Executives
Lawrence Sala – Chairman, President and CEO
George Blanton – Senior Vice President, CFO and Treasurer
Analysts
Charles John – Piper Jaffray
Steve Ferranti – Stephens, Inc.
Rich Valera – Needham & Company
Greg Weaver – Kern Capital
Chris McDonald – Kennedy Capital
Anaren, Inc. (ANEN) F2Q09 Earnings Call January 29, 2009 5:00 PM ET
Operator
Good afternoon. My name is Philip and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 earnings release conference call. (Operator Instructions). Mr. Sala, you may begin your conference.
Lawrence Sala
Thank you. Good afternoon and thank you for participating in the Anaren Fiscal 2009 second quarter conference call. I am joined again today by George Blanton, our CFO and Joe Porcello, our Vice President of Accounting. I will provide a brief overview of the results of the quarter, after which George will review the financial highlights. We will 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 actual results to differ materially from those discussed. You are encouraged to review Anaren's Securities and Exchange Commission filings to learn more about the various risks and uncertainties facing our business and their potential impact on our net sales, earnings, and stock price.
Net sales for the second quarter were $41.4 million, up 28% from the second quarter of last year and included $10 million in net sales from the M.S. Kennedy and Unicircuit acquisitions.
An increase in Space and Defense Group net sales was partially offset by a decline in Wireless Group net sales for the quarter. Non-GAAP operating income for the quarter excluding non-cash equity-based compensation and acquisition-related inventory step-up in intangible amortization was $4.8 million or 11.5% of net sales.
Despite a less favorable overall product mix, profit margins for the quarter were comparable to the first quarter of fiscal 2009. Wireless Group net sales for the quarter were $16.7 million, down 6.6% from the second quarter of last year. Net sales for the quarter were negatively impacted by an overall decline in demand for Wireless infrastructure products in the second half of the quarter.
In addition, approximately half million dollars in net sales was delayed until the third quarter of fiscal 2009, as a result of our efforts to tighten credit terms with several customers. During the quarter, the Group successfully captured additional standard component market share at several OEM customers and continued to make progress toward production on several new ferrite components and custom assembly opportunity.
Sales of consumer component products were $1.4 million for the quarter, up 88% from the second quarter of last year due to the continued diversification of design wins. We continue to see numerous new design wins for a wide variety of wireless consumer applications. Customers that exceeded 10% of Wireless Group net sales for the quarter were EG Components who distributes mainly to Ericsson, Nokia, and Huawei. For the Space and Defense Group, net sales for the quarter were $24.8 million, up 71% from the second quarter of last year and included $10 million in net sales from the M.S. Kennedy and Unicircuit acquisitions.
The Space and Defense Group continued to deliver organic sales growth, and the integration of the recent acquisitions is progressing to plan. Profit margins for the group were negatively impacted by the start up of 2 new production programs, which incurred lower production yields in the quarter. Profit margins for the group are anticipated to improve in the third quarter. New orders for the quarter were $33.3 million and were driven by demand for higher electronic products at M.S. Kennedy. Orders for the quarter included contracts for components and assemblies used in military satellite, imaging and targeting, radar, and counter IED applications.
The Space and Defense Group continues to experience a robust opportunity environment. Customers that generated greater than 10% of Space and Defense Group net sales for the quarter were Raytheon and Lockheed Martin. Space and Defense order backlog at December 31, 2008, was $86.7 million.
George Blanton
The highlights of the second quarter income statement and the balance sheet at December 31, 2008, are presented on a non-GAAP basis. These non-GAAP measures are each adjusted from GAAP results to exclude certain non-cash items including equity-based compensation and acquisition-related inventory step-up in intangible amortization.
The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with accounting principles generally accepted in the United States. Please refer to our Q2 earnings release for a reconciliation of GAAP and non-GAAP measures.
Non-GAAP gross margin was 33.5% for the current quarter compared to 33.9% for the first quarter of 2009 and 32.8% for the second quarter of last year. The small decrease in current second quarter gross margins resulted from the less favorable product mix and lower yields on several production startup programs compared to the first quarter of fiscal 2009. We expect non-GAAP gross margins to fluctuate between 33% and 36% during fiscal 2009.
