EMCORE Corp (EMKR) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the EMCORE Corporation Fiscal Fourth Quarter and Full Year 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

And at this time, I would like to turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.

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

These forward-looking statements are largely based on our current expectations and projections about future events and trends affecting our business. Such forward-looking statements include, in particular, projections about future results; statements about plans, strategies, business prospects; changes and trends in the business and the markets in which we operate. Management cautions that these forward-looking statements relate to future events and our future financial performance and are subject to business, economic and other risks and uncertainties, both known and unknown, that may cause actual results, level of activity, performance or achievements of the business or our industry to be materially different from those expressed or implied by any forward-looking statements.

We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements and the business that are included in the company's filings with the U.S. Securities and Exchange Commission 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 report on Form 10-Q. The company assumes no obligation to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.

With me 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 first quarter guidance before we open the call up to questions.

Now I will turn the call over to Jikun.

Thank you, Erica, and good morning, everyone. Today, I will focus my discussion on our fourth quarter and full year financial results ending September 30, 2017. Please note that consistent with prior quarters, these results include the effects of classifying what remains of EMCORE's Telecom and Photovoltaics businesses as discontinued operations.

Consolidated revenue for the quarter totaled $29.2 million, which is 14% higher than the prior year and 6% lower than the prior quarter. Fourth quarter revenues came in at the low end of our revenue guidance range of $29 million to $31 million.

Late in Q4 FY '17, we shipped roughly $800,000 of products to one of our cable TV customers' virtually managed inventory centers, which were subsequently clocked for revenue recognition purposes after the end of the quarter. This is a relatively new phenomenon, and we are anticipating a greater impact in our Q1 FY '18 financial results due to the extended holidays. This will effectively result in shipment cutoff 3 weeks prior to actual fiscal quarter end for this particular customer. This phenomenon is rooted in changes that our major customer has made in their choice of logistic partners earlier this year.

Our quarter-over-quarter revenue decline was also affected by the discontinuation of our video product line and the slight downtick in our chips. Cable TV held steady, while navigation grew quarter-over-quarter. For the navigation product line, the 5-year contract that we were negotiating was divided into 2 separate contracts: a 1-year contract, which we finalized and executed, along with a full year contract, which is currently going through a fixed-price sole-source (inaudible) fact-finding and confirmation.

During Q4 FY '17, we began shipping units based on the new 1-year contract. Jeff will provide additional details in his remarks.

GAAP gross profits in Q4 were approximately $10.6 million or 36.4% of revenue, an increase of 80 basis points year-over-year and 140 basis points quarter-over-quarter. Gross margin performance in Q4 was driven by cable TV and navigation.

New high-powered DOCSIS 3.1-based cable TV transmitters that we introduced during the quarter positively impacted margins in the quarter.

Total GAAP operating expenses for R&D and SG&A were $8.9 million, in line with Q3 and $1.5 million higher compared to the same period last year. We continue to invest in R&D to accelerate delivery of new products across all 3 of our major product families.

In the quarter, we invested aggressively in new navigation, chips and cable TV products. The benefits of these investments are expected to meaningfully contribute to our revenues and gross margin percentage in the future quarters.

On a GAAP basis, consolidated operating profit for the fourth quarter was $1.7 million or 6% of revenue. Our non-GAAP operating income from continuing operations after excluding certain adjustments was $3.3 million, a slight decrease of $0.2 million compared to the prior quarter. These results include the final impact of EMCORE Beijing transition expenses of approximately $100,000 in the quarter. Taking this into consideration as well as a shift of $800,000 of revenue from Q4 to Q1, driven by our customer's logistics partner switch, the non-GAAP operating income would have been closer to $3.7 million or 12.7% of revenues for the quarter. These results would have been slightly above the 12.5% guidance that we provided for Q4.

Our non-GAAP pretax income from continuing operations is $3.4 million, a slight decrease of $0.2 million 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 Q4 FY '17, the company's cash and cash equivalents were approximately $58.7 million (sic) [$68.3 million] or an increase of $2.2 million over the prior quarter.

Our cash balance increased $3.9 million year-over-year. This increase was driven by strong profits, effective management of working capital, offset by increased capital expenditures.

