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SMART Modular Technologies, Inc. F2Q09 (Qtr End 02/27/09) Earnings Call Transcript

March 26, 2009 | about: SMOD

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SMART Modular Technologies, Inc. (SMOD)

F2Q09 (Qtr End 02/27/09) Earnings Call Transcript

March 26, 2009 4:30 pm ET

Executives

Suzanne Craig – IR, The Blueshirt Group

Iain MacKenzie – President and CEO

Barry Zwarenstein – SVP, Finance and CFO

Analysts

Kamal Das [ph] – Barclays Capital

Gary Hsueh – Oppenheimer

Jim Suva – Citi

Edwin Mok – Needham & Company

Kevin Cassidy – Thomas Weisel Partners

Tony Venturino – Federated Investors

Rolf Sofnausky [ph] – SRC Capital Management

Presentation

Operator

Good afternoon, ladies and gentlemen. Welcome to the SMART Modular Technologies Second Quarter Fiscal 2009 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions). This conference is being recorded today, Thursday, March 26, 2009. We do apologize for the late start. We experienced technical difficulties.

I'd now like to turn the conference over to Ms. Suzanne Craig with Investor Relations. Please go ahead.

Suzanne Craig

Thank you, operator. Good afternoon, and thank you everyone for your patience and for joining us today on today's earnings conference call to discuss SMART Modular Technologies second quarter, fiscal 2009 financial results. Iain MacKenzie, President and Chief Executive Officer, and Barry Zwarenstein, Senior Vice President and Chief Financial Officer join me on today's call.

Before we begin, I would like to make the following Safe Harbor statements. During the course of this conference call, Ian or Barry may make may make projections or other forward-looking statements regarding future conditions or events concerning our future business, our current and new products and services and our performance, the size and strength of our market and or the future financial performance and outlook of the company.

These statements are forward-looking statements within the meaning of section 27 A of the Securities Act of 1933 and section 21 E of the Securities and Exchange Act of 1934. You should review the management's discussion and analysis and related risk factors affecting future results contained in the forms and reports filed with the SEC.

We caution you that such statements are just projections. Accordingly, our future results may differ materially from such projections. These forward-looking statements are made as of today and SMART does not currently intend and has no obligation to update or revise any forward-looking statements.

The second quarter of fiscal 2009 earnings press release is available on the company’s website at smartm.com or you may call our Investor Relations office at area code 415-217-7722 and we will fax you a copy. Please note that non-GAAP financial results presented equity charges related to stock-based compensation, restructuring costs and goodwill impairment charges. Please refer to the non-GAAP information section of our earnings press release for further details.

Our agenda for the call today is as follows

Iain MacKenzie will discus key highlights from the quarter then Barry Zwarenstein will review the quarter from a financial perspective and provide the forward-looking guidance. Our Q&A session will follow. An audio replay of this call will be available for two weeks by accessing the Investor Relations page at smartm.com or by dialing 1-800-405-2236 and using the pass code SMART.

And now let me introduce Iain MacKenzie, President and CEO of SMART Modular.

Iain MacKenzie

Thanks, Suzanne. And welcome to everyone on the call. Sorry again for the late start. We reported very solid financial performance adding $24.1 million in gross profit, a key financial measure of success and exceeding our expectations, despite a much weaker than anticipated macro economic environment and associated market challenges.

A favorable mix shift in our business combined with disciplined financial controls including a second restructuring and (inaudible) in the quarter led to earnings per diluted share on a non-GAAP basis of $0.06, well ahead of expectations. However, while our business model and execution allowed us to meet or beat our gross profit estimates, challenging macro economic conditions and weak market demand combined with persistent levels of DRAM ASPs throughout the quarter had a negative impact on our net sales.

Nonetheless, we are very pleased with gross profit and bottom line results, continuing our outstanding track record of profitability on a non-GAAP basis. In addition, our balance sheet remains strong with cash and cash equivalents of $125.4 million at quarter-end and long-term debt of $81.3 million, which is not due until the 2012.

