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Executives

Lawrence A. Sala – Chairman, President and Chief Executive Officer

George A. Blanton – Senior Vice President, Chief Financial Officer and Treasurer

Joseph E. Porcello – Vice President, Accounting

Analysts

Mike Walkley - Canaccord Genuity

Rich F. Valera – Needham & Company

Greg Garner - Singular Research

Bhakti Pavani – C. K. Cooper & Company

Chris McDonald – Kennedy Capital

Anaren (ANEN) F2Q13 Results Earnings Call January 23, 2013 8:30 AM ET

Operator

Good day ladies and gentlemen, and welcome to the Anaren Inc. second quarter earnings conference call. [Operator instructions.] I would now like to turn the conference over to your host, Mr. Larry Sala. You may begin.

Larry Sala

Thank you. Good morning and thank you for participating in the Anaren fiscal 2013 second quarter conference call. I’m joined again today by George Blanton, our CFO, and by Joe Porcello, our VP of accounting.

I’ll provide a brief overview of the results for the quarter, after which George will review the financial highlights, and we’ll then take your questions.

Certain statements made during this conference call will be forward-looking statements. These statements involve risks and uncertainties that could cause the actual results to differ materially from those discussed. You are encouraged to review our SEC filings and exhibits to those reports to learn more about the various risks and uncertainties facing our business and their potential impact on our net sales, earnings, and our stock price.

Net sales for the second quarter were $38 million, up 6.3% from the second quarter of last year, driven by an increase in sales from the Wireless group. Non-GAAP operating income for the quarter was $6.3 million, or 16.6% of net sales, up 134% from the second quarter of last year.

Margins improved for the quarter due to the improved operational execution in our Space and Defense group and cost reduction initiatives that were completed in fiscal 2012. Wireless group net sales for the quarter were $12.8 million, up 19% from the second quarter of last year, but relatively flat sequentially from the first quarter of fiscal 2013

Demand from our wireless infrastructure customers declined throughout the second quarter and current forecasts indicate comparable demand for the third quarter. In addition, third quarter sales for the group will be negatively impacted by annual price reductions, which went into effect on January 1.

New product investments for the quarter remained focused on expanding the wireless infrastructure and Anaren integrated radio module product lines, and we continue to see a steady increase in AIR design-ins as well as customers ramping to volume production. We believe that our software tools are being adopted by numerous customers and helping to accelerate the transitions to volume production.

Customers that exceeded 10% of Wireless group net sales for the quarter were Arrow Electronics, Huawei, and Richardson.

For the Space and Defense group, net sales for the quarter were $25.2 million, up 1% from the second quarter of last year. Improved operational execution and a more favorable business mix drove improved profitability for the group. Space and Defense group sales are expected to increase in the second half of the fiscal year, as production rates increase on the TPQ-53 radar program.

New orders for the quarter were $25.6 million, and were driven by numerous radar, satellite, and electronic warfare applications. The group continues to experience a high level of space and radar related new business opportunities.

The Space and Defense order backlog at December 31, 2012 was $105 million. Customers that generated greater than 10% of Space and Defense group net sales for the quarter were Lockheed Martin, Northrop Grumman, and Raytheon.

George?

George A. Blanton

The highlights of the second quarter income statement and the balance sheet as of December 31, 2012 are presented on a non-GAAP basis. These non-GAAP measures are each adjusted from GAAP results to exclude certain noncash items including equity-based compensation and intangible amortization.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Please refer to our Q2 earnings release for a reconciliation of GAAP and non-GAAP measures.

Non-GAAP gross margin was $15.3 million, or 40.2% for the current quarter, compared to $11.6 million, or 32.4%, from the second quarter of last year. Gross profit as a percentage of sales increased by 780 basis points compared to the second quarter of last year, due to increased wireless sales volume, more favorable product mix, improved operational execution, and cost reductions realized over the past year. We expect company non-GAAP gross margin to be between 37% and 41% for the third quarter of fiscal 2013.

Gross margins will be impacted by lower component pricing at several wireless customers as a result of annual price negotiations and higher healthcare expense, which we offset somewhat by increased Space and Defense sales volume.

Investment in research and development was 8.5% of the net sales in the second quarter, compared to 8.7% of net sales for the second quarter of last year. Total R&D expenditures for the second quarter totaled $3.2 million, compared to $3.1 million for the second quarter of fiscal 2012.