Regarding our working capital metrics, DSOs were at the 66 days, down from 68 days in the prior quarter and 73 days in the prior year. Net inventory turns including noncurrent inventory was at 2.7x. Capital expenditures in the quarter was $2.4 million and depreciation in the quarter was $1.1 million.

For the full fiscal year FY '17 results, consolidated revenue totaled $122.9 million, which is 34% higher than the prior year. Strong revenue growth was driven by cable TV, which includes RF over Glass products, offset by year-over-year decline in chips, Satcom video and navigation.

In the second half of FY '17, we saw chips and navigation product lines recover from the weakness we saw in the first half of the year. Please recall, chip product line saw a sharp decline in 2.5G GPON market in the first half of the year. And from the navigation product line, we were negotiating a critical long-term contract with a large defense client for Fiber Optic Gyro pricing and deliveries.

GAAP gross profits in FY '17 were $42.5 million or 34.6% of revenue, an increase of 100 basis points over the prior year. Strong performance was driven by cable TV revenue mix variances. Total GAAP operating expenses was $34.8 million, approximately $6.8 million higher than the prior year. R&D investments increased $2.6 million year-over-year driven by investments in new navigation products and chips. SG&A increased by $2 million, driven by increased equity compensation and severance expenses. Recovery of litigation expenses in FY '16 also contributed to the year-over-year increase in total operating expenses.

On a non-GAAP basis, SG&A grew slightly year-over-year by $0.3 million or 1.8%, and R&D increased by $2.5 million or 26%. On a GAAP basis, consolidated pretax income for fiscal year FY '17 was $8.4 million, compared to $2.6 million in the prior year, representing a 218% year-over-year growth. Our non-GAAP pretax income from continuing operations, after excluding certain adjustments, was $14.3 million, an increase of $9.2 million or 182% compared to the prior year. Our non-GAAP EPS for fiscal 2017 was $0.52, an increase of $0.33 or 174% from the prior year period.

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

Thanks, Jikun, and good morning, everybody. As Jikun highlighted, 2017 was a strong year for EMCORE. Revenue grew 34% year-over-year, bringing our compounded annual growth rate to nearly 31% over the last 3 years.

Once again, in 2017, our core cable TV products were significant growth driver as all 3 leading MSOs deployed DOCSIS 3.1 architecture. Even more impressive than our top line growth in the year was our operating performance and earnings growth, delivering 182% year-over-year non-GAAP pretax net income and 174% year-over-year non-GAAP EPS growth as we demonstrated the operating leverage that we've built into our business.

We've grown while reducing headcount by over 1/3 and reducing facilities, expense and footprint, all while keeping inventories roughly constant. By any measure, EMCORE is a far more efficient operation than it was when we started rebuilding it nearly 3 years ago.

With that said, let me take a few minutes to discuss the fourth quarter trends in each of our end markets before providing some thoughts on the broader business outlook for our first fiscal quarter in FY '18.

Starting with the cable TV market. In the fourth quarter, we saw continued strong market demand for our transmission products as cable operators continued the deployment of DOCSIS 3.1 transmitters, modules and receivers. Beyond our traditional strength in laser modules and transmitters, our RF micro node products, which were introduced in late 2016, provided nearly a $13 million revenue boost year-over-year. However, during the fourth quarter, we saw a slowdown in sales of these micro nodes as portions of the market began to favor low-cost, low-performance modules from competitors.

Our third generation LEML micro nodes, which we announced at in the ANGA in June, won't complete qualification until sometime in early calendar year '18, enabling delivery in fiscal Q3 and Q4. As such, we've removed RFoG revenue from our first quarter guidance. This is the primary reason why projections for our first fiscal quarter are soft as the rest of our cable TV and other product families are actually showing growth in the quarter.

Outside of RF micro nodes, we have a number of exciting developments within the cable TV market, notably, the traction that we're seeing with our LEML transmitter product line. In Q4, we began shipment of LEML head-end transmitters for RF over Glass application and received design wins for additional LEML transmitters that will start shipping as early as this quarter.

As our major customers have publicly stated, they are actively investing in advanced linear optics technology, and the LEML design wins I just noted are strong validation of those commitments. Consequently, we believe we're still in the early innings of this DOCSIS 3.1 network buildout and are poised to benefit from our highly advanced linear optics products, especially the LEML.