For the quarter, DRAM related business represented 76% of total sales. We remain watchful for the inevitable recovery in the DRAM market as consolidation tools continue amongst the large DRAM manufacturers hopefully leading to a sustained capacity reduction.

We have recently released several new DDR3 base designs with more in the pipeline, which we expect to qualify this year and start ramping production by early next calendar year. These systems encompass more core CPU platforms and as DDC price premium continues to erode, we expect to see increased demand for higher density registered bins.

With the March 3rd announcement of our 8 gigabyte VLP and 16 gigabyte 50 millimeter (inaudible) DIMMs we're well positioned to capture high density of the market share. Likewise, the introduction of AMD Shanghai will likely sustain demand for high density DDR2 DIMMs in coming quarters. As the Nehalem ramp progresses followed by AMD's introduction of DDR3 in 2010.

DDR2 modules, both registered and fully-buffered DIMMS will gravitate to our legacy status, tending to stabilize if not increase ASPs over time. In fact, we're recently seeing increased interest in some of our cost effective, high density, standard height and VLPR DIMMs as capacity upgrades for matured DDR2 systems, as well as for high density 800 megahertz fully-buffered DIMMs.

Under small fund fact of module fund a broad family of DDR2 based SO-DIMMs and Mini-DIMMs for networking and telecom, had expected to remain in production for years to come.

Turning to SMART results. Along with the global PC market Brazil's PC market has contracted. However, we managed to shift the same number of modules into this market, or be it that more competitive pricing, resulting in an increase in our market share. Additionally, gigabyte per module increased from quarter-to-quarter, which should result in higher ASP per module going forward if DRAM prices stabilize.

As mentioned in the past, we are expanding our term beyond Brazil and have begun component and module sales to neighboring Latin American countries, such as Chile, Argentina, Paraguay and Uruguay. We continue to believe that we are well positioned for long-term success in this growing region as we leverage our strategic Brazilian foothold and capabilities.

And now let me update you on our recent successes, as we continue executing our diversification strategy into non-DRAM businesses. We have made good progress in our solid state drive business and have recently celebrated the one-year anniversary of our Adtron acquisition. Adtron's second quarter revenue run rate was over 20% higher than what it was when we acquired the company. As anticipated, Adtron continues to excel in the market with leading edge secure SSD solutions for industrial, defense and the aerospace industries.

Playing a part in the quarter's results was a particularly strong finish in December, as orders were placed by military and aerospace to utilize full-year budget allocations, as well as lifetime buys for products nearing end of life status.

Going forward, we expect positive contributions per dier from a recently announced product line expansion of our Xceed family of industrial grade SSDs targeted for defense, aerospace, industrial and embedded applications which bring state-of-the-art NAND Flash technology to applications that require process and SCSI interfaces.

On a quarterly basis, we expect some degree of fluctuation, particularly as we come off a strong calendar year end. On the display and embedded side of our business, production shipments of displays for the mobile information terminal design win mentioned in last quarter's conference call have now ramped to full production run rate.

Additionally, several embedded custom programs have moved into production. Assuming a return to a more stable economic environment, these programs together with analog production shipment of our TouchScape E Series displays to multiple U.S. and European customers as well as production release shipments of embedded PCs with mobile applications should result in a continued display and embedded growth for the balance of the year.

In the third quarter, however, we expect a reduction of our non-DRAM revenue, as Adtron reverts to more normalized demand profile and one of our embedded programs transitions to a manufactured in-house by the OEM.

On another note, I'm happy to announce that our Board of Directors has authorized the repurchase of up to $10 million of company shares using our available cash. This authorization reflects the confidence that the Board and management have in the long-term growth opportunities, as well as our ongoing commitment to long-term shareholder value. We believe that our shares are undervalued relative to our long-term earnings potential and hence that the repurchase program at this stage is well timed.

And now we'll turn the call over to Barry Zwarenstein, our CFO, for a closer look at the financials and our forward guidance. Barry?