Space and Defense group funded nonrecurring engineering programs are anticipated to generate approximately $4 million in revenue in the second half of this fiscal year. R&D expenditures are anticipated to stay at current spending levels for the remainder of fiscal 2013.

Non-GAAP operating income was 16.6% of net sales for the second quarter of fiscal 2013, up 910 basis points from 7.5% in the second quarter of fiscal 2012. The increase in operating profit was the result of a $2.3 million increase in sales revenues with relatively no corresponding increase in operating expenditures, a more favorable mix of business, and an adjustment for favorable experience for healthcare expenses in calendar year 2012.

Non-GAAP net income was 11.3% of net sales, or $0.33 per diluted share for the second quarter of fiscal 2013, compared to 5.6% of net sales, or $0.13 per diluted share for the second quarter of last year.

The effective income tax rate for the second quarter of fiscal 2013 was 32%, compared to a tax rate of 21.4% for the second quarter of last fiscal year. The effective income tax rate for the third quarter of fiscal 2013 is anticipated to be approximately 9%, and includes the effect of the reinstatement of the Federal Research and Experimentation Credit in January 2013, retroactive to January 1, 2012.

The overall projected effective tax rate for fiscal 2013, absent one-time events and adjusted for the reinstatement of the Federal Research and Experimentation Credit in January 2013 is expected to be approximately 28%.

Balance sheet highlights include cash provided by operations was $4.9 million in the second quarter.

The company sold its manufacturing facility in Salem, New Hampshire for $5 million, and entered into a multiyear operating lease with the new owner.

Capital expenditures were $900,000 in the quarter.

Cash, cash equivalents, and investments were approximately $44 million, as of December 31, 2012. The company had $8 million outstanding on its revolving credit facility at December 31, 2012, unchanged from September 30.

The company repurchased 610,000 shares of its customer service in the second quarter. On November 9, 2012, the board of directors approved an additional 1.5 million shares that the company was authorized to repurchase on the open market through its previously announced repurchase plan. There are approximately 1.335 million shares remaining under the current board repurchase authorization as of December 31, 2012.

Accounts receivable were $32 million at December 31, up $3 million from June 30, 2012. Days sales outstanding was 78 days, up 1 day from last quarter. The accounts receivable includes $4 million of unbilled receivables related to nonrecurring engineering projects that are using percent of completion accounting methods. DSO, excluding unbilled receivables, was 71 days as of December 31.

Inventories were $38 million at quarter end, up $1.7 million compared to the June 30, 2012 level. The increase was due to additional inventory required to support the wireless vendor managed inventory and higher levels of production for the Space and Defense group. Thanks.

Larry Sala

For the third quarter of fiscal 2013, we anticipate comparable sales for the Wireless group and an increase in sales for the Space and Defense group compared to second quarter levels. As a result, we expect net sales to be in the range of $37 million to $41 million.

We expect GAAP net earnings, inclusive of a tax benefit of approximately $0.09 per share related to the impact of the reinstatement of the Federal Research and Experimentation Credit to be in the range of $0.29 to $0.37 per diluted share for the third quarter.

Non-GAAP net earnings, which are inclusive of approximately $0.05 to $0.06 per diluted share related to expected equity-based compensation expense and amortization of intangible assets, are expected to be in the range of $0.34 to $0.42 per diluted share for the third quarter.

We’ll now take questions.

Question-and-Answer Session

Operator

[Operator instructions.] Our first question comes from Rich F. Valera of Needham & Company. Your line is open.

Rich F. Valera – Needham & Company

Larry, just wondering if you could give a little more color on the wireless outlook. First, curious that you guided sort of flat sequentially despite commentary that it sounds like orders were actually trending down through the quarter. So wonder what gives you the confidence that things are stabilizing to sort of be flat sequentially.

And then wondering if you had more of a kind of 12-month outlook from your customers, and if that called for some growth from current levels.

And then finally, just an update on AIR expected revenue levels, like maybe where we are today and where we think we could go by the end of the year or so, would be great.

Larry Sala

We started with our expectations for wireless. As I think we’ve said many times, we get basically six-week rolling forecasts and then once a year we kind of negotiate and get annual demand forecasts. From what we can see in the forecasts, it looks like demand is comparable this quarter. We did see a decline in demand throughout last quarter.

