EMCORE's (EMKR) CEO Jeff Rittichier on Q3 2016 Results - Earnings Call Transcript

| About: EMCORE Corporation (EMKR)

EMCORE Corporation (NASDAQ:EMKR)

Q3 2016 Earnings Conference Call

August 04, 2016 05:00 PM ET

Executives

Erica Mannion - Investor Relations, Sapphire

Jeff Rittichier - President, Chief Executive Officer

Jikun Kim - Chief Financial Officer

Analysts

Jaeson Schmidt - Lake Street Capital

Dave Kang - B. Riley

Tim Savageaux - Northland Capital Markets

Operator

Good day ladies and gentlemen, and welcome to the EMCORE Corporation Fiscal Third quarter 2016 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] and as a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference Erica Mannion of Sapphire Investor Relations for EMCORE. Ma’am, you may begin.

Erica Mannion

Thank you, and good afternoon, everyone. Before we begin, I would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934.

These forward-looking statements are largely based on our current expectations and projections about future events and trends affecting our business. Such forward-looking statements include in particular, projections about future results, statements about plans, strategies, business prospects, changes and trends in the business and the markets in which we operate.

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

We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements and the business that are included in the company's filings with the SEC and that are available on the SEC's website located at www.sec.gov including the sections entitled Risk Factors in the company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

The company assumes no obligation to update forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.

With me today from EMCORE are Jeff Rittichier, President and CEO; and Jikun Kim, Chief Financial Officer. Jikun will review the financial results and Jeff will discuss business highlights and fiscal third quarter guidance before we open up the call to questions.

Now, I'll turn the call over to Jikun.

Jikun Kim

Thank you, Erica, and good afternoon, everyone. This being my first earnings call with EMCORE, I would like to introduce myself. I’m very excited to be part of a company at this critical juncture as we build upon the foundation formed over the past two years. I look forward to working closely with EMCORE’s Board of Directors and management team to refine and execute our mixed-signal optics strategy to drive long-term shareholder value.

Now onto the summary of our Q3 FY16 ending June 30, 2016 financial results. Please note that consistent with prior quarters, these results include effects of classifying what remains of EMCORE’s Telecom and Photovoltaic businesses as discontinued operations. EMCORE performed well in the quarter, revenues came in within the guidance range and strong operational performance drove quarter-over-quarter gross profit margin improvements, overcoming strong headwinds.

Consolidated revenue for the quarter totaled $22.4 million, which is 4% higher than the prior quarter and that’s a lower half of our Q3 FY16 revenue guidance of $22 million to $24 million. Cable TV which includes R5 product line drove the quarter-over-quarter revenue growth which was offset by a decline in our GPON chips. This quarter’s performance was also impacted by a delay in the shipment of a SAT [ph] car motor into the fourth quarter.

Fiber Optic Gyro performance was on plan during the quarter. Our gross profits in Q2 were approximately $7.4 million or 6% higher than the prior quarter. Gross profit percentage increased by 50 basis points quarter-over-quarter driven by the improved efficiencies.

Six sigma initiatives continue to be a contributing factor in driving operational improvements. Unfortunately these operational efficiencies were negatively impacted by lower chip pricing and lower material overhead absorption in the quarter, partially related to the long-term inventory purchases.

Total operating expense for R&D and SG&A were $5.9 million approximately $1.5 million lower than the prior quarter. The decline in SG&A was driven by the $2.6 million reimbursement of legal expenses related to the Sumitomo arbitration agreement but offset by higher severance, other legal and equity compensation expenses in the quarter.

R&D investments declined approximately $0.2 million quarter-over-quarter due to normal variations in project expenses. On a GAAP basis, the consolidated pretax income for the third quarter was $1.4 million or $1.7 billion better than the prior quarter.

Our GAAP net income was $1.3 million in Q3 or $2.7 million lower than the prior quarter. This decline was primarily driven by the Sumitomo arbitration settlement that we recognized as part of discontinued operations in the prior quarter.

Our non-GAAP pretax income for continuing operations after excluding certain adjustments, all of which are set forth in the non-GAAP tables included in today’s press release was $0.6 million relatively flat compared to the prior quarter.

Please note that we have included additional information regarding unique transactions, legal related expenditures, severance, stock compensation, amortization and other items in today’s press release to provide further clarity on our results.