Barry Zwarenstein

Thank you, Ian. Let me walk you through our income statement and balance sheet and then review our guidance. For the quarter, net sales totaled $109.1 million, down 23% from last quarter's $140.8 million and down 34% from the year-ago quarter. This decline, as Ian mentioned earlier, is attributable to continued economic uncertainty and the associated weaker demand, particularly for service as well as depressed DRAM ASPs.

Taking a look at our net sales by geography for the second quarter, the breakdown is as follows. U.S. 45%, Other Americas 24%, Asia 18%, Europe 13%

In terms of our sales by end markets, the breakdown is as follows. Service 34%, Network and telecom 24%, Desktop PC 20%, Logistics 8%, Storage 7%, Industrial 5%, Printers 2%. Sequentially, the biggest changes in dollar terms occurred in two end markets. Desktop PC which declined from 24%, a record for Brazil to 20% this quarter as the markets there weakened, and in Network and telecom which grew from 20 to 24% of quarterly sales, mainly because this is a legacy business in which ASP declines are relatively moderate.

HP continues to be our largest customer representing 30% of revenues this quarter, which is down from 34% last quarter. On a dollar basis, sales to HP were lower by approximately 32% compared to last quarter due primarily to a combination of softness in the server and PC end markets and to the low level of DRAM ASPs. Cisco remained our second largest customer during the quarter, representing 12% of our revenues, flat on a percentage basis with last quarter.

Moving to the rest of the income statement, gross profit for the second quarter was $24.1 million, down 7% from last quarter's $25.8 million. This exceeded the high end of our guidance range, as we benefited from cost reductions and a favorable shift in mix towards higher margin businesses. Second quarter non-GAAP operating expenses of $17.3 million was down from the $81.3 million reported in the prior quarter and included R&D expense of $4.7 million and SG&A of $12.6 million.

Non-GAAP adjustments net of tax for the second quarter of fiscal 2009 included $3.2 million of goodwill impairment, $1.8 million of stock-based compensation expense and $900,000 of restructuring charge relating almost exclusively to the reduction in-force initiated in January.

GAAP net loss for the second quarter of fiscal 2009 was $1.9 million or $0.03 per share, compared to a net loss of $6.9 million or $0.11 per share for the first fiscal quarter of 2009 and net income of $11.4 million or $0.18 per diluted share for the second quarter of fiscal 2008.

Non-GAAP net income for the second quarter of fiscal 2009 was $4.1 million or $0.06 per diluted share compared to $3 million or $0.05 per diluted share in the first quarter and exceeded our guidance for the quarter due to the higher gross profit, preemptive expense reduction initiatives and strict cost and expense controls.

Turning now to the balance sheet, net account receivables totaled $115.6 million at the end of the quarter, down $34 million from the prior quarter. Day sales outstanding were unchanged from last quarter at 42 days. Net inventory was $84.6 million at the end of the quarter, up from 78.5 million in the end of last quarter, and inventory turns were 11 times for the second quarter, versus 15 times in the prior quarter. The inventory increase was again due to the timing of a major logistics deal that extended beyond the quarter end.

Excluding inventory associated with these logistics deals, inventory turns would have been 17 times compared with 20 times for the previous quarter. As a reminder, as part of these logistics deals, we're compensated for holding this inventory and generally have no liability.

As we move forward, we expect our inventory turnover will be in the mid to high teens excluding the impact of any further major logistics deals that may cross over quarter end.

Consistent with past practice, accounts receivable and inventory turnover are calculated on a gross sales and cost of goods sold basis, which totaled $253 million and $228.9 million respectively for the second quarter of fiscal 2009.

Cash and cash equivalents totaled a 125.4 million at the end of February, down from the 137.3 million at the end of last quarter. Cash outflow from operations was $4.1 million for the second quarter of fiscal 2009, mainly due to a 10.7 million increase in working capital. Year-to-date, we have generated $24.6 million in operating cash flow and full cash positive operating cash flow in the second half of the fiscal year.

