anticipated to be to be in the range of 23% to 25%, a decrease of 0.6 percentage points compared to the third quarter at the midpoint of the range.

And non-GAAP gross margin is anticipated to be in the range of 24% to 27%, a decrease of 1 percentage point compared to the third quarter at the midpoint of the range, due to typical seasonal pricing considerations experienced in the fourth quarter. And diluted net loss per share is expected to be in the range of $0.08 to $0.20.

And non-GAAP diluted net loss per share is anticipated to be in a range of $0.01 to $0.13. Now, the share count assumption used to estimate the fourth quarter is approximately 33 million diluted shares.

As we continue on our path to profitability, we would like to provide you with some insights into the dynamics of our business, as it relates to the company's revenue for 2015. First, we anticipate overall market growth and growth in our 100G product suite. Second, the EMCORE transaction will add to revenue for 2015.

However, we want to point out, that we will be focusing on emphasizing the profitable EMCORE products. And third, as we have reported in our last two conference calls, we have been working to prune certain lower margin products from our portfolio, and we expect to complete this during the first half of 2015.

Now, ending production of these products will result in an offset to market growth. And we hope these elements will provide you with the view into the company's revenue for 2015, with an overall perspective of driving towards achieving modest, but profitable growth, with gross margins targeting our company model.

Now, this concludes our formal comments. And now, I would like to ask the operator to open the line for questions..

(Operator Instructions) And we'll take our first question from Alex Henderson with Needham..

First question, maybe I'm not sure I put this all in correctly when I was loading it.

But can you talk a little bit about what's in the other income line that $1.7 million in there? What is that?.

Well, most of that is the foreign exchange gain that we mentioned in our script. The foreign exchange gain component is $1.8 million..

So the negative $100,000 otherwise?.

Yes..

And talking about the '15 guidance that you just talked through, I assume that the micro-ITLA piece of EMCORE is profitable and that's going to continue.

Are you talking about the macro-ITLA piece being less interesting and therefore not including that or how do I think about that?.

Actually we would expect that the ITLA products for 100 gig will continue. The company also has a number of products that are much smaller in revenue and primarily developed around the 10 gig market, so some of those may have a shorter life..

So the 100 gig stuff is all intact, it's just the tunable stuff didn't accept tee-ins and like..

Yes. That's what we expect. Yes, that what we would expect..

So that's a pretty sizeable contribution to revenues.

Can you compare that and scale to what's your pruning in the first half?.

Well, let's say, in our conference call where we announced the acquisition of EMCORE, we said that these products were representing about $9 million per quarter, plus or minus. And the products that are pruning are essentially they are in modest single digits. So it could add up to maybe 5% of our revenue, but it's in that ballpark..

So $2 million to $5 million pairing; $9 million added, so net above $5 million or so a quarter kind of thing..

I think that's reasonable, yes..

And then the China situation, can you talk about how you would play the seasonality on that? I mean, just sort of take us through the normal pattern of their holidays and stuff, because obviously that that plays a big role in the timing of when you get revenues out of there..

Are you referring to China with respect to EMCORE?.

No. Your sales into China, in general..

Yes. Essentially the impact, I think what Ray's comments were relevant to the first quarter.

There are generally, three impacts in China; the first one is pricing and ASP decline, which we entailed; the other one is the fact that the first quarter is generally a short quarter, because of holidays and China New Year at the end of January, which is a little over a week shutdown; we have an additional effect that our Access business is primarily an outside plan, so that tends to contract little bit in the winter quarter.

But the result of that is our first quarter tends to be our seasonal low. We'll continue to enjoy continuity of business, but the first quarter tends to be lower than the fourth quarter as a result..

Can you talk a little bit about what the pricing impact of bringing the EMCORE business in-house is? Obviously, they were the most irrational pricers on the planet with almost no control over the way they priced their product.

I assume that once you brought it in-house that you're going to be able to establish a better discipline around that, which should not only impact EMCORE's business, but also impact your existing business.

Can you talk a little bit about that?.