Investment in research and development was 7.3% of the net sales in the second quarter compared to 7.6% of net sales in the first quarter of fiscal 2009 and 7.1% of sales for the second quarter of last year. Current R&D spending is supporting a number of wireless component and custom assembly product opportunities as well as a number of projects in the Space and Defense Group and is not expected to decline in the near future.
Non-GAAP operating income was 11.5% of net sales for the second quarter, down 60 basis points from the second quarter of fiscal 2008, and up 20 basis points from 11.3% for the first quarter of 2009. The decrease from the second quarter of fiscal 2008 resulted from less favorable product mix and less favorable product yields on new startup production programs in the Space and Defense Group.
Non-GAAP net income was 7.9% of sales or $0.23 per diluted share for the second quarter of fiscal 2009, including $622,000 in interest expense. This compares to non-GAAP net income for the first quarter of fiscal 2009 of 7.8% of net sales or $0.21 per diluted share, which included $266,000 in interest expense.
Non-GAAP net income for the second quarter of fiscal 2008 was 10% of net sales or $0.22 per diluted share. The effective income tax rate for the second quarter of fiscal 2009 was 18.2% compared to a tax rate of 28.4% for the second quarter of last year and included the reinstatement of the federal research and experimentation tax credit in the second quarter of fiscal 2009, retroactive to January 1, 2008, resulting in a one-time federal tax benefit of $265,000 in the current quarter. The expected effective annual tax rate for fiscal 2009, absent one time events and given reinstatement of the research and experimentation tax credit, which occurred subsequent to the end of the current first quarter, should be approximately 31%.
Interest expense for the second quarter of fiscal 2009 was $622,000 compared to $266,000 for the first quarter. This increase resulted from the spike in the 90-day LIBOR rate during the last week of September and the first week of October 2008 when the rate on the company’s $50 million line of credit reset for the second quarter. The 90-day LIBOR rate had declined significantly by January 1, 2009, and we now expect interest expense for the third quarter to be approximately $325,000.
Balance sheet highlights include cash provided by operations was $2.5 million in the second quarter of fiscal 2009. Capital expenditures were $1.8 million in the quarter. Cash, cash equivalents, and investments were approximately $45.4 million at December 31, 2008, up $1.4 million from June 30, 2008. During the second quarter, we did not purchase any shares of Anaren common stock. There are approximately 1 million shares remaining under the current board repurchase authorization at December 31, 2008.
Accounts receivable were $26.6 million at December 31, 2008, up $3.5 million from June 30, 2008, and included $7.8 million from the acquisition of M.S. Kennedy and Unicircuit.
Day sales outstanding were 59 days, down from 61 days at June 30th. Inventories were $38.6 million at December 31, 2008, up 43% from $27 million at June 30, 2008 due to the acquisition of M.S. Kennedy and Unicircuit, which added $9.9 million in inventory.
Lawrence Sala
For the third quarter of fiscal 2009, we expect an increase in sales in the Space and Defense Group and comparable demand for Wireless Group products. As a result, we expect net sales to be in the range of $41 to $46 million.
We expect GAAP net earnings per diluted share to be in the range of $0.17 to $0.20, using an anticipated tax rate of 31%, and accounting for approximately $0.06 to $0.07 per share in charges related to expected stock-based compensation expense and amortization of acquired intangibles, and inventory step-up related to the two acquisitions. Non-GAAP net earnings per diluted share are expected to be in the range of $0.23 to $0.27 for the third quarter.
We will now take questions.
Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Charles John.
Charles John – Piper Jaffray
At the end of the last quarter you had completed the platform transition with one of your largest customers. The question that I guess I have is you had also referenced some potential opportunities in the third and fourth fiscal quarters moving into production, could you give us some updates there and just a general level of visibility you have with this customer and with your other OEM customers?
Lawrence Sala
Sure. I guess as far as the transition and new programs go, we said, I believe, that we had a custom assembly opportunity that we expected to be ramping up in the second half of this quarter. We thought that was on the order of $4 to $5 million annual opportunity for us and that is progressing relative to plan. The other couple of opportunities that we’re pursuing are smaller in size, something in the order of $1 to $2 or $3 million dollars, and also, this should be ramping up late this quarter early next. So, we are pretty much, I believe, executing to the expectations we set out customer types of revenue opportunities coming into production kind of one per quarter over the next couple of quarters.