Depreciation and amortization totaled $3.1 million for the second quarter. Capital expenditures during the second quarter totaled approximately $5.4 million compared to $3.8 million last quarter, with the majority of the increase due to investments in SMART Brazil.

Before I move to our guidance for the third fiscal quarter, I want to update you on additional cost reduction measures that we are implementing. Despite relatively strong second quarter performance, our strong balance sheet and our confidence in eventual resumption of growth, we remain mindful of the current overall weak environment.

We have therefore decided to take further steps that help to take long-term profitability. These steps include salary reductions in the U.S., shortened work weeks internationally, a suspension of our 401K matching program and a reduction in Board compensation. Some of these actions are already underway and others will be underway very shortly. We expect that these cost reductions will enable us to ensure long-term profitability in these exceptionally difficult times.

Now let me turn to our guidance. For the third quarter of fiscal 2009, we estimated net sales will be in the range of $95 million to $105 million. Gross profit in the range of $17 million to $19 million, and GAAP net loss per share will be in the range of $0.05 to $0.04.

On a non-GAAP basis, excluding charges related to restructuring, stock-based compensation, and relocating our corporate headquarters, we expect net income for diluted share will be between $0.00 and $0.01.

Please refer to the non-GAAP information section in our earnings press release for further details. The shares used in computing net income per share are estimated to be approximately 61.7 million for GAAP and on a diluted basis 63.3 million for non-GAAP. That concludes my remarks. Now I'll turn the call back to Iain.

Iain MacKenzie

Thanks, Barry. So in summary, we're very proud of our results for the second quarter of 2009, amidst the backdrop of a challenging global economy and troubled DRAM market. We remain optimistic both what the future holds, as we believe we have the right business model and focused management team to navigate these challenging times.

We have the leading products and technologies to help our customers achieve their goals and we have a strong balance sheet, strong cost controls in place to weather this storm. Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions). And our first question comes from the line of Tim Luke with Barclays Capital. Please go ahead.

Kamal Das – Barclays Capital

Hi. This is Kamal Das [ph] for Tim Luke. Thanks for taking the question. The first question was on gross margin. Can you please tell us how you expect the different segments to be and how you expect the mix to negatively impact your gross margin from roughly 22% this quarter to 18% in the next quarter?

Iain MacKenzie

Yes, so we are looking for the gross margins to come back more in line to roughly above that 18% level, if you were to look at the calculation. And that last quarter was particularly strong. Remember, we had the strength of the Adtron SSD shipments, embedded shipments as a higher percentage of revenue because the DRAM prices were down and hence the higher margin products were a higher margin percentage. And in addition, you are seeing a normalized back to the costs have been reduced and reduced further on a go-forward basis, but more transition within Q3. So as you calculate through going forward, we'll have the weakness in the server market, you have DRAM prices stabilized, we'll have Adtron and embedded going back to normal levels as opposed to being high and high margins. So, and I think we've always said that normalized, this business will run at the 18 to 20% gross margin level.

Kamal Das – Barclays Capital

Thank you. Also, can you give us any guidance on what you expect operating expense and restructuring to be in for the third quarter?

Iain MacKenzie

Yes. So in the reconciliation, we have a total of 3 million. Of that stock based compensation is 1.8. A further 600,000 is for the – the relocation of the corporate headquarters and the balance of about 600,000 is for restructuring.

Kamal Das – Barclays Capital

And how should we model it going forward in the May quarter? Can you provide any color on that?

Iain MacKenzie

For restructuring?

Kamal Das – Barclays Capital

Yes. For restructuring and...

Iain MacKenzie

It should be very, very small.

Kamal Das – Barclays Capital

Very small. And for operating expenses, would we expect to decline?

Iain MacKenzie

It was that can also – it was there to ask in about the May quarter, which was that $600,000 fee you look at now.

Kamal Das – Barclays Capital

Oh. Okay.