Well, the overall 100 gigabyte market is a strategic growth area. And so it is a competitive market increasingly. And with a number of larger players now more present than preciously, and I think these larger companies are concerned about their performance and tend to be rational overall.

I think that it is worth pointing out though that we expect that deal to be closed by early January and most of the negations take place in November and December. So I think we'll do our best to manage the business in an appropriate way in 2015. But ultimately agreement to that come into place in 2014, we'll already be in place..

So are you saying that you don't have the ability to control how they price in the stub period?.

No. I don't. We don't have control over the company until the transaction is closed..

Is there any provisions to protect you from the irrationality during that window?.

No..

Well, but one thing we could point out again, this is our perception that their motivation does change, now that they're going to be part of NeoPhotonics. And so I think whatever that's worth, I think you may see some change of behavior..

So do you think they are less likely to drop prices just to go from market share upfront then?.

Yes. Exactly..

So you would expect more rational pricing then?.

We would be expecting the more rational. Yes, definitely..

We'll take our next question from Simon Leopold with Raymond James..

This is Victor Chu in for Simon Leopold. I'm sorry, if I missed this earlier.

Did you disclose your contribution from 40G and 100G?.

Actually, we talked about your Speed and Agility being about 74% of the total, and off that the 40 gig and 100 gig is about 45% of the total for the quarter..

And just on Alex's China question.

I just want to get a more general overview, kind of what your thoughts are on spending in China 2015 overall from 100G and for consumer broadband in backhaul and the likes?.

I didn't hear the backend of your question, Victor, could you say again?.

Just your thoughts on spending in China, in 2015 overall, in general, for 100G and on consumer broadband in backhaul?.

So actually just on your last question, let me just make sure I was clearly understood, when I said 45%, I don't mean 45% of 74%. I mean 45% of our total revenue was the 100G and 40G. Okay. And for 2015, the business has been relatively strong and it's been strong in the second half.

Generally, in the business in China there is a fair amount of news about what will happen that comes out just after the Chinese New Year, which means the first part of February. But at the moment, I think it looks like it will have continued strength, and that deployments will continue.

The customers are suggesting continuity of their deployment schedules, and so while there aren't really new headlines either to highlight, the general view of customers is for a reasonably strong 2015..

Beyond your annual pricing adjustments, how does ASP evolve as the mix of 100G products shifts from long-haul to metro applications?.

Well, generally speaking we would think the preponderance of 2015 revenue are likely to continue in the long-haul transport, but metro is beginning. Without a doubt, metro tends to be at lower prices than transport and that goes hand-in-hand with certain of the products being lower performance.

So while volumes increase, average ASP per unit would decrease. But I think again, for 2015 it would probably look a lot more like 2014, just because the majority will continue to be transport..

Would you sell different products for metro than long-haul or other cost reduced versions for metro 100G?.

Generally speaking, metro deployments are using line cards or transponders that are a generation newer than comparable designs that have been done for long-haul.

And therefore while the names of components, if you will, are often the same, they're transmitters, they're modulators, they're lasers, they are receivers, they are often redesigned smaller form factors, potentially lower price and with a different spec. So it does go hand-in-hand with the drive for higher volume at lower cost with metro.

And so the answer is yes, there is a whole new generation of component products that go into these systems..

And just quickly on your Technical Difficulty can you speak about the timing of when you're expected to pay down for the EMCORE acquisition?.

Yes. So just to give you an overview, it's a two year note. And in addition to that, while the first year's interest is 5%, the second year is 13%. And so our motivation here is to attempt to paydown the note before we get to the second year, because it's kind of confiscatory rate.

And so we would be looking to do that based on other things we would be looking at in the company in terms of generating more cash internally and/or restructuring our existing line, so on and so forth, so we're targeting the first year to pay it down..

Take our next question from Jorge Rivas with Craig-Hallum Capital Group..

Quick question on micro-ITLAs.

As we transition to micro-ITLAs in 2015, and once the NeoPhotonics and EMCORE business are combined what would you expect your share to be in micro-ITLA market?.

Well, I think EMCORE's total revenue for ITLAs and micro-ITLAs is slightly larger than ours, with looking just at micro-only. They were in production earlier. And I think that currently they're enjoying half or slightly more than half of the market for micro-ITLA..