As far as demand goes and visibility from our customers, we really haven’t seen demand forecast change very significantly. In the late part of November and the majority of December, we saw a pretty significant decline in just orders received without a lot of visibility in any kind of forecast deviations. Since the beginning of January and most recently, we have seen again pretty much forecasting, pretty consistent, orders may be picking up a little bit over the December time frame, but a lot of discussion from customers who have exposure to the build-out in China that they expect things to pick up a bit here over the next couple of weeks. So, we are optimistic and after the Chinese New Year, we will see some positive impact from new build-outs in China, but we are just hopeful that people start to order more consistently with the forecast that they are providing. So, we are having a good dialogue. We just have seen a little bit more of inconsistency between forecasts and orders than we have traditionally seen.
Charles John – Piper Jaffray
Thanks for that color Larry. That was helpful. But just to help us with the modeling, the Space and Defense obviously really strong, very nice backlog and the Wireless Group, there is some volatility there. When you have given this guidance for the gross margin, how should we think that there would be upside or downside risk to this margin guidance? This China opportunity, have you totally excluded it from your guidance or is that baked in somewhat, and in terms of your Space and Defense, from your previous expectations, is it a faster than expected ramp in the back half of this fiscal year?
Lawrence Sala
I’ll speak to the revenue drivers, and Joe and George can speak to the margin impacts. From the Space and Defense Group, we do expect to have an acceleration in growth here in the second half of the year. We have not put up the kind of growth in the first half for Space and Defense that we thought we might; they have had some growth but certainly not at the kind of rate relative to the book to bill ratios we have had for the last year. So, we are hopeful we can execute a little better in the second half and see more acceleration of growth in the second half, and some of that is in our forecast.
From a wireless standpoint, we are pretty much putting a plan consistent with the forecast that we get from our customers, so we haven’t really put a big haircut into their forecast. We have been in pretty consistent discussions with them, and so we are pretty much projecting relative to the forecast that we have, and that’s pretty much been our practice over the years.
George Blanton
I think from a gross margin standpoint with the production programs that were coming up in the first quarter and second quarter, we should see some margin improvement along with the volume increase in the Space and Defense area, and then on the Wireless side, I think with the favorable product mix, which is uncertain right now some improved gross margin also.
Charles John – Piper Jaffray
Just in terms of the tax rate for fiscal 2010, do we assume that this tax credit that you guys got, does it stay and do we just assume a 31% or does it get bumped back up to the 35%?
Lawrence Sala
As long as the tax credit stays, the rate will stay somewhere where it is right now, somewhere around this 31% range.
Operator
Your next question comes from the line of Steve Ferranti.
Steve Ferranti – Stephens, Inc.
I wanted to ask you about the growth in Space & Defense backlog, was this just sort of some orders that came in late in the quarter that might not have gotten filled or is this, it sounds like its real backlog growth in the sense that you are expecting an acceleration of that revenue in the second half of the year.
Lawrence Sala
Yes, I mean it is just certainly a little bit of both. If you recall, we had heavy orders in the fourth quarter. We had a little bit light orders in the first quarter, and then we had very strong orders again here. Overall, I think we are a little bit ahead of our plans seeing a little more strength in a few programs coming in that we thought might be pushed out or the numbers are a little higher than we expected, but nothing dramatic I would say. You certainly see a good opportunity environment for the rest of the year, so we are optimistic we can have a solid book to bill for the year, but we will see as things push around. Really the quarter’s numbers were driven largely by better than expected performance, and I think a good part of it is incremental business at M.S. Kennedy to their plan, so they did book some business above and beyond what their expectations for the year were.
Steve Ferranti – Stephens, Inc.
Okay. It seems like you had thought there were some opportunities for some revenue synergies in terms of the added capability that was brought on by Unicircuit and M.S. Kennedy, are you seeing any of that materialize yet? It obviously sounds like you’re seeing some strength related to that but have you seen any sort of incremental opportunities that are related to sort of the synergies between yourself and Unicircuit and M.S. Kennedy?
Lawrence Sala
Well, we are certainly starting to pursue and prototype a few things for customers jointly. I say that the biggest synergy has been more reliance on Unicircuit as a circuit supplier for us to go after some higher end work that we have been challenged to pursue in the past, so that part of the vision is playing out fairly quickly for us. Unicircuit is participating with us on a number of new opportunities and has supported us for some fairly complex work. M.S Kennedy, we have got the equipment in place now and probably half of it up and qualified, the rest should be done here over the next couple of months. They got, like I said, some first time prototypes and proofer concept things for customers that we are were starting to work through with them, but really our intention there was to really get this capability in place this year and really start driving new revenue streams next year as a result, but I would say we feel like we are well on plan.