Iain MacKenzie

So in a third quarter – third fiscal quarter, Kamal, it should be about $600,000 for the restructuring.

Kamal Das – Barclays Capital

Okay. Thank you. Last question of cash flows, if I may, well you had cash burn from operations of around $4.1 million because of working capital changes. How should we expect it in the May quarter, the coming quarter?

Iain MacKenzie

We don't break out the cash flow within a particular quarter. We're given guidance that for the second half of the year we expect positive operating cash flow and that's really about as far as we're willing to go.

Kamal Das – Barclays Capital

Thank you.

Operator

Thank you. And our next question comes from the line of Gary Hsueh with Oppenheimer. Please go ahead.

Gary Hsueh – Oppenheimer

Yes. Hi guys. Thanks for taking my question. I basically understand what’s happening here in – in terms of the Adtron SSD business basically boosting margins in the Q2 kind of time period and sort of that number subsiding in May. Is that going forward sort of the seasonality inherent in that business based on your exposure on the military, industrial side? Is that – is that just kind of the end of the year budget for us and should we be kind of expecting that kind of magnitude in terms of mix improvement going forward?

Iain MacKenzie

Yes. Only to that magnitude in dollars, Gary, because clearly the SSDs will expand into more enterprise products and will become a larger portion of the total business. But yes, certainly for the defense and aerospace in particular, you would see a couple of million or million to $2 million upswing in fourth quarter calendar.

Gary Hsueh – Oppenheimer

Okay, and on the enterprise side, which is maybe the faster growing side, I mean that's more kind of linear throughout the year?

Iain MacKenzie

That's correct.

Gary Hsueh – Oppenheimer

And just, since you've kind of mentioned that number, I mean the breakdown in terms of the Adtron SSD business, you said it was 20% higher now in the fiscal quarter you are reporting than when you acquired it. Roughly what percentage of revenue in the Adtron business is kind of government related, military, aero?

Iain MacKenzie

I think at this moment in time, Gary, I would classify all of the Adtron revenue as high end industrial and then defense and aerospace. The SSDs for overall SMART at this moment in time are selling through the Adtron brands necessarily.

Gary Hsueh – Oppenheimer

Okay. Okay, great. And then you guys had a goodwill write-down, but maybe I had my notes wrong or my model wrong. But I thought goodwill was written down to zero exiting November. Is there – am I missing something here?

Iain MacKenzie

Gary, it's a very fair question. So we – we had a good quarter with Adtron. We have an earn-out associated with Adtron. As a part of that earn-out, we had the write-off – we had to make the earn-out payment and as a consequence of that, we created goodwill with this part in rate back to the original contract and then per the accounting rules, we need to write it off, which is what we did in the quarter.

Gary Hsueh – Oppenheimer

Okay. Okay. And, in response to the benefits on an ongoing basis from this restructuring, this new round that you're putting in place in Q2, I'm not sure I caught, what exactly is the benefit in terms of, cost savings at the COGS line and the R&D and SG&A lines, or the OpEx lines? Is there anything you can help us out with there?

Iain MacKenzie

Yes it’s I have been saying switches between the COGS, R&D and SG&A. I think overall it reflect another over $1 million in cost savings per quarter from next quarter being the first – full quarter, so that would be from our Q4. Q3 will be a transitional quarter. So that $1 million in cost payments so I don't have the breakdown between the other costs and OpEx.

Gary Hsueh – Oppenheimer

Okay. Okay. Fair enough. Thank you.

Iain MacKenzie

Thanks, Gary.

Operator

Thank you. And our next question comes from the line of Jim Suva with Citi. Please go ahead.

Jim Suva – Citi

Great. Thanks very much. A quick clarification, the guidance for EPS. Am I correct about assumes no buyback?

Iain MacKenzie

That would be correct.

Jim Suva – Citi

Great, and then as a follow-up, can you talk to us about the timeline of this buyback? Is it a 12 month authorization? Do you expect to have completed in 12 months, from the press release it appears as if it's not an accelerated buyback? And I was just wondering if we expect it to be linear or pretty lumpy or how we should think about the timing?

