Good day, everyone, and welcome to the Advanced Photonix's 2015 First Quarter Earnings Conference Call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference call over to Mr. Jeff Anderson, Advanced Photonix's CFO. Please go ahead, sir.

Thank you. Before we get started, I want to remind listeners that this conference call will contain forward-looking statements which involve known and unknown risks and uncertainties about the Company's business and the economy and other factors that may cause actual results to differ materially from our expected achievements and anticipated results, including unforeseen technological obstacles, which may prevent or slow the development and/or manufacture of new products; problems with the integration of acquired companies and technology and possible inability to achieve expected synergies; and limited or slower-than-anticipated customer acceptance of new products, which have been and are being developed by the Company. Please see our press release of today and our periodic reports filed with the Securities and Exchange Commission for a fuller statement of such risk factors. Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statements contained in this conference call. The forward-looking information given during this teleconference represents management's expectations and beliefs as of the date hereof. The continued availability of this teleconference on the Internet, or through other media, does not mean that the Company is reaffirming or confirming its continued validity. Except as may otherwise be required by law, the Company expressly disclaims any obligation to update or alter any of the forward-looking statements made herein as a result of any event occurrence after the date hereof. This conference call also contains a presentation of non-GAAP financial measures, as defined in the SEC's Regulation G. Reconciliations of the non-GAAP financial measures to the Company's GAAP-based financial statements are included in the Company's first quarter earnings press release dated June 27, 2014, and are available on our Web-site at www.advancedphotonix.com. On today's call, I will briefly review a few financial highlights from our first quarter 2015 fiscal year, and then…

Thank you, Jeff, and good afternoon everyone and thank you for joining us on the call today. We continued to make progress in our first quarter toward the two near term goals that we believe will drive shareholder value, revenue growth and positive adjusted EBITDA. Revenue grew 8% compared to last year's first quarter and we returned to a meaningful positive adjusted EBITDA of $267,000 for the first time in 11 quarters. In addition, we were very close to reporting non-GAAP profit for the quarter, recording a $3,000 loss compared to a loss of $403,000 in the first quarter of last year and a loss of $887,000 last quarter. Our revenue growth was driven by an 87% growth in our high-speed optical receiver product platform including a 94% growth in our transmission products driven primarily by our 100-gig coherent receiver product offerings, and a 76% growth in our Comtest product offerings. Growing global bandwidth demand to deliver high-definition video anytime anywhere is driving long-haul network upgrades over the next several years to support 4G wireless deployments as the long haul and the metro networks transition from 10 and 40 gigabits per second to 100 gigabits per second. Our success in gaining market share in the 100-gig long-haul telecom market in China has contributed to our growth this quarter. In addition, the move to cloud computing is also demanding more bandwidth in the enterprise data center market, which is in the early stages of transitioning to 100 gigabits per second, although they won't be using coherent technology in this market segment. Our Comtest new products introduced in the second half of last year, which we report in the test and measurement market, are used to test the next-generation transponders necessary to support high-bandwidth cloud computing. Our high-speed optical receiver revenue growth…

Thank you, Rob, and good afternoon everyone and thank you for joining us on the call today. Our first quarter was a validation of the cost savings actions and the investments we made last year. It's also a great indication of what we can expect in our growth and revenues and EBITDA for this fiscal year. As already mentioned by Jeff and Rob, we grew our revenues by over 10% over the prior quarter. We had a better than expected product mix which raised our gross margins, even without receiving a major governmental contract for the F-35 program. We are now expecting to receive this $1.5 million Terahertz development contract in the second quarter. This contract will deliver a fully commercialized version of a prototype handheld measurement sensor that was delivered under an earlier contract. We expect follow-on product sales as a result of this in not only domestic but also international OEMs in the coming years after completion. We are continuing to see a strong buildup in potential T-Gauge orders in the industrial market. We will be exhibiting at the International Conference on Infrared, Millimeter, and Terahertz Waves or IRMMW-THz Conference in Tucson, Arizona, which runs from September 14 till September 16. This conference is focused on the research market and brings together researchers from around the world, with 90% of the conference and papers focused on Terahertz's research. While we've had long-standing presence in this market, with our new T-Ray product line we are expecting to more than double the number of T-Ray product sales to the research market in the next 12 months. We have a growing backlog in our high-speed optical receivers and 100-gig products, being driven by China and European markets. The news out of the telecom market is one of growth and opportunity. As…

(Operator Instructions) Our first question comes from Dave Kang from B. Riley. Please go ahead with your question.