Steve Ferranti – Stephens, Inc.
Okay, and then I guess just turning to the operating margins on the Space & Defense side. I understand that you did have some startup costs in the quarter. First, can you sort of quantify what the impact of those was in terms of the second quarter numbers? I guess just looking forward, it seems like these would be sort of fact of life in this business just given the development that is going on. Are you sort of underestimating maybe the risks in these jobs or is it more operational, can you give us some sense on what is going on there?
Lawrence Sala
We had 2 programs in a new technology for us in the LCCC area, so that one, we expected it would be challenging yields for the quarter. I think we probably even underperformed some of our estimate there and then we also had a pretty significant startup of revenue stream from the counter IED application, and we went through the same sort of transition on the last go around where we got to get up and running pretty quickly and so working overtime, expediting things through, eating some poor yield just to product out of the door in the first month or two of that was part of our expectations. The Space & Defense Group also had probably about a $0.5 million to a $1 million of sales pushed out both from people, customers just wanting to delay receipts and not have to have as much inventory on their balance sheet at calendar year end as well as some credit issues, I think, even with some foreign customers of our customers on the military side, so they came up a little bit light on the revenue side as well as had some challenges on these new startups, but I do not think it is anything significantly outside our expectations.
Steve Ferranti – Stephens, Inc.
Related to Space & Defense, any update on how crew is progressing?
Lawrence Sala
Yes. We got the second, fully funded on the first as we said about $5 million. We have gotten partial funding of another $1 million to $1.5 million of that contract, and we would expect some material orders either late this quarter or early next quarter based on what we are hearing from the customer, so progressing to plan. As I said, we are trying to get ramped up to full production rate by next month, so far onward and upward there.
Operator
Your next question comes from the line of Rich Valera.
Rich Valera – Needham & Company
Larry, I just wanted to address your visibility in Wireless. I think historically you have been very vary of sort of taking your customers’ forecasts at face value and you have been sort of typically, I think, dictated your guidance of the most recent demand level you have seen and it sounds like recently you have actually seen quite weak demand levels but you have what would seem to be a higher than historical level of conviction things will come back in the back half of the quarter. Is that due to sort of specific event like the China 3G ramp you are expecting as well as, I guess, the ramp of your new custom program that gives you that sort of seemingly higher level of confidence of a ramp here than maybe you have had historically?
George Blanton
Yes, I guess we have had a few things that give us a little more confidence. I mean, we are basically saying that last quarter started relatively strong, nothing ridiculous, and ended exceptionally weak and this quarter starting out little bit weak, and we expected to improve a bit throughout the quarter, so I do not think we are looking at it inconsistently from the way we have in the past, but we do have some better visibility as to demand here in the early half of the quarter from this China build out and we’ve got exposure through a number of customers including Huawei and Ericsson who got the majority of the share of that business and then we have a new revenue stream picking up here for us, hopefully generating some revenue at the back half of the quarter for us, and we also have put some customers on much more stringent credit terms, which has caused them to have to give us much firmer commitments of delivery and prepayments in some cases, which has given us a little bit better visibility with customers who have been very difficult for us to pin down in the past. So, I will be the first one to say, this business changes on a dime and is certainly the highest risk of our ability to provide forecasts, but we, I think, are looking at it consistently with the way we have looked at in the past.
Rich Valera – Needham & Company
George, is it fair to say that the majority of that range and the revenue for the quarter of the guidance is due to Wireless?
George Blanton
Yes, virtually 100% of that.
Rich Valera – Needham & Company
On the gross margin side, sort of working through your guidance, it would appear that you are expecting something on the order of maybe 100 basis points of gross margin improvement from your mitigation of those startup issues in Space & Defense. Is that a ballpark figure?
George Blanton
Yes. I think if we performed a plan the way we think we should, I think that is good a ballpark.
Lawrence Sala
Yes, if you recall, we too announced some time ago that we had a second reduction enforced in our ceramics operation in November-December last quarter that probably had about a 50 basis point impact quarter to quarter between what the severance costs were for us and the cost take out impact on a quarterly run rate going forward, so there are a few factors that we think should help us improve gross margins a bit.