Had we seen consistent demand relative to October levels, we would have seen a much stronger quarter and it would be far above our expectations for this quarter. So last quarter would have been 15% or more higher in revenue for the Wireless group had October levels continued throughout the rest of the quarter.

So as far as our expectations this quarter, they’re consistent with what we’re seeing in forecasts. They’re consistent with what we’re seeing in customers pulling on a daily basis. So if we take the daily pull rate today, and run that out across the quarter, even flat from where we are, we should end up relatively close to our guidance expectations. So we’re not expecting any big trends.

About 25% of our wireless business comes from ceramic products, a high percentage of which are not infrastructure-driven. And we are expecting to see a pickup in that side of the wireless demand. So they’re products used in semiconductor manufacturing equipment, but also significantly in medical apps, implantable medical apps. And those customers are historically soft in the December quarter as it’s year-end for them, and they tend to pick up and have stronger demand here in calendar first quarter.

So that’s offsetting what is really a little bit softer expectations out of the wireless infrastructure side, all of which we report as wireless. For the rest of the year, if we looked at the forecasts we negotiated to, we’re definitely running a little bit below what our customers had for annual expectations in forecasts. And we would say traditionally our customers have been pretty conservative in those forecasts and more frequently exceed them than they do fall short.

Obviously, in recent years they’ve fallen significantly short, once, and it can happen, but we would say as the year progresses, if our customers even meet those expectations we should see a pickup in demand as the year progresses.

None of our forecasts that we have to date show that pickup happening, so over the course of the next six to eight weeks, the forecasts we receive are actually valid. We’re not seeing that pickup yet, but we certainly would expect that there’s a high likelihood that they’ll meet or exceed their forecasted demand, and we’ll see demand increase throughout the fiscal year.

And then we don’t say there’s seasonality in this business, but I think if we look historically, our June quarter is typically one of the strongest wireless quarters from the infrastructure side for the year. So I hope that covers that part of it.

On the AIR side, we’re starting to see more customers transitioning into volume production. So whereas on the last nine months we’ve been talking about being at about $1 million run rate, that’s still the case today. We’re still kind of stuck in that kind of run rate.

It’s actually a little lighter last quarter, because we had one customer go through a redesign cycle and actually return some product to us, so not only didn’t we see demand pick up, but we saw one of our larger customers actually return some product. That customer is now transitioning back into production, so we should see them be a contributor later this quarter and beyond.

And we probably have a dozen customers who are transitioning or into some reasonable level of volume production. We’re seeing a good steady flow of new design-ins, as many as maybe a couple a week now, so we definitely believe that the demand rate is picking up and that hopefully as we move into next fiscal year, over the course of the next six months, nine months, our forecasts show demand going from kind of this million dollar-ish run rate per year now to more like $2 million.

And hopefully we’ll see that steadily increase. As long as this pipeline on the front end continues to grow, we would expect a comparable percentage of customers transitioning consistently over time. So we feel like we’re starting to see a broader base of customers making that transition and a number of customers that are using 10,000 or more a year starting to show up.

Rich F. Valera – Needham & Company

And then on the defense business, it sounds like the TPQ-53 is the main driver of that back half. So, first do you have that already in backlog, or are you expecting additional orders to drive that? And then are there any other programs that you are expecting orders for, that you expect to drive that second half ramp?

Larry Sala

There’s no real new orders that we expect to drive the second half of our year, so everything that’s in our plan, I believe, is booked. We’ve actually booked our TPQ-53 order some eight months ago or more, I believe. It was a $15-ish million radar order that we booked. And our lead time was about nine months. We started to deliver in the November-ish timeframe, and we’re ramping up.

We should hit a kind of stable rate of production in February and that will continue for a year plus, I believe. So we would expect a follow-on order for that program sometime late this spring, early this summer. But that would impact our shipment levels a year from now or more. So nothing expected or necessary to be booked to meet our expectations for the rest of this fiscal year.

Rich F. Valera – Needham & Company

And then final one, just in terms of tax rate, particularly the pro forma tax rate, to get to a 28% rate for the year would imply a higher tax rate in your fiscal fourth quarter than I would have expected. So just wondering if there’s any clarity on what we should think about for the pro forma tax rate in the fiscal fourth quarter. Any help there would be appreciated.

George A. Blanton

Well, if we look at it in terms of just the credit reinstatement, the credit’s worth about $1 million a year. And it’s reinstated back to January 1, 2012. So it’s kind of a half a million kind of one-time event that’s going to occur related to fiscal 2012.