Moving on to the balance sheet and cash flow statement; at the end of Q3 FY16 the company’s cash and cash equivalents was approximately $105 million or a decline of $5.3 million quarter-over-quarter. The decrease in cash from prior quarter was primarily driven by increased inventory as well as accounts receivable offset by higher accounts payable balances.

Please note that EMCORE funded the special dividend payment of approximately $39 million on July 29, 2016. The stock went x-dividend on August 1, 2016. Regarding our working capital metrics, DSOs were at 88 days, higher than our typical range of 65 to 70 days, driven by a backend loaded quarter.

Net inventory terms including non-current inventory was at 2.4 times, as we increased purchases of certain components, primarily related to lifetime buys of raw materials which increased inventory levels.

Overall, our financial results improved relative to the prior quarter. EMCORE continues to perform with higher efficiency and improved factory absorption driven by realization of cost savings from six sigma initiatives.

Our continuing operations were profitable on both GAAP and non-GAAP basis. For the first month of Q4 operations continues to perform well.

With that, I will turn the call over to Jeff.

Jeff Rittichier

Thanks Jikun and good afternoon everyone. Before walking through our third quarter results in greater detail, I’d like to take a moment to discuss the outcome of our strategic review and the decision to issue $1.50 per share special dividend.

When I first joined EMCORE, there were several direct actions which needed to be taken to improve the health of the business and right-size it after the divestitures of both the solar and telecom business. As a result of these actions, we were able to grow revenues by 47% and improve gross margins by 13 points within the first fiscal year, positioning the company for profitable growth.

Building on this progress, in June 2015, we elected to return $45 million to shareholders by way of a Dutch tender and also begin executing the strategic realignment of the manufacturing operations to improve our efficiency and reduce our breakeven point.

With the core operations of the business on improved footing and roadmap for our operations team in place, in December 2015, the board and management reinitiated their comprehensive strategic review with a focus on striking the right balance between return on capital to shareholders and investing in growth opportunities to generate long-term shareholder value.

As part of the strategic review process, the company evaluated its growth opportunities in existing and adjacent markets, analyzed its products, technologies and production capabilities and concluded that the best way to grow the business and drive long-term sustained value creation was to leverage EMCORE’s core competency in mixed signal optics in both existing and new markets.

Mixed signal devices have both, analog and digital elements on single or even multiple chips offering the opportunity for unique products outside the communication market. The value of these solutions is often far greater than those found in communication products, providing EMCORE with an opportunity to leverage its unique expertise.

Given EMCORE’s existing leadership in mixed signal optic products such as the DOCSIS 3.1 transmission devices and the cable television market. And emerging position in new products such as fiber optic Gyros and 5G distributed antenna system components for wireless applications, it became clear that EMCORE has the potential to create leadership positions beyond our traditional communications focus by leveraging these mixed signal competencies including our design expertise and captive wafer fabrication facility.

Our mixed signal strategy opens up market adjacencies that will also share common technical and production assets with our current products. Hence, these represent our lowest risk, highest return opportunities for profitable growth.

Our first proof-points of the merits of the strategy, is the early success we had in the fiber optic Gyro market. As our Gyro products share the same technologies, chip designs and production assets with our transmission products, we’re able to leverage our high volume infrastructure and improved performance while driving down cost in a traditionally lower volume, higher value added product area.

As a result, our fiber optic Gyro products has significant size, weight and power advantages versus competing solutions in the market today and are offered at lower prices.

While we’re seeing a high degree of customer interest in the market for our fiber optic Gyro within the $1.3 billion fiber Gyro or ING market, it’s important to note that this is nearly one application within the broader $3.4 billion fiber optic sensor market.

Sensors by their nature collect non-digital, real-world information and process that information into the digital domain where higher levels of control and analysis are done. As a result, the combination of analog and digital functionality inherent in mixed signal technologies is crucial for the performance of many products, while the ability to lower production cost will drive a greater proliferation of individual applications.

We believe EMCORE’s core competencies and engineering, wafer fabrication and lead assembly will provide us with opportunities to replicate the success we’ve seen in the Gyro market enabling us to grow our business profitably.

With that said, we’re still early in our evaluation in development of these opportunities. And while we’re excited to explore the potential of each, we’re also pragmatic in our approach as we do not want to lose focus on the core business.