The first question is regarding gross margin. Certainly a nice increase from the previous quarter. Just can you provide more color, when I saw that number I thought it was Terahertz but looks like it wasn't Terahertz, so any more color regarding the sequential increase, and where does it go from here I guess?

Dave, this is Jeffrey Anderson. It's a good question. I think last quarter we had a real difficult mix. That did change around this quarter here. We had good growth in HSOR. That added some volume that was good fall-through for us, but I think the cost reduction activities that we've been talking about in Optosolutions where we're outsourcing our photodiode production really kicked in, in the quarter. It wasn't there in the last quarter, we did see it this quarter. And then we also had material cost reductions in HSOR. So remember, last quarter was impacted because we kind of had our annual contract award kind of cycle with one of our major customers. We're starting to catch up with some of those cost decreases that we had to give out on the top line by decreasing the material cost as Rob talked about.

So you [can put] 38% without Terahertz, and I hate to ask but when Terahertz does get going, I mean can we expect like mid-40%, I mean is that something realistic or maybe at least low 40s?

In the near-term we've got some consolidation activities to do yet here. So I don't think you're going to see us reach our mix this coming quarter. I think you had us at 35%, we did 38%. One thing that you didn't hear me mention also was that we did have some tailwind for the quarter because we built WIP and finished goods too, so we're not going to have a recurrence of that. And so, this next quarter I think we'll normalize, and then from there we'll see the buildup as Terahertz grows to some good numbers for the year, but I wouldn't change your total year forecast dramatically from what I've said.

Got it, got it. And then I guess the OpEx $3.1 million, is that sort of a normalized run rate going forward?

I think you've got us styled in pretty well on what we expect in the out (inaudible), you are very close to the total.

And then Rob, on the optical side, obviously we saw nice pop there but is it more of a ZTE driven or both ALU and ZTE driven and how is the visibility for both customers? Obviously I've been hearing the U.S. market being a little bit soft whereas China seems to be very robust. So, is it more ZTE driven at this point for you guys?

I would say that looking at the last quarter, it was a pretty good contribution from both. But when you look at the visibility, I'd say there tends to be a little better visibility coming out of China at the moment than domestically here. So I think we probably don't see quite as much as maybe some of the others have reported but there is a little bit of reduced visibility in the North American market, AT&T and Verizon have been preoccupied.

Yes, got it. So if that is the case, if it's more ZTE driven rather than ALU, then what kind of margin degradation are we talking about, if any?

I'd say that you get a little bit of margin degradation over there. And we sell through distribution there. If you look at what the end user pays, it's not too far off. Our sales price through distribution, we take a little bit of a haircut on that. But I would say that the Chinese market – 100-gig is still in its early phase slot. The huge lead that ALU had is they no longer have that lead. So the others are really ramping up. And so, the volumes out of China and out of the design wins we have there are pretty healthy volumes.

And right now obviously it's really China Mobile driven but I saw an article this morning, I guess China Unicom finally seems to be spending. So it looks like the runway, at least the Chinese runway looks pretty healthy as this point.

It's healthy. The Chinese runway is probably going to be well over 50% of the worldwide market this calendar year.

Okay. And then you talked about cloud and data center, but obviously they're not using coherent, they're using CFP. So what's the receiver for that, 100-gig CFP, do you have a similar product on the receiving side?

Okay, so the first participation in the enterprise data center market which is driven by cloud is coming from the Comtest piece where we've got that proprietary technology broad-wavelength receiver that can handle fiber channel which is 780 nanometers and Ethernet which is 850 nanometers all the way up to the 1,310 which is kind of the access market. So we have rolled that out, that's been an important contributor and it's continuing to gain traction for the testing of transceivers, 32-gig fiber channel and the 100-gig Ethernet market. So currently the way we participate in there is through the Comtest piece. But we have in development a 25 gigabit per second avalanche photodiode which will be important in the access market to get…

So that will be the counterpoint, I guess that would match up with CFP or CFP2?

Correct, yes.

I see, I see.