Then we’re going to have a million blended into the rate. That’s what’s bringing us down to this kind of 28% give or take a half a percent rate for the entire year, going forward. So a million dollars’ worth of credit is all that would show up in that 28% rate. The other half a million is just a one-time event in the third quarter. That’s what gets you down to the 9%.

So if you look at it as 28% in total on the year now, minus half a million dollars for the third quarter.

Operator

Our next question comes from Mike Walkley of Canaccord Genuity. Your line is open.

Mike Walkley - Canaccord Genuity

George, just on the higher healthcare costs, can you give us just where you think the operating expenses in total might be? Is it up $500,000 per quarter now, like $9.5 million type run rate? Just trying to get a feel for the increased operating expenses for calendar 2013.

George A. Blanton

Well, we had a very favorable calendar year for healthcare expenses, where our large claims were much lower than they had been historically. And as a result, we made an adjustment in the second fiscal quarter. The third fiscal quarter, we don’t plan to make that adjustment. That was about a half million impact in the fourth quarter.

And our operating expenses, I think, will be maybe slightly higher, but not much. We have some other expenses blended into the opex, obviously, with R&D and marketing. And I think we’re kind of at that $9.2 million or $9.3 million rate for the rest of the year, we would expect. It’s probably up $100,000 or so a quarter, hundred or two. So relatively flat opex for the rest of the fiscal year from the Q2 levels.

Mike Walkley - Canaccord Genuity

And then Larry, very strong gross margins this quarter due to the mix, and understand the price declines that start the calendar year in wireless. Do you think if you get wireless at a run rate, if things improve later in the year, to that $15 million level, that your combined company will have 40%-plus gross margins?

Larry Sala

Definitely. We should see a lot of operating leverage with any growth of the wireless segment. And as I said in the press release, we continue to look for opportunities to get more efficient on both sides of the business. The Space and Defense group made tremendous progress in the last two quarters of improving their operational execution. They’ve really embraced Lean manufacturing and have been able to get a lot of cost out of their business. We continue to try to allow attrition to reduce our headcount, find ways to get things done without new hires. So that continues to be our objective. So I would be very confident that at those kind of sales levels we would exceed 40%.

Mike Walkley - Canaccord Genuity

And then just with the TPQ program ramping, is it Space and Defense, is that division, the gross margins, you expect to increase as that fully comes online? Or is that more dilutive to the overall gross margin structure, that program?

Larry Sala

You know, I think we’re projecting them to stay relatively where they are, as I said. They made a lot of good progress. They’ve had good success in bringing in follow-on development contracts. Those are hard for us to forecast. So their externally funded engineering should be strong for the rest of the year. But we’d expect them to run comparably to how they ran last quarter.

Operator

Our next question comes from Greg Garner of Singular Research. Your line is open.

Greg Garner - Singular Research

Question on the wireless forecast. Would you say it’s just an extension of the December run rate, having come down from the October run rate and looking forward for your forecast for the third quarter?

Larry Sala

Yeah, we’d say it’s somewhere in between. As I said, we felt like January has picked up here, and we’re seeing demand on a daily basis. We saw some effect of people just slowing down their pulls at the end of the year to try to keep their inventory levels down. We see that commonly every year from our medical customers, and we’re seeing that demand pick back up again. So we’re not forecasting demand at the rate of October, not nearly that strong, but we’re also not forecasting demand as weak as it was for the month of December. We’re somewhere in the middle.

Greg Garner - Singular Research

And as I recall, there was a mention before that China was a large driver for the wireless for calendar 2013. Is that still the case?

Larry Sala

Yeah, we’re still seeing real steady demand out of China, at least that’s our expectation based on what we see in current forecasts.

Greg Garner - Singular Research

Question on the AIR products. You mentioned there’s 12 customers moving to transition to 10,000 units a year. Did I hear that correctly?

Larry Sala

I wasn’t quoting an exact number, but around a dozen kind of customers that are in what I would say is volume production. We have customers in that group that might be using 5,000 a year, and we have customers in that group that we expect will be using 40,000 a year. So it’s not as though there’s any prototypical customer, because it’s such a diverse array of folks. But just generally, something on the order of about a dozen, and on average these are guys who use 10,000-ish kinds of volumes a year, based on what they’re telling us.