Rich Valera – Needham & Company
And then looking forward from there, would you say gross margins should just vary by volume or is there some continued margin enhance in activities that you think you could engage in the next couple of quarters beyond that?
Lawrence Sala
Well, we had a very aggressive cost reduction program in general company wide here, and we are starting to see some of the benefits of that, but the big drivers are going to be volume index as usual. We believe in opportunity to see a reasonable incremental increase in our volume over the next couple of quarters and that will have the biggest factor.
Rich Valera – Needham & Company
Right. Just a book keeping item, D&A for the quarter, do you have that item handy?
George Blanton
Amortization?
Rich Valera – Needham & Company
Yes, depreciation and amortization for the quarter?
Lawrence Sala
Cash flow, depreciation was a little over $2,050,000, and amortization was about $530,000 for the quarter.
Rich Valera – Needham & Company
Then, for a non-GAAP tax rate, I think last quarter you might have mentioned high 30s; is that still what you think of it as a non-GAAP tax rate?
Lawrence Sala
Yes, it’s in the middle 30’s, about 36% on those non-GAAP items.
Operator
(Operator Instructions). Your next question comes from the line of Chris McDonald.
Chris McDonald – Kennedy Capital
A quick one on M.S. Kennedy, you mentioned some order strength there. It sounds like that’s the legacy business where you are seeing the strength versus some of the new capabilities that you are putting in, is that right?
Lawrence Sala
Well, it is certainly their legacy capabilities because they don’t have any production or they are not taking any significant orders yet for any of the new capabilities, but it is some new program for them; some opportunities where they have taken some business from some competitors as well as some new production programs for them, so I would say a good portion of their incremental business has been business they have captured away from some competitors but using their legacy capabilities to do it.
Chris McDonald – Kennedy Capital
Okay. Could you just spend a minute taking about some of the new capabilities that are going in there and just give kind of ballpark market sizes that you think might be available from an addressable market standpoint?
George Blanton
Sure. The general capabilities are very broadly applicable capabilities, so they build electronic hybrid module; so they buy semiconductors in dye form, put them onto substrates and encapsulate them in modules and do that mainly for satellite and military applications which requires high levels of certifications for those industries. The capability that we want to put in place is to attack high frequency electronic modules, so electronic modules used in radars systems and receiver systems and missile receivers and all different types of high frequency and microwave applications, and so the addressable markets are enormous. The airborne radar market is a very large multi-billion dollar market that they can attack, so our vision is to go after radar modules where we already have a significant amount of content in many of these applications as well as applications for electronic warfare receivers and other EW applications. So, it is a very large addressable market, and it is very much adjacent to many of the products that we already provide to the same basic customer base. We are still talking about the Lockheeds, Raytheons, ITTs, Northrop Grumman, are really are addressable opportunity.
Chris McDonald – Kennedy Capital
Okay, and I would imagine you have kind of worked with those customers on building out this capability, and I am just curious what their receptivity is?
George Blanton
Yes, in fact in some cases we have actually worked closely with our customers’ process engineers, identified what their capabilities are and what their capability needs are in order to speck out the equipment that we have been putting in place and the capabilities we have been putting in place, and our customers are very receptive to it. It’s a capability that they have come in and audited our capabilities and identified this is one of the shortcomings for us to be able to access new market segments and do more business with them and so it is not something that we just conceived on our own and certainly something that we kind of pursued jointly with a couple of our largest customers.
Chris McDonald – Kennedy Capital
Just shifting gears to talk about the crew program for a minute, I am wondering when you look at the ramp-up there and the eventual margin opportunity on that program, how does that compare to the prior crew program from, I guess it was a year and a half or so ago from a margin opportunity standpoint?
George Blanton
Yes, the crew program for us on the first go around since it was a brand new device the first half of that program we had very strong margins. We provide one bid and we built out the first half. When they came back to us for the second half, we adjusted our pricing down quite a lot a bit due to history, and so the margins weren’t quite as strong in the second half as it were in the first. We bid it based on our historical rates and hours and our expectations from the prior experience we had, so we would expect it to be good margins and drive quite a bit of leverage for us because there is not a lot of incremental expense we have to put in place to execute this program, but from a bid standpoint, we bid it with our typical expectations of margins in the Space and
Defense Group, which we bid it with expectations of mid-teens operating margins.