Barry Zwarenstein

Well, as you know, Jim, this is a well established rules regarding the rate at which we can buyback based upon average daily volumes. We advised that by the bankers that it will take many months before we could complete the buyback. So it will be a fairly protracted affair.

Jim Suva – Citi

Do you expect to complete it in 12 months?

Barry Zwarenstein

Yes, the estimates would allow us to probably complete it within 12.

Jim Suva – Citi

Okay, and then, Iain, I think on your prepared remarks, you had mentioned something, and excuse me if I heard it wrong, but something about OEM shift or OEM in-sourcing or pulling something. Can you explain little bit in details around the magnitude, who or what that was and is there more of that still to come?

Iain MacKenzie

Yes, I certainly wouldn't like to mention the name. If the program features probably one of the longest running program and at the end of that period then the OEM is clearly the only one we have, where the OEM has the right to take the design after such a long time of running and then manufacture in-house and I think as you have well written, is that the trend that's happening where you don't own the, you know, where you don't have full ownership of the design. So we designed some, I think it's about three years ago at least to that program. And so it was a very early time in 2005 after the acquisition of ConXtra. So no, no more of it, I don't believe that to go. I don't think we'll have any other contracts of that nature.

Jim Suva – Citi

Great. That was very helpful. Thank you very much, gentlemen.

Iain MacKenzie

Thanks, Jim.

Operator

And our next question comes from the line of Edwin Mok with Needham & Company. Please go ahead.

Edwin Mok – Needham & Company

Hi, thanks for taking my question now. First question, can I ask looking forward in the coming quarter, which group do you think could potentially – show any growth or if which group will be stronger and which group would be weaker? Thanks.

Iain MacKenzie

I think as we go forward into Q3, we're looking at the servers and high-end servers being weak and probably the weakest of the bunch. I think some of the – we saw HP announced that BCS was down from 17 to 20% Q-over-Q. So servers we expected to be weak. But PCs in Brazil, that will pick up again for us and equivalents in network and telecom has been up fairly as stable dollar level product for us and we see that continuing and we mentioned the Adtron would relax. So, I think that's how each of them play through.

Edwin Mok – Needham & Company

Great, and just two housekeeping questions. First thing is where was actually Adtron reported within the end market that you guys have reported? And second thing is what do you expect tax rate to be in the coming quarter?

Iain MacKenzie

So the first part would be under storage is the Adtron sales, on SSE storage product and Barry?

Barry Zwarenstein

With respect Edwin, to the tax rate, I'll be happy to give you a range of estimated tax rate. But, I think I'll be more helpful to you if I tell you that based upon our projections for the taxes in our tax paying entity we'll probably have something in the order of $1 million or less in each of the upcoming two quarters. The GAAP rates, of course, are non-centrical for this past quarter, for example, it is a non-meaningful number. On a non-GAAP basis, for this past quarter we had tax rates of 23% and for the full year, we would expect it to be in the mid 30s.

Edwin Mok – Needham & Company

Great. That was very helpful. One more question regarding inventory. You know, it looks like inventory has gone up and I know you guys explained part of the reason is due to logistic, but even excluding logistics, seems like inventory is going up. Is there a reason behind that? Is your customer maybe pushing you guys to hold more inventory? Is that because, expectation that price will go up, can you give some color on that? It would be helpful, thanks.

Iain MacKenzie

Yes, Edwin I'll take that one and kind of three phase answer. One, the inventories are not going up, you see the turns going down a little bit because the inventory value over revenue and over cost of sales is actually – has been impacted. So, no changes really and in fact the second piece being that as we mentioned before, as the non-DRAM products are some 24% of revenue at this quarter than they are as for moving inventory and not relative to the DRAM. So you still have DRAM inventory moving exactly the same speed as before. And it is true in the logistics deals and with all this volatility in the DRAM market, then we are certainly taking ownership and distribution of these logistics deals, but as Barry said, minimal to no liabilities and we do get paid for cutting them. So I think it makes business sense to do it. But we continue to have very low liabilities for all of our inventories on hand.