It will match them. And it really gets them, the PIN-based receivers gets you to about 10 kilometers and to O-Flys which is not very far as the fiber winds around. So after that, they need APDs and these high-speed APDs. So we don't anticipate any significant revenue out of that, that's a product development. So we don't anticipate revenue out of that this year, but that's okay because 100…

So 2015?

Market is a 2015 market anyway, yes.

And speaking of APDs, what about 10G, is that more of a second half or is it over 2015?

Yes, that's right, that's the second half.

It's calendar, right, calendar second half or is it fiscal?

It's fiscal year second half. We have 2.5-gig and 10-gig and we have traction in various different design wins there, but rolling that out, it just takes a while for design wins on both of those.

And are those going to have a different margin profile compared to your HSOR?

The chip-only sales will have a higher gross margin. The package sales will be a similar gross margin of transmission products.

Got it.

Or probably just higher volume but similar gross margin. And if you recall, I think we mentioned this on the last call, we have outsourced the assembly of that to Chinese CM. So we provide the whole building material and the design and the semiconductors and they do all the assembly for us.

Great. Alright, that was it for me. Thank you. Good job.

Our next question comes from Gregory Hillman from First Wilshire Securities Management. Please go ahead with your question.

Could you talk about the HSOR market? It had such a large percentage increase. Was there something abnormal for the spike up and do you think that will mitigate or continue to grow at that rate or at a faster rate for that matter?

The markets are going fast but part of that comparative quarter analysis comes from the fact that we were coming off of some supply chain shortages that restricted some of our shipping at the same time last year, except first quarter last year. So the pop is – there is quite a bit of demand but the markets aren't growing at 100% a year in that coherent receivers, they're growing at more like 50% or so. So you get a little bit of a combination of that, but it is a pretty good pop on the Comtest side where the fiber channel, the 32-gig fiber channel just entered that market. So, that's coming from a zero base growth on that.

And that's a test kind of production product, that's just a test product?

That's a test product testing the production of the transceivers that go into the enterprise market.

Okay. And your capacity, are you going to have any capacity, do you have all your ducks lined up to build capacity in HSOR that's like 2x or 3x higher than what it is right now?

We started our year with a plan, we kind of snapped the top line. Our fiscal year is April 1-March 31, we snapped our top line for our planned capacity back in February and we have had to revise that planned capacity upwards by a significant percentage, and actually in the first quarter got that implemented, got partway there. So our plan was, it's almost a doubling of capacity by the second quarter compared to what we came into the fiscal year planned capacity, and we're now trying to plan what might happen beyond that. So most of this capacity, we haven't intended to have any significant CapEx expenditures for that, but there is a little bit of a lag because we have to add second shifts, which means training, and there is a lag of training. So I guess to answer your question, that's a lot of words but to answer your question, we think we'll be able to ramp up but right now we're still not quite ahead of the curve on ramping up.

And then Jeff, in terms of your fixed and working capital requirements necessary to execute your business plan, you mentioned your 12 months out here okay, but how about two to three years out?

I still think with the EBITDA, we're expecting our [indiscernible] will be fine as we get out into that two, three year range. Our need for capital has declined since we shut down the silicon photodiode production capability in-house. So our traditional CapEx as a percentage of revenue has declined now. And where we would have significant CapEx would be if we went and say we want to add a whole new HSOR line. Today we're running, say, two shifts and we maybe could go to a third shift and then we might need a whole new line at that point in time, that's when we'd add in a lump of CapEx. But for now, we've got the capacity that we need in the near term because we're running one or two shifts on pretty much everything.

What would it take to open up a new line in terms of training costs and capital equipment cost?

The capital equipment cost probably will be $0.5 million. Training costs, the real cost of training is the reduced productivity of your best production workers during their training period, and that just means that you don't get the capacity online quite as quick. That's really where the true cost is on that.

Okay. And then finally on the T-Gauge, the adoption and you're talking about the [indiscernible] going from these contracts to more of a steady-state production. I guess what's your take on that, I mean are there any verticals you think are going to take off anytime soon for that and do you have the right team in place to train the value-added resellers all over the world in terms of what it can do?