As of today, we’re concentrating on the capital investments required for the exploitation from these opportunities. And to be clear, we have not yet identified any M&A targets at this time. However, given the new market opportunities that have the potential to accelerate both top-line and earnings growth, and generate substantial long-term shareholder value, we’ve decided to maintain a degree of flexibility in our capital structure for just such investment opportunities as they arise.

With approximately $85 million of cash returned to shareholders since June 2015, representing approximately 50% of the cash received from operations sold in the prior fiscal year, our board believes we struck the right balance between capital returns to our shareholders and flexibility that the business needs to grow its income.

Having settled on the strategic direction I just discussed, we conducted extensive analysis of the company’s liquidity needs and analysis of the cycles affecting profitability and cash flow, the company’s best return opportunities on internal capital spending and finally, a view of the size and type of acquisitions that the company might consider at some point in the future.

We found all these analysis overlaid well with a strong convergence at about $1.50 per share capital return. While these balance sheet transactions are now complete, we’re now focused on our plan for building long-term shareholder value for the profitable growth of our core business as well as entrance into adjacent market opportunities which will enable us to generate additional leverage from our intellectual property and our technical and production assets.

Moving on to our third quarter results. As Jikun highlighted earlier, despite headwinds in the GPON market, we did a good job this quarter not only on top-line growth and product mix but through improved efficiencies in our manufacturing operations. We managed our operating expenses well and began the process of reducing our operations headcount as planned.

Within our cable television business in the third quarter, we saw a return to strong revenue growth both sequentially and year-over-year. This strength and demand clearly demonstrates that the MSOs are making their plans shift to DOCSIS 3.1 fiber D deployments.

Given our leadership position in the market and the significant investments we’ve made in CATV chip technology over the past few years, EMCORE is enabling the shift to DOCSIS 3.1. Over the next year as we rollout new products based on the LEML, and it’s derivatives we expect those products will set the standard for both DOCSIS 3.1 and RF over Glass deployments in downstream and the transmitter portions of the network.

Evidence of this can already be seen with our recently announced $4.7 million purchase orders to supply R5 optical networking units to a major U.S. supplier of network infrastructure for the cable TV market. And these are expected to be shipped over the next quarter or two.

Within our chip business, revenue decreased by approximately $1.8 million sequentially due to softness in the GPON market, resulting from a slowdown in purchasing from carriers within China and a result in inventory build-up in the supply chain.

This appears to have been caused by a delay in the release of a large tender for O&Us [ph]. The delay magnified the expected slowdown and was partially offset by growth in our non-GPON business. As we’ve mentioned previously, despite the continued volatility in the GPON market, it remains incrementally beneficial to EMCORE as it allows us to spread fixed manufacturing cost over a much larger number of devices, while laying the foundation for next generation devices.

One can think of our GPON business as really just our initial offering in the merchant chip market as EMCORE intends to become a broad supplier of chip-based products to the entire telecom industry, thereby optimizing our product mix between captive and merchant use and driving a higher blended margin for both our chip business and the company overall.

Moving on to Satcom, as Jikun mentioned, we did see the timing of one large system shipment pushed from the third quarter to the fourth quarter creating an incremental headwind to our top-line results. EMCORE continues to enjoy strong market share and close relationships with customers in this market while quarterly revenue can be lumpy sometimes due to the timing and size of individual products. The market as a whole tends to be steady as opposed to network upgrade cycle driven as with the cable television market.

Within our Gyro business in the third quarter, we made further progress in building our presence in the market and winning designs against larger competitors in the defense industry. We’re increasingly encouraged with commitments we’ve received from the world leaders and defense systems in addition to the $2.5 million order we discussed last quarter, which is scheduled to ship by the end of our fiscal ‘16.

In July, we awarded a second quarter for $3 million which we’ll begin shipping in fiscal ‘17 with the potential for additional shipments totaling $15 million over a five-year period. If we continue to meet our commitment to these demanding customers, we’ll expect to continue to build design win momentum and significantly grow the revenue from these unique long life-cycle and high gross margin products in the years ahead.

Shifting gears now to the operations side of the business. First of all I’d like to provide a little color on the quarter’s gross margin. As Jikun stated, we expensed a large amount of material overhead in the quarter from a last-time buy that we previously described. This component in question is used in several applications including our R5 transmitters where we’ve had excellent success in the market.

