Multi-Fineline Electronix, Inc. F3Q09 (Qtr End 6/30/09) Earnings Call Transcript

Multi-Fineline Electronix, Inc. (NASDAQ:MFLX)

F3Q09 (Qtr End 6/30/09) Earnings Call Transcript

August 6, 2009 5:30 pm ET

Executives

Reza Meshgin – President and CEO

Lasse Glassen – IR, Financial Relations Board

Tom Liguori – EVP and CFO

Analysts

Alberto Mann – Thomas Weisel Partners

Rich Kugele – Needham & Company

Brian Jones – RBC

Jiwon Lee – Sidoti & Company

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MFLEX fiscal 2009 third quarter 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, August 6, 2009.

I would now like to turn the conference over to Mr. Reza Meshgin, President and CEO of MFLEX. Please go ahead.

Reza Meshgin

Thank you. Welcome to MFLEX's fiscal 2009 third quarter conference call. Today, I will discuss our operational highlights and business outlook; and Tom Liguori, our CFO, will discuss our financial results for the third quarter of fiscal 2009. Phil Harding, our Chairman, Tom, and I will be available to answer your questions at the conclusion of our presentation.

Lasse Glassen, from the Financial Relations Board, will now review our forward-looking statements before we begin our discussion. Lasse?

Lasse Glassen

Thank you, Reza, and good afternoon everyone. I would like to remind you all that certain statements made in this conference call are forward-looking statements that involve a number of risks and uncertainties.

These forward-looking statements include, but are not limited to, statements and predictions regarding revenues, sales, net income, operating expenses, capital expenditures, cash balances, cash flow, tax rates, DSO, DIO, inventory levels, gross margin, productivity and operating efficiencies, yields, growth and diversification of the company's customer base, expected demand from the company's customers, and for products within different markets, including the effect of the economy and seasonality on such demand, product lifecycles, market opportunities and competitive advantages, expected benefits from the Pelikon acquisition, the utilization of flex and flex assemblies, programs, product mix, and material content and wrapping thereof, the company's manufacturing facilities, capabilities, capacity, and expansion thereof, including the MFC3 project, solid operations in other proposed sites, the company's ability to ramp production, uses of the company's cash, credit facilities, and liquidity.

Additional forward-looking statements include but are not limited to statements pertaining to other financial items, plans, strategies, or objectives of management for future operations, the company's operations and financial conditions or prospects, and any other statement that is not of historical fact, including any statements which is preceded by the words assume, can, will, plan, expect, estimate, aim, intend, project, foresee, target, anticipate, may, believe, or similar words.

For all of the foregoing forward-looking statements, the company claims the protection of the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from the company's expectations. Important factors that could cause actual results to differ materially from those stated or implied by the company's forward-looking statements include the risks detailed from time-to-time in the company's SEC reports and in this afternoon's news release. Forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any intent or obligation to update these forward-looking statements.

And with that, I would now like to turn the call back over to Reza. Reza?

Reza Meshgin

Thank you, Lasse. Despite the global economic challenges, we have continued to generate solid financial results. I am pleased with our operating execution in the third quarter, where we maintain our gross margin within our targeted range while delivering our flex assemblies for larger startup programs in support of major product launches by key customers.

During the third quarter, we generated net sales of $174.5 million, which was also within our guidance range of $160 million to $180 million. Third-quarter net sales increased 4% compared to net sales of $167.6 million in the same period last year, and we are slightly on a sequential quarter basis from net sales of $174.1 million generated in the second quarter.

We recorded net income of $11.7 million or $0.46 per diluted share. This compares to net income of $8.8 million or $0.34 per diluted share in the third quarter of fiscal 2008 and $8.7 million or $0.34 per diluted share in the previous quarter. Net income in the third quarter of fiscal 2009 was positively impacted by a one-time net amount of $2.4 million tax credit, representing $0.09 per diluted share, which Tom will discuss in more detail in his remarks.

In addition, our business continues to generate a significant amount of cash. Cash flow from operating activities was $22.2 million for the quarter. And the strength of our balance sheet, highlighted by a substantial cash balance provides us significant financial flexibility to grow our business. It is worth noting that our cash balance has more than doubled during the nine months of fiscal 2009.

From a customer demand standpoint, the third quarter proceeded as expected. Our sales mix continues to primarily come from flex assemblies for smartphones and portable consumer electronic devices that are continuing to experience strong end user demand.