Within the Satcom market, we saw demand return to more normalized levels in the fourth quarter, following a higher-than-typical increase in demand in the third quarter. As we mentioned on prior conference calls, quarterly revenue in the Satcom business can sometimes be lumpy due to the timing and relatively large size of individual products. However, the growing market for new satellite launches is driving great greater opportunities in this product line. In addition to revenue growth, there are strong technology and operational linkages to our cable TV and DAS products, which create cross-product leverage in our R&D investments as well as operating leverage in production. We plan to grow the revenue of our Satcom product line through the introduction of new low-cost L-Band links and technology for radio-over-fiber, such as DAS.

Going forward, we will combine the reporting revenue for cable TV, Satcom and wireless underneath the broadband umbrella. All of these products have the movement of information in common and rely on strong development synergies, making it logical to combine these into a single reporting line for revenue.

Moving on to the chip market. In the fourth quarter, we continued to see strong demand for both our 2.5G and 10G chip products within China, offset by a momentary pause in spending from one of our customers outside of China because of the small inventory buildup. Since Q4, shipments have restarted and we expect them to return to normal levels this quarter.

Our development work on new chip products, such as our wireless and data center products continue with the goal of broadening both our chip product portfolio and the number of markets served. We expect that this growth will drive revenue as well as a higher blended margin for both our chip business and the company overall. To that end, we've made additional investment in senior talent for the chip business at both the business unit and operations side of EMCORE. The heart of EMCORE's business has always been optical semiconductor chips, and we're committed to making this business successful over the long term as our base business is today.

Finally, within the navigation market. As Jikun highlighted earlier, in the fourth quarter, we decided to execute a 1-year sole source supply contract, while we continue to finalize the longer 4-term agreement. This enables us to deliver products to our customer, which they badly needed, as we work through the voluminous documentation required for the longer-term agreement. Subsequently, we've received orders going out several quarters, enabling us to have excellent demand visibility for this program.

Our strong performance with the leaders in the defense industry continues to open up larger new programs for EMCORE, with higher-margin, higher-complexity navigation products, such as our new EN-300 measurement unit. We shipped our first EN-300 qualification unit a few days ago and plan to announce several exciting new products over the coming months in the tactical market for gun stabilization as well as in navigation applications.

It's important to note that when we make a decision to develop a new navigation product, we do so in partnership with at least one Tier 1 prime defense contractor. The EN-300 IMU is a great example of this approach. We chose an industry standard form factor and build it -- built-in up to 5x better performance, increased reliability and lower cost than legacy IMU that the EN-300 replaces. The recent uptick in R&D spending is largely in response to the needs of customers in this business, which we expect to grow significantly faster than the rest of the company over the next few years.

In addition to the EN-300, we've identified lead customers for several exciting new products and are working to get those opportunities under contract. Finally, we've also received verbal notification that we were chosen to build a next-generation IMU exclusively for one major client contractor, potentially representing business in the mid-8 figures over the life of the product.

Given the long design qualification and product lifetimes in this business, it's useful to think that each program is a layer over a technical foundation. Each new program adds revenue over many years compared to their commercial counterpart.

EMCORE is now building multiple layers on its technical and production foundation, enabling navigation to be at least as large as the current broadband business over the next few years.

We have wins in multiple programs and with multiple customers that will become production business this year. Clearly, it's easy to see why we're excited about EMCORE's prospects in navigation.

Shifting gears briefly to the operations side of the business. As we discussed on our last call, in the fourth quarter, we completed the transition to our new manufacturing facility in China, reducing the direct labor headcount by approximately 270 from our peak of nearly 430 in December of 2016. With these actions now complete, we have not only brought our operational fixed costs down and created a much more manufacturing -- flexible manufacturing operation, but we've also increased our leverage of Chinese engineering resources for future operational improvement and product development initiatives.

It's important to understand that this manufacturing transformation is not the endpoint for EMCORE's operational transformation. For example, we expect to add fully automated material management systems to our Beijing assembly test-and-tune process in Q1 and Q2 FY '18. Our Alhambra facility will have important automation upgrades in the fab this year, along with the FOG IMU assembly process.

We would expect that operations hiring will be very limited going forward, enabling us to take advantage of the operating leverage that we're creating.

Turning to the outlook for the business. As this is our fourth fiscal quarter, I'd like to take a moment to discuss both our near-term guidance as well as some thoughts on longer-term goals.