The net of the fact of expense in all this material overhead as the gross margin was reduced last quarter but will shift into the quarter in which the unit-shift with correspondingly higher margins. We also wrote-down the value of chip inventories to match our expectations for future price declines. Absent these adjustments, our gross profit would have been over $1 million higher.

Moving to the general side of operations now. I’d like to talk a little bit more about the specifics of our six sigma program. Over the past year, we’ve made significant progress for laying the foundation for best-in-class engineering and manufacturing company.

We’ve now completed the transfer of all of our turnkey product transfers to external EMS from our long-fund China operation and are in the process of starting to install automated processes at EA, which is our new Beijing facility.

One example of this is our new automated transmitter tuning process which has taken operator touch-time from 45 minutes per unit down to less than 5 minutes, improving both variable cost and return on assets. Our new super-sell manufacturing technology for laser modules enables us to quickly adjust capacity upward to take advantage of new opportunities in the market.

In total the fiscal year ‘15 Greenbelt program identified $2.5 million in cost savings that we expect to realize in fiscal ‘16. We’re expecting the fiscal ‘16 Greenbelt program to create even more benefits for us in FY17.

Six sigma is really helping to build a new culture here at EMCORE, one that’s nimble enough to quickly exploit opportunities where the company can create sustained and differentiated value as well as the mobilized resources across functions to meet large customer requirements.

Although we’re working hard to reduce our capital requirements, you should expect to see some inventory build-up over the next few quarters. The largest example of this was the multi-million dollar inventory purchase was sole sourced component is being discontinued by the manufacturer.

We did evaluate the business case behind developing our own version of this device, and we are hand with that, and concluded that we would not have met our internal hurdle rates for ROI or opportunity cost. Therefore we decided to doing a lifetime buy for this part was less expensive and less risky than any of the other branches in the decision trade.

In our last call I stated that we have been incurring some double-cost on the personnel side during the transition of certain manufacturing processes, which will improve as we exit the calendar year. We believe that those costs peaked in Q3 and we’ve already started to reduce some of the operational headcount as per the plan.

Three quarters into the transformation of our manufacturing operations, we’re beginning to realize improvements in our operating leverage, cycle times, yields and product costs. Once our manufacturing initiatives are complete, we expect to see some additional upside in the model over time.

Jikun and I will be updating our long-term model as we prepare for annual operating planned presentation for our board in mid-September. And we’ll plan on updating all of you when we announce our full-year results in December.

Given my formal commentary and the continued strength that we’re seeing in cable television and the fiber optic Gyro market, for the fourth fiscal quarter of ‘16, fiscal ‘16 ending September 30, we expect revenue to be in the range of $23 million to $25 million with gross margin in the mid-30s.

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

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from Jaeson Schmidt of Lake Street Capital. Your line is now open.

Jaeson Schmidt

Hi guys, thanks for taking my questions. I’m wondering if you could first talk about how bookings have tracked for kind of the first five weeks of the quarter, and what type of backlog coverage you have to your guidance.

Jeff Rittichier

Hi Jaeson, this is Jeff. Bookings have been excellent. We’ve had linear shipments thus far in the quarter. And I would say we’re in excellent shape in terms of booking coverage for the quarter. So, we will not be backend loading this quarter.

Jaeson Schmidt

Okay, that’s helpful. And looking at the growth margin line, I know you said it will be kind of in the mid-30s for this quarter. Would we expect continued improvement going forward? Is there room for margins to expand even higher?

Jeff Rittichier

I think the short answer to that is yes, it might be possible. Part of it is going to depend on product mix. Some of it is going to depend on timing. And so what Jikun and I have to do is take a look at the exact timetable for the shutdown of Leo and the transfer on EA. And at the point at which we’ve got clarity on that, which will be the next call, we’re going to update you guys with some additional thoughts on margin and our operating expense.

Jaeson Schmidt

Okay. And then the last one from me, and I’ll jump back into queue. It looks like you guys probably have let’s, call it around $70 million in cash post the distribution. I’m wondering how you’re thinking about how much cash you need to operate the business.

Jikun Kim

Sure. Yes, so, basically you’re approximately right. I think it’s a little lower than that. But yes, we’re contemplating $25 million to $30 million to operate the business. And the extra funds would be for just comments about our strategy and flexibility to support the strategy to grow.

Jaeson Schmidt

Okay, that’s helpful. Thanks a lot guys.