Edwin Mok – Needham & Company

Okay. Great. Yes. Just maybe just to clarify. It sounds like non-DRAM – you have a slightly lower turn than your DRAM business. Is that fair to characterize it that way?

Iain MacKenzie

Yes on record by saying that's probably less than 10.

Edwin Mok – Needham & Company

I see.

Iain MacKenzie

In that…

Edwin Mok – Needham & Company

Great. And then finally, just quickly on the non-DRAM business. How do you guys visualize it going to the second-half, as you have mentioned the macro environment still looks pretty tough, but at least seriously you guys looks like – you think that non-DRAM is quite promising even for this year. How do you guys look at it for the second-half and how do you look at it for 2010 in terms of the growth trajectory for that business?

Iain MacKenzie

Yes. Certainly for the balance of 2009, our task in (inaudible) is to continue to design products and get them out into the market, get them tested by engineering, get them qualified to feed through into 2010 adoption. In this year alone, it's all about design wins and getting the products to work robustly on all of the platforms. In 2010, I think we're going to – we still see that to be conservatively at a 20% growth rate product.

Edwin Mok – Needham & Company

Does that even pertain to the embedded displays fees, which I think hasn’t been working for a while?

Iain MacKenzie

Yes definitely.

Edwin Mok – Needham & Company

Great. Thank you.

Iain MacKenzie

Thanks, Edwin.

Operator

Thank you. And our next question comes from the line of Kevin Cassidy with Thomas Weisel Partners. Please go ahead.

Kevin Cassidy – Thomas Weisel Partners

Thanks for taking my question. You had mentioned DDR3 as a growing, pretty – are you see growth there. And I just wanted to know if you could give us an estimate of what the breakdown is between DDR3 and DDR2 and what do you see going forward? What percentages?

Iain MacKenzie

See, that Kevin it's very tough to forecast this transition this year with the increased cost pressures at the same time the increased die size leading to semi's being reluctant to sell at the same price. And clearly I would say that we are is we are in the single-digit range of DDR3 to DDR2 and best we can feel is that by the end of the calendar year, it will may be, be in the 20 to 30% and not as fast as any if we knew as fast as originally projected and the full transition to the 75% being in 2010.

Kevin Cassidy – Thomas Weisel Partners

Okay. And is there much gross margin difference between your two modules?

Iain MacKenzie

No. Really we've gone through and all the only thing that will happen is the gross margin on DDR2 will likely become better in the long-term, but DDR3 as it comes into these high DRAM prices is probably a large gross margin percentage, and but it's still very good in trying to increase gross profit dollars per unit than DDR2.

Kevin Cassidy – Thomas Weisel Partners

Okay. Great. And if I could just turn to the secured solid state drives, in these markets, do you get better visibility, or first I guess, I wanted to understand a little more about the design cycle and then visibility for orders?

Iain MacKenzie

Yes, let me separate the market into the Adtron type business, the high end industrial, aerospace and defense which is more project based. And then once you do get qualified on the project and it starts, which can sometimes be a 12 to 24 month delay, then it becomes a fairly good backlog repetitive business. I think in the industrial and headed towards the enterprise side, then it's the same as our regular business, where it's more of a product into a market and hence the backlog visibility. Certainly at this moment in time, when you're designing onto platforms is extremely light. You need to develop a history with a platform so that you can watch the sell-through of your end customer systems and hence make our judgments on SSD drives from that. So, it's just too early in the market to have that history that we use to give guidance.

Kevin Cassidy – Thomas Weisel Partners

I see. Okay. Thank you very much.

Iain MacKenzie

Thanks.

Operator

Thank you, sir. (Operator instructions). Our next question comes from the line of Tony Venturino with Federated Investors. Please go ahead.