As we look out into the opportunities in 2018, it is worth first level-setting on the progress the EMCORE team has made over the past 3 years. Revenue has grown 121% from approximately $55 million to $123 million, with profits growing from a loss of $0.46 a share to a profit of $0.52 a share, a nearly $1 improvement in non-GAAP EPS. We did this with 34% fewer people and a smaller footprint, while we generated cash despite massive capital reinvestment. Most importantly, we did this all with organic growth and superior execution.

The company is now at an inflection point that it has been preparing to take advantage of for nearly 3 years. EMCORE is finally poised to become much more than a cable TV business.

The operational and technical foundation that we've built in the chip and navigation market is ready to support rapid growth, and we got the team necessary to build those 2 businesses. My most important set of objectives for this year revolve around building revenue diversity. We're going to do that by taking advantage of our cross-product synergies in broadband by accelerating the growth in our chip and navigation businesses.

This brings me to an important point about the heavy R&D expenses that we incurred during Q3 and Q4. The bulk of these expenses were in our navigation product line, where we're working on multiple products with larger ASPs and correspondingly larger bills of material.

I pointed out earlier that our new Orion family flagship Inertial Navigation System has an ASP starting at about $50,000, while the EN-300 average selling prices are also larger than EMCORE's typical products in the $30,000 to $40,000 range. Consequently, expenses in material necessary to support this level of sophistication are also higher. With that said, the customer commitments that we've already gotten have provided us with strong evidence that these investments will have a return on investment well in excess of our cost of capital. Going forward, we would expect R&D to stay at the Q4 levels as we work to take advantage of these important growth opportunities in navigation, chips and broadband.

Taken together, we believe that our R&D investments will provide us with a highly competitive portfolio of new products, which will drive further growth in revenue and profit in 2018 and beyond. Our current view of the year is that within our broadband products, cable TV will be flat year-over-year with growth in Satcom and DAS. We also expect very strong growth in chips and navigation over the year. Over a 3- to 5-year horizon, we believe that EMCORE can grow its chip and navigation businesses to each be the same size as its current cable television business. Now I'd like to address how this is likely to play out over the next several quarters.

In the first fiscal quarter, given the RFoG market dynamics that I highlighted earlier, combined with the vendor-managed inventory that Jikun referenced, we expect revenue to be in the range of $24 million to $26 million. While it's difficult to forecast timing with certainty, given the number of variables outside our control, we expect to recover the RFoG revenue and grow the base cable TV business over FY '18 through new LEML transmitters that are just starting to ship and a streamlined RF micro node distribution model.

We also expect that as our revenue diversity initiatives take hold, we will see greater than 30% of the company's revenue coming from non-cable TV products over the whole year, exiting at an even higher rate in Q4, setting the stage for larger absolute growth in FY '19. We expect to do this while keeping our goal of 15% non-GAAP operating margin on a run-rate basis that we execute for. By continuing to capitalize on our technology leadership in existing markets, leveraging our intellectual property, technical and production assets into adjacent market opportunities, we believe we're in a strong position to build significant shareholder value in the years ahead.

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

(Operator Instructions) And our first question will come from Jaeson Schmidt with Lake Street Capital Markets.

Just fairly quickly, first off, wondering if you could provide the revenue breakdown by segment for Q4.

Sure, Jason. This is Jikun. Cable TV was 77.5% to 82.5%; Satcom video was 5% to 10%; chips was 5% to 10%; and navigation was 2.5% to 7.5%.

Perfect. And then, Jeff, wondering if you could help us quantify the RFoG impact for the December quarter. How much that is creating a headwind this quarter?

Sure. It's pretty significant. If you take a look at the total amount of RFoG that we shipped in fiscal '17, it was in the range, I believe, of between $17 million and $19 million. And so simple math will tell you that it's about 1/4 of that. And it's this business that was significantly lower than the corporate average from a margin perspective, and we just made a business decision that we're not going to chase it down into the ground. We'd rather get our new products out and solve both -- some cost issues because these products have lower, let's call it, assembly complexity as well as allow us to deconvolve some margin stacking that was designed into the business model some 4 years ago when that project kicked off. But that's pretty much the size of it.

Okay, that's helpful. And looking at the CATV business, are you seeing any impact from Remote-PHY or other technologies? Just curious if you think you're seeing any market share shifts because of these new technologies.