Jeff Rittichier

Jaeson, I want to leave you with one thought on that. It’s not all about M&A, there is opportunities to invest in the business as it sits here, it would require some CapEx or possibly some seed capital to do some other interesting things.

So, walking away thinking, EMCORE has one lever and it’s the M&A lever. I don’t think that provides the right color on this.

Jaeson Schmidt

Okay, that’s helpful. Thank you.

Operator

Thank you. And our next question comes from Dave Kang with B. Riley. Your line is now open.

Dave Kang

Thank you, good afternoon. First of all, can I get couple of numbers? Can I get depreciation and also CapEx?

Jikun Kim

Sure. CapEx was approximately $1.8 million and depreciation in the quarter was $615,000.

Dave Kang

Got it. And then, since Jeff, you talked about investment and perhaps that includes or may include CapEx. How should we expect CapEx to trend for the next few quarters?

Jeff Rittichier

I think as we take a look at the - at the next few quarters and into ‘17, I think we’re going to come out on the heavy side. And that’s just given some of the things that it meets the business both in terms of the wafer fab and some other pieces of equipment that we’re going to need to exploit opportunities we’ve already gotten in front of us. Hence my point to Jaeson, about don’t think of it as just M&A, it’s not.

Dave Kang

Okay. And then, just a few more items on the OpEx side. So, does that mean that R&D I guess if I strip out some items it looks like it was $2.3 million last quarter. Where does that R&D go if it’s internal investments? And also, if I can just finish on the OpEx question, and SG&A it looks like stripping out some items, it looks like it went up by about $0.5 million from $4.1 million last quarter to $4.6 million this quarter. Can you just go over that $0.5 million increase?

And I thought SG&A will be flat to down because of that - I thought you were trying to streamline your operations further?

Jikun Kim

Yes, so I’ll comment on the R&D and then I’ll address the SG&A question. R&D is going to be, there is some noise there, couple of hundred thousand plus or minus on a given quarter but we should expect it to be pretty steady until the end of the year and now we have been discussing FY17 plans with you. So we’ll introduce those numbers on our next call.

On the SG&A front, so the net number of say $5.9 million is roughly net of that $2.6 million Sumitomo reimbursement for legal expenses. What we also did incur during the quarter were several items, one was, we did see roughly a $670,000 severance charge in the quarter related mostly former CFO as well as some other employees here in the Alejandro area as well as that we also incurred some additional new expenses unrelated to the Sumitomo as well as we also did have some higher equity comp expenses related to the former CFO.

Dave Kang

Got it. And then on, can you guys breakout revenue by, in the old days, I mean, you guys broke that out by cable TV versus the laser tip business. Can I get those numbers?

Jikun Kim

Yes, so roughly, in the quarter, our Cable TV revenues - was about 75% to 80% of revenues. And our chip business was 5% to 10%. So, we are - our cable TV business is performing very well.

So our cable TV just came in light because of GPON and Satcom we just had couple of orders that pushed out in Q4, one big one.

Dave Kang

So, now you’re separating us separately from the laser and chip business that’s the way it sounds like?

Jikun Kim

I’m sorry I didn’t quite understand that question?

Dave Kang

Because before it was just cable TV and laser chip, but now you have three categories so it sounds like you’re separating out Satcom from the laser chip business now?

Jikun Kim

Yes.

Dave Kang

Yes because before laser was running about 20% now, it’s only 10% so it sounds like that Satcom is the 10%. And we and talk about it offline, so.

Jikun Kim

Yes, sure, Dave. I think we pretty much always sort of broken out the four major areas separately. And if we confused you in any way we’ll spread that away when we talk to you, okay.

Dave Kang

Sure. And then, can you just talk about what’s going on in GPON market, it sounds like for, you were saying tender has been delayed but then I’ve heard other saying that it’s really the 2.5 gig to 10 gig transition that’s causing some chop in this year. So, can you just go over that? And then do you have plans to compete in the 10G market especially with Greg Doherty [ph] announcing that they’re going to get into the GPON market as well in, it may come it’s always strong there. So, just can you cover your strategy there in the GPON market?

Jeff Rittichier

Sure. I would say that and we’re pretty close to a situation over there. It was literally a six-week delay in the release of a tender for nearly $30 million O&Us that caused some amount of buildup in the channel. And what you tend to see is also a little bit of a slowdown because people are things but when they don’t show up, you’ve got a bit of an emotional reaction in the market.