Chris McDonald – Kennedy Capital
As this program transitions to its full rate production, I think you mentioned maybe even here in the later part of this quarter, it ought to put upward pressure in the Space and Defense margins certainly, going forward?
George Blanton
Yes, it is a substantial part of the growth that we expect out of the group quarter over quarter, so as long as we execute the base business and it’s incremental, it should be a good strong margin incremental piece of business for us.
Chris McDonald – Kennedy Capital
Then, just one more on the Wireless Group. When you look at the opportunities with the China 3G build out, can you just talk about the business mix that you would expect, the two customers you mentioned Huawei and Ericsson, I believe, tend to be more on the standard product side and so I was curious if that ought to be favorable from a mix standpoint to the extent that builds going forward?
George Blanton
Yes, that is absolutely correct. Both those customers are much more standard component users for us than anything else. If that plays out that way, it should drive a more favorable wireless mix for us this quarter than what we enjoyed last quarter.
Operator
Your next question comes from the line of Greg Weaver.
Greg Weaver – Kern Capital
Any updates you can give us on the EQ36, how that has come along?
Lawrence Sala
Sure. We have received the orders as anticipated, I believe, it was 12 systems late in December, so that was part of the significant overall bookings for the quarter for our Space and Defense Group. I think the program itself is progressing to our plans and our customers talking to us about the potential for more system demand here in the relatively near future, so I guess it is pretty much planning out to our expectations.
Greg Weaver – Kern Capital
And in terms of yields and how the new stuff is coming together and all that is on plan?
Lawrence Sala
Yes, the issues we had were more underbidding the deliveries of the prototypes, but once we recognized what it was going to truly cost us, we both renegotiated some pricing but more so were able to redesign some things to reduce costs. The circuit was a part of that helping us reduce some of the cost. We feel confident about our ability to see reasonable margins on that going forward.
Greg Weaver – Kern Capital
In capturing that additional piece of content you are hoping to get, is that still up in the air?
Lawrence Sala
It is still up in the air. We are hoping to deliver prototypes here over the next few weeks actually. If we are able to do that successfully, we should have a better idea of our ability to compete their next quarter, so yes, we are still pursuing it but it is taking us a little longer to get the material for that than we had expected.
Greg Weaver – Kern Capital
Okay, on the consumer component side of thing, any color there on how it is looking for the second half of the fiscal year in terms of ramping up business?
Lawrence Sala
Yes, we are expecting, I guess, at a minimum to see comparable volumes of business. We have seen a little bit of softness on the handset side, some applications we have had slow down, but we have seen a little bit of a pickup actually on the satellite television side, so overall I think we are expecting a little bit of sequential growth from last quarter, this quarter. I would say right now probably staying at that relative rate through the fourth quarter.
Operator
You have a followup question from the line of Steve Ferranti.
Steve Ferranti – Stephens, Inc.
Just a quick housekeeping question. Can you give us a split between standard and custom in the wireless business for the quarter?
Lawrence Sala
Yes, if you just give me one minute, I think I can.
Steve Ferranti – Stephens, Inc.
Well, maybe I can ask you another one while you are looking for that. I think you mentioned in your prepared remarks that you felt like you were taking share on the standard component side. Any thoughts as to who you might taking share from and what might be enabling that?
Lawrence Sala
Well, it is different by product lines. You have got really two distinct product lines there. On one we had some Asian competitors who have picked their particular products. We do not really have in our Zinger product line a broad competitor across every part number, so we went into negotiations with some redesigns to go after particular slots where we have not been as competitive as we would like to be, and we were successful in getting those slots, and then on the resistive side of our product line, the transition to China has helped our competitiveness and that is probably the biggest factor in being able to take more share and be more aggressive than we have been able to be in the last couple of years as we struggle for margin in that product line, so those were the biggest factors.
Steve Ferranti – Stephens, Inc.
Standard to custom?
George Blanton
I think we are still 60 standard, 40 custom roughly in the second quarter in that range.
Steve Ferranti – Stephens, Inc.
Okay, and you guys have any sense for, it is a very general question, any sense for content per base station or maybe per power amplifier in a given base station? Are you seeing, I know traditionally you have held a pretty high share in terms of your position in the Zinger market, and just curious if you are seeing any opportunities for incremental tangential markets there?