Great question. Really, we're not. What you're going to hear over the year is about small test cases, very small field trials in Remote-PHY that will generate some buzz, but they really don't have any kind of an impact on what we're doing. I believe there was some comments at the Needham conference, which confirmed that from the major players yesterday, the day before. And from our perspective, we understand how long it takes to achieve the level of perfection necessary to put these products into a public network. And so it's just going to take longer, I think, than some of the people who are in the outside looking in from the linear optics business perspective. It is just going to take longer for it to start to transition. So we don't see it having much of an impact in FY '18 at all.

And our next question will come from Jon Fisher with Dougherty & Company.

Just on cable TV and RFoG, just with the competitive low-cost dynamic. What gives you comfort that, that kind of dynamic isn't more of a persistent overhang on the business and product mix for you and maybe you need to do more to adapt or position yourself to be more competitive in that new dynamic?

Jon, this is Jeff. I'll take that one. There are sort of 2 sets of reasons and let's broadly categorize them into, call it, the RFoG situation and then, secondly, there's an overall growth picture. So within RFoG, there are really 2 issues. The root of the, call it, cost competition, we're seeing competitive products that are going out that have pretty significant logistics implications. In other words, the MSOs when they deploy these, they'll have to stock many SKUs in order to get a network built out. And they have to do some pretty careful selection of which SKUs can be deployed in what parts of the network. And some people are willing to deal with that and others are not. Whether they are or aren't, it still puts price pressure on the component itself, the RFoG transceiver, DOC transmitter. And so there's 2 things that we've done to help solve that problem. One is that the new RFoG transceivers are based on a chip that enables us to eliminate a lot of complexity and cost over on the component side, and that directly boils down to assembly complexity. The second thing is, is that, again, as I mentioned about 4 years ago before we sort of had to start rebuilding EMCORE, there was an arrangement put together with 3 parties: it was CommScope, it was EMCORE and another company, and they jointly owned the intellectual property associated with the RFoG transceiver. And so the challenge is that you can't stack margins one on top of the other, and that is one of the big cost problems in the whole RFoG situation, is margin stacking. So the new generation, which is in sampling, is 100% owned by EMCORE, with its latest technology, and will not suffer from that. So we have a lot more flexibility. The other point that I would make is that LEML continues to gain strength in the market. And so we have several knobs, if you will, to push on the cable TV revenue portion of our business. And we expect that, in the second half of the year, especially as those transmitters start -- as LEML transmitters ship in larger volumes, we'll see greater opportunities for growth in cable TV.

Okay. And then the next question will be on navigation. The commentary that you provided beyond the contract that's currently being negotiated is a pretty bullish picture. I mean, it sounds like you have a lot of things in the near term in the works, as far as new customers and new products and new programs. Is my perception of that correct that we could be seeing kind of an inflection point in the navigation business pretty soon in 2018 with a lot of announcements of new design wins, new program wins and new customer wins? Or are the negotiations such that, that inflection really wouldn't occur until 2019 or 2020?

Yes. So we are very bullish about navigation, number one. No ifs, ands or buts about it. Secondly, you're correct. There are going to be new announcements of new products. Thirdly, one of the challenges that we have is that we do have to get permission from our customers to talk about exactly who is buying what and in what quantities. And we can't uniformly say that we're going to be able to put names associated with specific programs. We're going to try to provide as much visibility as possible into the strength of that business. But fundamentally, yes, we're very bullish on it and we continue to see more people pulling us into more programs. And so where the dollars will really start moving is in the later -- latter half of the year. And then into '19, I think we'll see some exciting absolute numbers.

And our next question will come from Dave Kang with B. Riley FBR, Inc.

This is actually Lee Krowl filling in for Dave Kang. Just first, I'm kind of curious on the vendor-managed inventory situation at cable TV. You mentioned that was a single customer. I was curious if there's any risk that any other customer would switch to a similar style of inventory. And then is this a 4-quarter cycle through? Or is this a single-quarter impact on this transition?

Do you want me to tackle this, Jikun?

Yes, that's fine, Jeff.