As far as the 10G transition from 2.5G, we’re already shipping what I would call low production quantities of those parts. But I would caution anyone thinking that there is going to be some sort of a magic transition to 10G on that point, I don’t think that’s going to happen quickly. I can’t imagine that the Chinese carriers are going to go in and tear out any of the 2.5G stuff that they’ve got in favor of 10G. I think it gradually will feather into the overall GPON demand.

If Greg Doherty is getting into GPON, well more power to him. Welcome to the club Greg.

Dave Kang

Sure. On that $30 million O&Us, so I assume that based on your comments it sounds like that’s all 2.5 gig related correct?

Jeff Rittichier

Yes, it is. Again, it’s - and the Chinese are very, very pretty bunch and you take a look at even the small things we’re looking after for example small change in the laser chip to make, enable $0.20 cheaper fall lines to be used in the package. It’s not like the application can automatically afford a 2x, 3x sort of price increase. I think that 10G will be good for a while and then prices are going to become extremely competitive again, just like 2.5.

Dave Kang

Got it. And my last question, of course I’ve got to talk about the cable TV segment.

Jeff Rittichier

Yes.

Dave Kang

So, can you just talk about things are strong now but how long can it last? And what’s driving this current demand is it DOCSIS 3.1 or is that more of a yet to come story?

Jeff Rittichier

No, no, no, DOCSIS 3.1 is virtually everything we’re shipping, when I say virtually everything I mean, there are places in Europe and some parts going into South America which are Ovando or other sorts of technologies. But the thing that’s driving it is really increased competition that the MSOs are seeing whether its Google fiber or threats on Verizon in fixed wireless or what Direct TV and friends at AT&T are doing. I think the MSOs believe that they fundamentally have to build a traffic agnostic network because over the top stuff is here to stay.

And as you take a look at subscriber movement which is the big thing that we keep looking at, as far as who is winning the battle and who isn’t. On balance, cable TV seems to be doing pretty darn well. So for all the discussion about cut the cord it’s really just as about one aspect of cable which is reselling content right.

The results would suggest that cable is adding subscribers even if it’s just for high speed internet. Comcast had a recent announcement where I think in two of their major markets now they’re offering gigabit Ethernet service. And theoretically at least in their architecture they could offer 2 gigabit Ethernet.

So, what you got here is a pretty big push by Comcast. It also affects our thought Comcast is a leader in that area as well. And it has started to become a fair bit of activity with Charter and Time Warner as that acquisition gets simulated. Because remember the Time Warner network is primarily O-band and the Charter network is C-band right.

So, with Charter essentially in the driver seat on that, lot of people are expecting to see the Time Warner network migrate more towards C-band and look more over time like Comcast if you will.

Dave Kang

Got it.

Jeff Rittichier

That makes sense Dave?

Dave Kang

Yes, very helpful. Thank you.

Operator

Thank you. [Operator Instructions]. And our next question comes from Tim Savageaux with Northland Capital Markets. Your line is now open.

Jeff Rittichier

Hi Tim.

Tim Savageaux

Hi, good afternoon. I wanted to ask a few questions mostly focused on the top-line. And you had broken out some of the percentages of revenue coming from the cable TV side. I think that previously I know it was in the low to mid-60s.

So, are we talking about 25% to 30% sequential growth on the cable TV side and kind of where do you expect that to head even at the high end of your guidance range, if you assume some bounce back in Satcom and maybe a little ramp in Gyroscopes? Those models are pretty significant reduction in that rate of growth. So I wonder if you can sort of talk about whether that sequential growth range is accurate and what your expectations there are going forward.

Jikun Kim

Yes, so, you’re correct. The cable TV did see substantial sequential quarter-over-quarter growth in the tune of roughly 30%. Now we did provide guidance for the fourth quarter, 22% to 25% that contemplates obviously lots of moving pieces. Jeff, did you want to provide any highlights on that?

Jeff Rittichier

Yes, so, where we see cable TV going and how that affects the rest of the numbers, right now we’re just seeing real strong demand across the board, especially on the downstream side of cable. And we’re expecting that business to keep growing both on an absolute basis and maybe even percentage wise compared to some of the other businesses. But they are or product lines, but they are growing too.