So is it fair to say that, we should expect something about something about 50%..

Say that again..

Would you prefer to say that, we should expect a share about 50%, once these two businesses are combined taking into account there are new entrants into the market?.

I think at the start that's a reasonable assumption, but it is a competitive market and there are other entrants as well. We also think that with both the general growth of the 100 gig market and with the turn-on of a number of metro systems, the overall volume growth will continue to grow relatively fast though..

One more question. So I'm sorry if I missed this, but could you mention when will you be able to hit, when would the business be able to hit the target gross margins, once your low margin products are prune, which you say would take place in the first half.

Is there reason, I would expect that sometime in the second half of 2015?.

Yes. So we have what we call our interim model and then we also have what we call our target model. And the interim model is to get to sustained breakeven for the company and the target model is to get to positive net income percentage, somewhere north of 5% on a sustained basis.

And so we were looking to achieve the interim model here over the next one to two quarters or so. And then the target model would have been 12 to 18 months from about a quarter or two ago. That's kind of the timing..

We'll take our next question from Dave Kang with B. Riley..

Regarding the EMCORE situation, so I believe you said it will be accretive in second quarter.

So first quarter, is that going to be dilutive or neutral?.

Well, I think it will be slightly dilutive in the first quarter. We've acquired a company starting early January is targeted at this point. And then there will be some kind of jockeying around combining facilities, moving people around, there you'll have some costs.

There maybe some restructuring costs associated with it, although most of that's going to be born by the seller. And kind of that's a transition quarter Q1. And then so it is integration costs is what could driver to be dilutive in the quarter.

But then in the second quarter, we're there what's kind of a clean sheet, and fully integrated with our existing businesses. So we have the opportunity there to save class of the combined companies..

And then can you just talk about the visibility, especially North America. It seems like there are some mix data points there. What do you see from your side with your two major customers Ciena and ALU, particular..

Well, let's see, in terms of visibility, the overarching situation has to do with the overall CapEx picture. We have just very recently seen some decreases notably with AT&T in CapEx. That doesn't translate directly to visibility, however.

So for example, in terms of North American customers such as Ciena and Alcatel, I think Ciena actually expects to benefit some, even though the overall CapEx numbers might be compressed, they would expect to benefit. And in the current quarter Ciena was 17% of our revenue, so it's a positive.

That overall theme is that when CapEx compresses, that's negative, but then our customers do well it can offset that. So there isn't at this point a clear trajectory as to whether our visibility is better as a result of knowing more about the 2015 CapEx.

I think what we're seeing is continued pressure on the more legacy systems and the 10 gigabit systems and more of the available wireline CapEx going to 100G and coherent systems..

And I thought it was interesting, actually Ciena it was still a 10% customer and yet ALU fell off.

Can you just go over what caused that? I thought it would be sort of a reversal?.

Well, it varies quarter-to-quarter based on their shipment schedules. I think in the case of those two customers, Ciena as a customer is really a transport metro customer there, so line side 100 gig. Alcatel has both, the transport side of the business, and fiber-to-the-home or PON side of the business.

I think in the most recent quarter, the Alcatel PON side of the business was a bit softer, and so that made a difference for the quarter..

And then last question is on your pruning process.

So are you mainly looking at the Access and legacy stuff, is that kind of where the pruning process will hit the most?.

Yes. I think that's accurate. It's not in the new strategic growth area, it's in 100 gig I'll tell you that..

Does the Speed and Agility -- any of the Speed and Agility get impacted?.

Not in the material way, no..

And we'll take a follow-up question from Alex Henderson with Needham..

I was wondering if you could just step us through the cash flow scenario for the next couple of two, three quarters with what are the pings and pongs that are in that waterfall?.

I think we got to look at it. If you look at the Q4, starting with the fourth quarter, we would be seeing the continued management around the receivables and the inventories that we've talked about, so we achieved in Q3. And so that'll be number one.