Greg Garner - Singular Research

Okay. Just trying to get a sense for the dynamics of that, how many are moving over there each quarter. Is this a normal amount, this dozen, or is it ramping up?

Larry Sala

As I said, it’s been fairly stable the last couple of quarters as far as people have been giving us indications and forecasts and haven’t been hitting their numbers. But we’re starting to see more people pick up in terms of what they’re actually taking for delivery. So this is a business we service through third-party distributors. So we’re a little bit removed from what customers are doing on a daily and weekly basis.

Greg Garner - Singular Research

I remember about a year ago or so there was higher expectations for the AIR product. Is there anything that has occurred that gives you a reason for perhaps it hasn’t really done as well as originally expected? I mean, it seems like there’s some very interesting products. Or does it just have a longer development time cycle here? Is that where we’re in?

Larry Sala

Yes. Absolutely this business has fallen well short of our expectations for really the last year. We thought we’d be at this stage about a year ago, and we’re just starting to feel as though we’re getting past that now. From everything we can see, there’s been no real substitution. The customers we’ve been engaged with have continued. It’s just taking people longer to actually get their apps developed and into production, from what we can see.

The pipeline of new people coming in continues to grow, as I said. It took us a couple of years to develop what we’ve been saying is about 100 design-ins. We’ve had the product in the market for about two years. But now we’re starting to see people come in a couple of weeks, so we’re running more at a rate of maybe 100 design-ins a year.

So we’re definitely seeing some acceleration at both the front end and then at the back end with people actually giving us indications that they’re expecting to ramp up to production over the next few months.

So as you stated, we definitely have fallen short of our expectations in this product line. It’s a very new market and customer set for us, so we don’t have as good a history as far as being able to predict what customers are doing and when they’re going to ramp up. And so we’re certainly cautious about giving forward guidance in this product line specifically, because we just don’t have a lot of history in it.

Operator

[Operator instructions.] Our next question comes from Bhakti Pavani of C. K. Cooper & Company. Your line is open.

Bhakti Pavani – C. K. Cooper & Company

My question was related to the guidance that you have given of the third quarter revenue guidance of $37 million to $41 million. I was curious to know what events would take you to either side of the guidance, and what should be the kind of delta we are looking at?

Larry Sala

Sure. You know, we say pretty consistently in our Space and Defense business, we have maybe a million dollars plus or minus of really execution risk. As we said, the orders are booked, the business is here. But they’re large dollar value contracts, and large dollar value shipments, so you know, if a customer doesn’t show up to accept a delivery, that can push a half a million or a million dollars out of the quarter quickly. Or, you know, if we have some supply chain or other execution problem. We’d say that’s maybe plus/minus a million dollars of risk on the Space and Defense side.

In wireless, it’s that or more. It’s a million plus or minus or more of really what we would say is demand risk. Last quarter was not uncommon, where we start out the quarter at a monthly shipment rate of as much as $4 million a month, and we end the quarter at a monthly shipment rate of $3 million a month. But our customers forecasted probably a million dollar higher demand last quarter than what we actually executed to. So not as much execution risk on the wireless side, although there’s certainly some there as well, but significant demand risk from customers in the wireless business.

Bhakti Pavani – C. K. Cooper & Company

Talking about the gross margin level, the gross margins were significant higher this quarter, taking into consideration the revenue line of $38 million, and you’re kind of guiding the same $37 million to $41 million range for the third quarter. So are those the gross margin levels that we should be looking for the third quarter? Any color on that?

George A. Blanton

Yeah, I think those are levels that we could expect in the third quarter. We saw significant improvement in our Space and Defense business, and there’s a couple of reasons for that. One, we continuously develop new products, and typically we have some products that don’t pass qualification, or we have some design issues meeting specifications.

And for the past two and a half, three years, we have been in significant development mode, and making it through these specific programs, maybe $100,000 per program. There may be several programs that have this $100,000 challenge, I would say, from a specification or qualification test, or even design issues as we go through. We didn’t experience that level in the second quarter of these new program issues, and so that was helpful. That pushed margins up there.

And also, we had improvement, as Larry had mentioned, on our continuous improvement and operational execution. We improved our operational execution considerably in a couple of legacy and current production programs. And we continually do have efforts to redesign products for cost, and we’ve had some benefit there, so I think the combination of those two items have really improved the Space and Defense margins.