Okay. So given the history of how both of our major cable TV customers handle logistics, I would say it's relatively unlikely that we would see a second customer move to that sort of approach and cause some additional problems. I think the current quarter, Q1, probably see this greatest impact because of the holidays and just the schedule for receiving things. Going forward, you can't -- the thing about cable that can be a little bit challenging at times is -- it's been called volatility, but the reality is that you got big numbers in terms of dollar -- absolute dollar value of equipment moving out from the big guys, like Eris and Cisco. And so when they decide to -- if they consolidate some manufacturing operations, which they need to do in order to make good on some of the synergies that they've identified, we can occasionally get slowdowns because of a bit of inventory here and there piling up, and that's virtually impossible to predict. So while I would say the chances that you have another VMI issue crop up is pretty slim, you can always see inventory pile up in the channel. And again, I think many folks out there look at our customers and say, "Gosh, are they a proxy for EMCORE?" And in a broad sense, they are. But in, call it, a quarter-to-quarter sense, you can see a product mix shift where, let's say, an Eris, would sell an awful lot of CMTS or CCAP equipment and maybe not as much transmission equipment. So you have to be careful with how you use the proxy analogy. But for us, I think VMI is -- we are sort of at the worst of it in the current quarter, and I don't think a second supplier, a second customer of ours is going to probably go in that direction. I can't imagine they would.

Okay. And then my second question is on your target margin model of 15%. With the stepped-up increases in R&D, is there any cost offset associated? Or is it all just driven by a sales leverage to reach that target 15%?

It's both, really. There is -- so for example, as we move products into 3-inch wafers over in the fab, that's a great example of where you're going to get cost leverage. And we are, of course, because we've got operating leverage, we are volume-sensitive. So some of it is going to be due to increased revenue.

So, this is Jikun. But keep in mind that the R&D increase is not for the full year. We anticipate, for the first half of the year, the consistent level of R&D investment, but in the second half, that should wane off.

(Operator Instructions) And our next question will come from Tim Savageaux with Northland Capital Markets.

One question on the kind of RFoG revenue dynamic as we look into the December quarter. And I guess, really in general. What sort of -- would you anticipate maybe even a significantly positive gross margin impact as a result of overall volumes being lower, tamp that down? So question one, gross margin impact of really taking, I guess, what amounts to taking RFoG out of the first half numbers?

Jikun?

Yes. So in general, RFoG has a lower gross margin than the corporate average. However, with the volumes being reduced in Q1 relative to Q4, we do anticipate a lower overhead absorption, and hence, the gross margin to decline a bit from the 37% non-GAAP gross profits that we had in the quarter in Q4.

Okay. And then over on the navigation or defense side. I think you made reference to a pretty significant opportunity there, some sort of mid-8 figure commentary. Jeff, I just want to come back to that and see, did you talk about having been awarded something there? Or was that sort of an opportunity? And in general, if you can you speak more broadly, I guess, to the size of your kind of funnel or pipeline in navigation in that regard if you were to take what you're seeing around there and including this one opportunity and give us a sense of what you're pursuing there?

Yes. So in the case of the, let's just call it, the 8-figure opportunity, we've reserved -- received a verbal notification and we are working with that customer to get under contract. We will be doing some custom development for them. And the expectation is that we will deliver prototypes roughly around the end of the fiscal year, yes, in '18. That is going to be -- is expected to be quite a large program over its life. And as Jikun used to work actually the large defense line, and I think his analogy of bricks in the wall is -- or layers of product is absolutely applicable here. In the broader sense, Tim, there is just an awful lot of -- it's not activity, right? It's things that we're actively quoting, they're projects that are about to come in. Some of which will have nonrecurring engineering dollars attached to them. Some of which are for products that are -- what we'll call incremental sort of developments relying on EMCORE technology as opposed to some of the things we've partnered for in the past. And so we see a lot of good reasons in terms of -- not reasons -- we see a lot of evidence that the work we've done over the past couple of years is about to bear fruit. And so you're looking at significantly higher growth rates, probably in small numbers this year, but pretty significant absolute numbers in '19.

And this does conclude today's question-and-answer question. Jeff, at this time, I will turn the conference back over to you for any additional or closing remarks.

Okay. In closing, I'd like to thank all of you for your time this morning and, of course, your interest in EMCORE. I'd like to also acknowledge our team here in Alhambra and Beijing and over in Warminster and thank them all for their hard work and commitments to make the company a great success. And with that, I'll say goodbye. Thank you again.

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