Number two is, we have just a normal debt payment; again the fourth quarter is nothing unusual, and then given our guidance for the non-GAAP of $0.01 to $0.13, I think very close to into either breakeven or a real loss; combination of all that with our non-cash expenses here, it would be very possible to generate cash in Q4.

And I might add also that we'll be holding the line here on capital expenditures. So we see we have reasonable shot at growing some cash in Q4, and I don't really have a number for you in terms of that, because no matter what I'll say it will be wrong, but I would say, it'd be in the flat cash to the low millions or higher.

So in Q1, I really don't have much commentary there on Q1, only because we haven't really done detailed plan around Q1 here, so we don't give guidance out that far anyway. What are variable for us, we're going to be acquiring EMCORE business in Q1, and also we do have debt payment with our mortgage in Q1 in Japan.

We also have a $1.5 million payment for the escrow account in connection with the acquisition, probably it would be in Q4 potentially, but it would be given Q1. So there are some unusual items in Q1 that impact the cash numbers.

And then of course, whatever the revenue and/or profits are obviously we'll do that, which we don't have a visibility into at this point in terms of public announcement..

So is it reasonable to think that little generation in Q4 or a little bit of a burn in Q1, and then net between the twos, probably flat to slightly down?.

I think it is reasonable to think some generation in Q4 and some burn in Q1. It's hard for me to say how much the burn in Q1 would be, but it would be a neutral between the two quarters, it'd be hard to say.

I was just going to say, one thing you should you realize is that cash is our singular focus in the company right now, in terms of making sure we're managing cash expeditiously.

I think when we were in the conference call last quarter at this time, we were talking about burning some cash in Q3 and we ended up actually generating cash in Q3, and we ended up actually generating cash in Q3. We are surprising ourselves, our ability to manage the balance sheet and expenses. But I can't really give you a specific number for Q1..

So the second question is around the restructuring.

Is there any sense of the scale of additional charges or cash out that might be coming down the pike?.

Alex, we announced the restructuring action, and some is in -- we did made a lot of progress in Q3 and there's more progress in Q4. So it would be really smaller levels of restructuring charges than we had in Q3, comparable but smaller. I think is the best I could say..

So can we talk about the restructuring benefits going forward? You noted that your OpEx declined by $2.2 million and that you're looking for overall cost savings of $2.5 million a quarter prior.

So is there an update on what you think the ultimate benefit of these restructuring actions will be? Is it now more than $2.5 million a quarter or how should we be thinking about that?.

Recall that it was actually $2.5 million a quarter, and what we said was $2.5 a quarter plus we said about $1 million a quarter of G&A. And the G&A addition was recognizing that we had done a lot of restatement work and we ended that. So you add them together, yes, it would be a bit more than $2.5 million.

And just let me finish, just the $2.5 million was, 75% of that we said was actually in OpEx. So if you just do the math, 75% of $2.5 million plus $1 million, it's just a bit under $3 million..

I may add just one additional point to that. As you know, we're entering the end of the year and also what that means is that we're also doing our annual audit. And so the audit fees are, as you incur the service, they get paid. So those fees are heavily weighted towards the end of the fourth quarter and principally in the first quarter.

And so that potentially could drive an increase in OpEx over current levels in that quarter. So that's one thing to consider..

Just so we're clear, so it sounds like you have another about $1 million a quarters worth of cost cutting coming out of the numbers over the next couple of quarters, as you finish up restructuring, is that what I'm hearing?.

Alex, I think it's really just between $2.5 million and $3 million in total. And so rather than saying it's an incremental million dollars a quarter, I think the total will be between $2.5 million and $3 million per quarter. There's a little bit that goes in cost of good sold also, but just in OpEx between $2.5 million to $3 million..

And keeping in mind that again not to beat the horse down some more, but we do have heavily a weighting of audit fees in Q1 time period that will kind of avail those costs..

And at this time there are no additional questions. So I'll now turn the conference back over to Mr. Tim Jenks for additional or closing remarks..

Thank you. In closing, I would like to thank everyone for taking the time today to join our call. We look forward to updating you on our progress on our next quarterly call. Have a good day. Bye..

Thank you for your participation. This does conclude today's call..