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…

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…

(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.