Lawrence Sala
Well, over the course of the last year to a year and a half, we have probably seen, I will give you a general answer to your general question, we have probably seen some improvement in terms of the dollar, I guess, opportunities for our Zinger product line within amplifiers. So, as amplifier architectures change, for a couple of years we saw a decline in designing opportunities for PAs and in the last year and a half, we have seen architecture shift to where that has actually increased in terms of the number of slots available to us in typical amplifier architectures. The introduction of our Zinger 2 product line opened up a number of low-noise amplifier applications for us in the Zinger product line and that has really driven that product line’s growth over the last couple of year, so even though we consistently are providing price reductions to our customers, we have still been able to grow that revenue stream and a large part of that has been access to low-noise amplifier designs and that is because the price performance improvements of the Zinger 2 over Zinger 1 made us able to unseat customers who were typically trying to design those couplers themselves into their printed circuit boards, so we did not really unseat anyone except instead of designing in it themselves, our customers are buying our parts and using them, and we are in the process, over the next couple of quarters, we will be introducing Zinger 3, and we hope that too can unlock additional slots for us, within power amplifiers where our customers are still printing some devices for some of their applications, and we think our product is a better fit for those, and our customers will design those in as well, so we are seeing some improvement in adjustable market there.
Steve Ferranti – Stephens, Inc.
You have any sense for your content?
Lawrence Sala
It varies tremendously, I’d be really at a stretch to try to guess, but probably in general there might be something in the order of a dozen or so slots for Zinger and amplifier applications, and that can vary greatly, and there are a couple power terminations depending on the amplifier’s architecture and how people lay things out. Sometimes, the terminations are sold with the isolator devices so they are not even sold to the OEM, they are sold to the person building the isolator, and sometimes they are used in the amplifier themselves and sometimes the isolators are embedded in the filters as opposed to the amplifier; so the architectures can vary quite a bit.
Steve Ferranti – Stephens, Inc.
I understand. Any exposure to Nortel on the custom side of the business or the standard for that part?
Lawrence Sala
Well, they have historically been about, I do not know, 4-5% of wireless customer in terms of sales, and to date they are still plodding ahead. As we said, we looked at our customer base, and we are continuously doing that right now and tightening up credit terms with anybody that we are uncomfortable with. We do not feel we have any significant exposure to them right now, and we do not know what this is going to mean to their business, but we feel like we have worked through all our issues with them, and they are supporting use as a supplier, and we would expect if they win, we will win.
Operator
You have another follow-up question from the line of Chris McDonald.
Chris McDonald – Kennedy Capital
I just forgot to ask one about the LTCC opportunities you mentioned working through development there, and I just wondered if you had an update on where visibility lies to the size and the timing of some of those opportunities right now?
Lawrence Sala
As part of the Space and Defense strong bookings for the quarter, we are driven by some new LTCC business that we captured and some radar applications. I’d say in the near term, we have been pretty positive about the opportunities we’ve booked. Longer term, we have had some disappointments in the LTCC area this quarter where the cost effectiveness of the technology seems to be being questioned for some of these higher volume applications, so we are looking at ways in which we can enhance the cost effectiveness of LTCC working with some of the material suppliers and trying to understand the direction of our customers to try to achieve the performance that they want at a price that they can tolerate for some of these very high volume applications, so I would say we are still trying to understand the magnitude of the addressable market at various price points.
Operator
We have another followup question from the line of Rich Valera
Rich Valera – Needham & Company
Just wondering how we should think of cash flow from operations, how you guys are modeling maybe for the balance of the year and if you have any sort of longer term goals in terms of cash flow from up, as a percent of revenue or any other matrix you would care to share with us?
George Blanton
Well, we are aggressively pursuing cash flow right now, and we are targeting inventory and receivables. You heard Larry talk about tightening up the credit terms with some of our commercial customers. We are working that very closely. I’m trying to make sure we mitigate any risks we have from any customers that may have financial difficulties but also taking advantage of that where we can to leverage our collections, and also on the Space and Defense side, we are focusing on the same thing with our key customers there, so we are looking for some benefit there, and we are also looking at improving our inventory levels and reducing those to generate some cash. So, we think in the second half, our cash generation should be considerably better than it has been in the first half. In terms of goals, it will obviously be in excess of our earnings, but we also think we will have a reduction in our capital expenditures compared to the second half somewhat, slight reduction there.
Operator
There are no further questions at this time.
George Blanton
We greatly appreciate your participation, and we look forward to speaking with you again next quarter.
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