During the third quarter, our four largest customers represented approximately 96% of our net sales, which was similar to the last several quarters. As you are probably aware, for competitive and customer confidentiality reasons, we do not disclose these large customers by name, but instead refer to them as customers A, B, C, and D.

During the third quarter, customer A represented 4% of net sales, customer B represented 7%, customer C represented 35%, and customer D represented approximately 50% of net sales.

We believe our ability to grow our business is a reflection of our success in supplying flex assemblies for the high-end portable electronic device market, including smartphones, that continues to experience healthy demand.

In addition to smartphones, we continue to have success with programs for other popular consumer handheld electronic devices. During the first nine months of fiscal 2009, net sales from these types of devices comprised approximately one quarter of our overall business. We believe our ability to deliver flex assemblies for complex devices faster and better than our competitors continue to prove extremely valuable to our major customers, as product cycle has shortened and time to market becomes more critical. Our unique ability to wrap production quickly has allowed us to win new programs for the most popular devices, and actively participate in the growth of the smartphone market.

Our gross margin was 14.3% during the third quarter, which was in line with the gross margin guidance range we provided of 13% to 15%. To this end, I am quite pleased with the efforts we have made over the last several quarters in improving our operating efficiencies.

We continue to execute ambitious lean manufacturing and Six Sigma quality improvement initiative. We are also continuing to engage our supply chain and cost reduction activities. The enhancements in our manufacturing and supply chain operations have by and large helped to offset the negative impact on gross margin, resulting from the recent product mix that has a higher material content, along with today's more competitive pricing environment, which has also put pressure on our gross margin.

To help attract new programs and customers and continue to expand our business, our capacity expansion initiatives are moving forward with the development of our new facility in Suzhou, China, called MFC3. During the third quarter, we broke ground on the new building and construction is progressing on schedule. We continue to expect that this facility will be online during fiscal 2010. In addition to providing increased capacity, the new facility will also allow us to advance our technology capabilities to enable us to produce the more sophisticated products that customers will need in the future.

Within MFC3, we will focus on advanced flex manufacturing capabilities, by facilitating high-density interconnect rigid-flex and possibly roll to roll [ph] and other highly-automated flex manufacturing capabilities. To meet additional capacity needs, we are continuing to identify opportunities that strategically expand our operations with the objective of diversifying the company’s geographic footprint.

Late in fiscal 2008, we signed a lease for a turnkey facility in Malaysia, to accommodate certain needs of our assembly manufacturing business, and more recently, we have identified a site for an additional manufacturing facility in Chengdu, China. We believe these and other alternatives provide us with viable options to meet future capacity requirements.

We continue to be very optimistic about our prospects for long-term growth, due to the strong relationship we have developed with our customers, we believe we have good organic growth opportunities within our existing customer base. We continue to actively support the business of our current customers. As our customers update and refresh their current products for full year, we believe we are well positioned to benefit from any commercial success that is achieved with these models.

We are also encouraged by the number of new entrants to the smartphone arena market, and I believe we are making good headway in our ongoing efforts to expand our base of customers. We have started producing small volume programs for a fifth major handset OEM, which is based in Asia. If the models we are working on for this OEM achieves commercial success, then it is possible that we will see a meaningful level of net sales to this customer in the future. Aside from this opportunity, we are in advanced discussions with several other OEMs and it is worth noting that the technology we acquired from the Pelikon acquisition has been very helpful in building relationships with some of the OEMs we are pursuing.

Before wrapping up my prepared remarks, I would like to provide our guidance and business outlook. We expect fourth-quarter net sales to be in the range of $190 million to $205 million. The expectation of a sequential quarterly increase in net sales reflects the impact of anticipated higher unit volumes as our larger customers increase production requirements ahead of the holiday season. We project gross margins to range between 13.5% to 15.5% in the fourth quarter based on projected product mix and leveraging of manufacturing costs.

Despite the ongoing near-term challenges, as the recession continues to impact consumer demand, we remain optimistic about our long-term growth opportunities.

With that, I will now turn the call over to Tom for a more detailed discussion on our third quarter financial results. Tom?

Tom Liguori

Thank you, Reza. Since Reza summarized our net sales performance, I will begin with some additional comments on the gross margin and operating expense.