And we anticipate a similar product mix in the third quarter for Space and Defense as we had in the second quarter. So we think those margins are sustainable in the third quarter. Obviously that’s for Space and Defense. Now, Wireless, with the price reductions that we have annually from several customers, is going to be a headwind against that.

Bhakti Pavani – C. K. Cooper & Company

Also on the last call you had mentioned about working with one of the European aircraft manufacturers on the commercial aerospace side. Would you share some color or developments on that front?

Larry Sala

I don’t have a tremendous amount of color. We build a hybrid electronic module used for actuation of one of the systems on a commercial aircraft for, obviously, a large European aircraft manufacturer. The platform that it goes on is one that’s being developed and is not in production yet, but it’s our expectation that will happen over the course of the next year, and star to be a revenue driver for us.

I can’t quantify it for you yet. I don’t know that we’ve gotten through final price negotiations and gotten good indications of volume. But we, you know, have a number of hybrid electronic devices that are used in various engine functions, controlling valves and controls, and actuators, as well as things like wing flaps and other flight related systems. As these aircraft move from hydraulic-driven actuation to electronically driven actuation, it’s opened the opportunities for our MS Kennedy division.

Bhakti Pavani – C. K. Cooper & Company

Would you be comfortable naming the platform?

Larry Sala

I’m not, because I’m not 100% certain. So no, I’m not comfortable naming that yet.

Bhakti Pavani – C. K. Cooper & Company

Okay. You have about $35 million in cash on the balance sheet. Other than the stock repurchase, what are the other opportunities that you are looking at for deploying the cash?

Larry Sala

We continue to look for acquisition opportunities. We’ve been looking historically in our Space and Defense business, and that continues. We’re really focused on trying to expand our product portfolio in the space side of our Space and Defense segment. So the things that we’ve done at MS Kennedy to expand their product portfolio organically have been very successful but we’d like to look for other radiation hardened technology opportunities and products to expand us into higher levels of integration in the space side of our business. We do that on the defense side, but we’re still at a very low level of active product integration in the space side of our business.

We’re also looking at our AIR product line in some vertical markets, where we may be able to be a bigger integrator in the AIR space, in this short range, on licensed wireless communication arena. But that’s really just been an area we’ve been starting to look in in the last six months or so. But acquisitions would be the highest priority of use of cash.

Operator

Our next question comes from Chris McDonald of Kennedy Capital. Your line is open.

Chris McDonald – Kennedy Capital

Larry, could you spend a minute or two just walking through what you see are some of the key growth opportunities over the next couple of years in space and defense?

Larry Sala

Sure. Obviously we’ve talked for years about this technology transition in radar systems, and that’s probably the biggest single technology driver that we think has significant growth potential for us. It’s the big driver behind this year’s growth, which has come from ballistic missile defense radar growth and this TPQ-53 radar program, which is a ground mobile radar. It uses this new electronically scanned array technology that we participate in.

We’re now starting to see the significant development programs to put this technology on to surface ships, which has potential to be one of the largest programs in our history, as well as in fighter aircraft and other airborne applications. So that technology evolution, we think, is the biggest driver of growth for us, because we’ve had a historically strong position in putting that technology in place over the last decade.

So there’s a number of programs, airborne and ship-borne, as well as other ground-based radar opportunities that we’re pursuing to put this electronically scanned array radar technology in place.

On the space side, we’ve just seen general. We think our growth there is going to come generally from the continuing expansion of our product portfolio in the space market. We’ve had and continue to develop relationships with semiconductor companies to provide radiation hardened certified modules to space OEMs, predominantly for power management on spacecraft.

And as we continue to expand those relationships and product portfolios, we continue to grow our content potential on any type of spacecraft. And so that’s just driving a continuing growth as the market’s growing, and our content is growing. We think that’s one of the bigger drivers for us.

The other opportunity in what we call space is to start to provide more RF technology into space apps. So we’ve been able to work with the MS Kennedy acquisition to develop microwave related products that we can now offer to space customers. And that’s starting to actually become a meaningful revenue stream for them, and we think that expands as people put more complex active antennas onto spacecraft we can be a bigger participant.

So those are the two biggest opportunities we see in our space and defense business.

Operator

I’m showing no further questions in the queue at this time. I’ll hand the call back to management for closing remarks.

Larry Sala

We greatly appreciate your participation, and we look forward to speaking with you again next quarter.

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