This is Rick, Gregg. I think that we've started the process with regards to our value-added resellers. We are working with them to do what we refer to as the field trials in various vertical markets where we take the equipment and provide the equipment to them, they take it in, they stood up the line, they start the line and they run it for a couple of days to collect the data that they necessarily need to demonstrate the ROI on increased quality or reduced material usage that the end user would be getting. So we've done that and we're continuing to do that. There are other opportunities out there. We talked a little bit about the large purchaser we received from an European equipment manufacturer. We're hoping to have a major open house with them in November timeframe where they'll be doing a major introduction on multiple systems with our T-Gauge sensor on the process control. So, all these things are, again, just starting to build.

And Rick, I might just add on top of that, these value-added resellers then, once they are trained and we have worked hand-in-hand with them on the first few verticals for successful installations, they have leveraged quite a bit. So there the big guys are multinational in verticals, which service world markets. So it's a growing field, sales and service force. Ss we're feeling pretty good about all of that.

Okay. And then finally, how can I tell when fiber-to-the home or a metro-link is taking off in terms of part when you finally report sales, but what would indicate before then if it's going to actually happen and if it's going to affect you in the near term?

Fiber-to-the-home, the thing that's really driving that is Asia, China, and so we're working on design wins. So you will probably see as we deploy, as it moves out of the product evaluation stage and into the deployment stage, you'll probably see press releases ahead of, so you can look through the product windshield rather than through the rear-view mirror, because if you wait until we report significant revenue, that's going to be a rear-view mirror look.

Okay. And for the metro?

To the metro side, it's 100 gig coherent, and that market there are some metro 100-gig deployments right now with the current Gen-1 types of products. And when I say Gen-1, I refer to the optical interface forum, OIF, generation receivers. The metro market will really start taking off probably in 2015 and you will see us introduce a product introduction targeted at that, which is a little bit of a reduced performance. It has less features for the metro market than the long-haul market for a100 gig coherent. So you'll see the product introduction announcement, and then you can figure six months after or something like that is when you'll start seeing some traction.

Okay. And for the data center, do you have like a non-test product to go through the data center share, like production product that you ship all the time?

We have one that used to go into the data center which was a 40 gig serial transmission, OC-768, but that is we still ship some of those but that market is on the downtick dramatically. 100 gig has been 10 times 10 gigabit per second over the last year. That's going to transition, and we don't participate in that on the transmission side, that is likely to, that will transition to 4x25 gigabits per second, and we anticipate participating in that market segment with both our PIN arrays as well as our 28 gigabit per second avalanche photodiode. Those will probably be chip sales and not packaged product sales.

Okay, and when will that start to happen?

That won't happen until next fiscal year. You won't see samples in the 25 gigabit avalanche photodiode. That won't be sampled until late in the fourth quarter of this fiscal year or early next fiscal year. You have to prove – you have a lot of reliability testing and that's still in the product development phase.

Okay. Thanks very much, guys.

Our next question comes from [Randy Knutson] (ph) who is a private investor. Please go ahead with your question.

Big congratulations. It was a great conference call and great results this quarter, so a big pat on the back for everyone there. I know we've gone through some roads to get here and I'm really excited about what you've told us today. So thank you. No mention today of – Rick mentioned last time on the last conference call about new product line coming out as I understood from API Canada.

Yes, the TLS, tunable light source we talked a little bit about during the mid confidence call too. That's still under development. And again, I don't expect it to have any sales this calendar year, at least we're not forecasting any. But we're excited because it will open up some new market opportunities for us. So we have to go through not only the engineering development but also the market requirements documentation we'll call it, we refer to as MRD, that identifies who would be early adopters, what the price points are, how would we go about attacking those markets or getting the introduction to those markets. So that's still an ongoing development we'll say but we are excited about that and hopefully by the end of the calendar year we'll be able to talk about what the product configuration is going to look like and who the first customer may be.

I'd say that's still on kind of the technology development and market development phase versus the kind of product development phase.

But it's something brand-new and it's going to bring some new income in if it's successful and you're able to…?

That's right.

Great. HSOR, did I misunderstand or you're actually looking towards the development of a 200-gig product line?