So you sort of strip - let me give you a couple of ideas. Again, if GPON would have come in where we indicated, we were expecting it to, we still would have been right at our target for the percentage of non-GPON business. So, non-GPON is continuing to grow nicely, there is more things that are being added every day.

And they take a little longer to sneak out. But fundamentally that piece of it is moving forward. Same thing could be said for Gyros and Satcom. So, if it’s not that the other [indiscernible], it’s just that cable TV right now is really, I hate to use the term “on fire”. But it’s, we’re really being pushed by the equipment guys to deliver very large numbers of devices. And that’s a good thing.

And I also wouldn’t, for us RFoG is part of cable television. And as we’ve already announced there was a significant order that was shipped in Q3 for RFoG. And there will be more in Q4.

Tim Savageaux

Got it. Well, I mean just to completely beat that horse to death, if I could continue on that I mean, well, first off I’ll say I’d been expecting modeling some degree of disengagement from the GPON ship market just based on price and margin pressure in general outside of any demand reductions.

So, that being said, again, if you, one assumes some sort of ramp on the Gyroscope side as well as kind of a bounce-back in Satcom. I think that, well is it fair to assume that? I know you made some comments earlier in the call, and I think I missed them about the timing of these Gyroscope orders one being in fiscal ‘17, so next quarter. But something more near-term, did you comment on that, whether you had another near-term order in the gyroscope side?

Jeff Rittichier

Yes, so there were two big orders, same program and one we’ll finish up by the end of fiscal ‘16, at the end of the current quarter. And then one is for beginning the production in ‘17. There are other new programs that we’re pursuing that we hope to bring in, in the not too distant future. And those obviously would be accretive.

We also indicated in the press release on the Gyro orders that the ultimate sort of five-year production contract for, those very high grade navigation FoGs, that’s going to come up here in the next few months as well. And that would give us a nice lift and certainty on-demand. I mean, where in networking do you see sort of five years of clarity, right on production orders. But in the defense world that happens sometimes.

So, all-in-all the FoG story is a good one. It’s just that you have to have patience with it. But the uptick is good. The feedback is good. For our major customers we’re delivering 100% on time. So we like that business and we like where we’re headed with it.

Tim Savageaux

And just one quick follow-up there and I’ll finish up the top-line focus. And that is, would you expect the FoG business, the Gyroscope business that is to approach 10% of revenue next quarter?

Jeff Rittichier

Next quarter, I don’t think so. Sometime in ‘17 maybe towards the end, yes.

Tim Savageaux

Okay, great. And then, one quick follow-up on the gross margin side. If I heard you right, in your sort of - you had $1 million headwind of the gross margin. I think that would put you in the high-30s right, close to 38%. And I wonder if you could sort of discuss that relative to your mid-30s gross margin guide and eventual, potential targets moving up into the high 30s?

Jeff Rittichier

Sure. So, as far as the guide goes, one of the things that we always, we have a pretty good mixture of what should ship in the quarter. But customers all the time, they move things around on a, as far as pull-ins and push-outs. And so, it’s hard to say with certainty that you’re going to hit a specific number because the mix contingent in the quarter, especially in the businesses that we’re in, right.

So, we’re trying to be reasonable about our gross margin guidance here. But the reality is there is a fair bit of positive sign on our manufacturing efficiencies. As far as on a go-forward basis, again, what we really got to do is get the timing down and the actual amounts of headcount reduction before we comment on cost of change to the long-term model.

But clearly it’s our objective to try to drive margins higher than they are right now. And we live in a competitive world, you just heard we got Greg Doherty, I guess he’s going to join us in the GPON world with everybody else. And so, crystal balls necessarily have to be foggy to a degree even though it’s easy to sort of look at the good things that are going on. It’s always runs scored by the other team, right.

Tim Savageaux

Got it. Okay, thanks very much. I’ll pass it on.

Jeff Rittichier

You’re welcome.

Operator

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back over to Jeff Rittichier for closing remarks.

Jeff Rittichier

Thank you very much. In closing I’d like to thank my entire team for all the hard work they put in every day. And I believe I speak for Jikun and everyone on the board when I say how proud we are of the business we’ve built and the opportunity that lies ahead of us. I just want to finally thank all of you for your time. And I look forward to speaking with you again on our next earnings call. Thank you.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone have a great day.

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