So let me explain that a little bit. So 200 gigabits per second is, in coherent technology is just, today the primary approach is just using two 100 gigabit receivers together using the same, you'd use, it's called 16-QAM modulation format. So that's really how that market would occur. Some customers may want us to put both of the receivers in one package, most would just use two receivers together, just soldered to a printed circuit board. So, that is the current state of 200-gig. When you go to 400 gigabit per second, they might want a little higher analog speed. The speed that is used, the analog electrical speed used to deliver 100 gigabit per second is about 20 GHz per channel. So really it's a modulation technique that provides multiple bits of information per pulse and that's how you get to a 100 gigabit per second payload, which requires some sophisticated front-end optics on receivers, so the receivers are much more complicated. But anyway, it's a long-winded way of saying that it's not a separate 200-gig development, it's more of a market adoption of 100 gig receiver technology.

Okay, thank you for clarifying that. And then I know you can't talk specifically about Terahertz companies or companies – but are you expanding into new markets beyond the ones we've been in, in the past?

I mean, again, there are some other areas where people are interested in measuring density measurements we'll say on a product that really can't be done in a direct method without using Terahertz technology. There is also, some people are interested in doing measurements of where something is in-between layers, sometimes it's referred to as balance. So there's a couple of new vertical niches that we're looking at and we'll be doing trials on some of these and hopefully be able to make some announcements in the coming quarters.

And then I know that our T-Gauge is not used exclusively for nuclear gauge replacement, I'm correct about that?

That's correct, yes. Nuclear gauges are used to measure the fitness of asphalt on roads. So it wouldn't be used for that.

Okay, so everything beyond that particular purpose is not a nuclear gauge replacement, it is process control?

That's correct. Now there is nuclear gauge process control that are measuring fluids in pipes, okay. But again, that's a volume indicator not a process control indicator. So that again would not be 100% replacement on that particular application. Again, we're focused on where they are used to control a manufacturing process.

And then you mentioned in the F-35 contract that's still looming, you anticipate that the handheld device that I know you've shown some pictures of in the past, is going to be marketable in other situations. Did I understand that correctly?

Other OEM, so you remember the F-35 is made up of an alliance of a number of countries that contribute not only money to the program but capabilities. So, you have the ability to sell to other countries that same tool for quality control and quality control checks out there. So ultimately, whether it'd be at an allied facility depot for inspection or it'd be a domestic depot inspection, we believe in there being opportunity to sell into those markets.

And when we talk about handheld devices, that obviously brings up the anomaly detection device and is there – I know last time you didn't have any news to bring to us about any new thing with key essay but is there any movement at all there?

No, there really isn't. One of the things that we thought we'd do is bring the device to the IRMMW Show to show other researchers, and maybe we can stir some interest overseas.

Great, that's a great idea. Last thing, and this is something that you can't control but I just want to ask the question, I looked on your VAR sites and I've been not there looking for information on Terahertz all the time. I can't find where any of them even mentioned a partnership with us or a relationship to us, can't find Terahertz on their sites, and I just am kind of curious, has anyone noticed that? I mean maybe it's…

Again, what we're talking about is some of the bigger guys don't have it listed on their sites, which is a little bit of a disappointment for us, but again, we're looking at, at what point do we have the critical mass within their own organization for the number of sales to really justify them to start advertising on their own sites. So that's one of the things that we're working on as we speak. Like I said, we've got some trials going on this week with a couple of people. So hopefully we'll be able to move that to get a little bit more exposure in the future here.

Once again, great job and look forward to hearing from you the next report.

Our next question comes from [Sally Prescott] (ph) who also is a private investor. Please go ahead with your question.

I just wanted to congratulate them on increasing the potential for the future. And I know that it's been a slow long haul, I've been a shareholder for a long time, but I'm patient because I think a lot of this is going to come to fruition. And I really am interested in the little handheld device. I think there are many uses for it that people are unaware of and I'm glad you're going to be showing it at your next presentation and I hope that something good comes from it. But I just want to say, a lot of us are going to hang in there with you and wait for things to do better in Washington after the literal frozen situation there as far as buying and everything is concerned. I think the future looks bright and I want to be there with you and thank you so much for all your efforts.

Thank you, Sally.

Thanks Sally.

Ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

I don't have anything to add other than thank you everybody for taking the time to listen to our report today. I appreciate, and for our entire team, we appreciate your continued support of our Company. We are very focused on growing our revenues and increasing both non-GAAP and EBITDA and transferring this into GAAP profits. So have a good week and thank you again.

Thank you again everyone. That does conclude today's conference call. We do appreciate your participation. You may now disconnect your telephone lines.