Our gross margin was 14.3% this quarter compared to 13.8% in the same quarter last year. The 50 basis point improvement was due to a 390 basis point improvement in yields and a 290 point improvement in (inaudible) efficiency. These items were partially offset by a 560 basis point reduction due to higher material content in the third quarter's product mix.

Similarly speaking, smartphones and our consumer product programs have more and higher value components, and that is the higher material content; and a 70 point reduction due to higher overhead cost, (inaudible) indirect labor, depreciation, and facility-related costs.

I think it is important to note that our factories have achieved some significant improvements in labor productivity, cycle time, and yields. All of these have enabled us to maintain a respectable gross margin during the period where we have experienced a very competitive pricing environment, and where our product mix has a higher material content.

On a sequential quarter basis, gross margins increased by about 10 basis points from 13.2% in the second quarter of fiscal 2009, as improved labor efficiencies more than offset the impact of higher material content. As Reza mentioned in his remarks, third quarter gross margins were within our guidance range.

Third quarter R&D expense of $1.5 million increased $0.8 million year-over-year and increased approximately $0.2 million on a sequential quarter basis. The year-over-year increase was primarily due to increased wages and benefits due to higher headcount for development activities, and the additional R&D costs associated with developing our melting keypad technology that was acquired with Pelikon. The sequential quarter increase was primarily the result of increased wages and benefits for development activities.

Sales and marketing expense was $5.2 million in the most recent quarter, compared to $5.1 million in the third quarter of last year and $6.1 million in the second quarter of fiscal 2009. Sales and marketing expense declined on a sequential basis primarily due to lower commissions that are now based on a new commission structure, where commission rates decline as certain volumes are met.

G&A expense declined to $6.1 million in the most recent quarter, compared to $7.6 million in the third quarter last year. The decrease was due to lower wages and benefits, travel costs, and other discretionary expenses.

The 2.4% effective tax rate in the third quarter was lower than normal, primarily due to a $3.4 million reversal of a tax accrual for a transfer price item that reached the statute limitations, partially offset by a $1 million tax expense as a result of a change in tax rules related to international cost allocations and other items. The net favorable impact of these two items was $2.4 million or $0.09 per diluted share. During these one-time items, the effective tax rate was 22.5%. Going forward, we continue to expect our annual effective tax rate to be in the low 20% range.

Moving onto the balance sheet and liquidity position. Our cash balance increased by about $21 million during the quarter to $127.1 million, or approximately $5 per diluted share. Our cash balance has more than doubled during the first nine months of fiscal 2009.

In the quarter, the company generated cash flow from operations of $22 million and capital expenditures for the quarter totalled $7.1 million. CapEx was lower than our guidance at $12 million to $14 million due to the timing of payments to the IT system upgrade, new machinery purchases, and construction of the MFC3. For the fourth quarter, we expect total capital expenditures to be in the range of $15 million to $17 million.

Our current debt balance is $10.7 million, which is comprised of notes payable related to the Pelikon transaction.

We continue to focus on our receivables, inventory, and payables management. Our DSO declined to 61 days in the third quarter from 59 days in the second quarter and days inventory also increased slightly to 19 days from 18 days last quarter. These increases were offset by a 5.1 day increase in our days payable.

The total net working capital days of 25.4 days compares to 40 days in the same period last year, and is an historical low for the company. This metric has contributed significantly to the increase in cash balance. Inventory days benefited from operations activities to reduce cycle times, as well as different time sourcing through raw materials. While we are working to continue to keep our working capital low, we anticipate an increase in inventory levels as demand increases in the second half of the calendar year.

Earlier this year, the Board of Directors approved a stock repurchase plan for up to 2.25 million shares in the aggregate of the company's common stock. During the three months ended June 30, 2009, we did not repurchase any shares. Program to date, the company has repurchased 562,500 shares for $8.4 million. We have approximately 1.7 million shares remaining under the current authorization. We continue to have in place a 10b5-1 program for the plan. We evaluate a variety of factors, such as cash needs, forecast, dilution, and share price in setting repurchase parameters.

With respect to our potential uses of cash, our top priority is reinvestment into the business to support our long-term growth opportunities. As we previously discussed, we expect to complete the construction of MFC3, purchased the production equipment, and become operational in 2010. The total cost for MFC3 is anticipated to be $65 million to $75 million. This is MFC3; we intend to begin construction of a new assembly facility during 2010 in Chengdu, China with an estimated cost in excess of $20 million.

In addition to these capacity expansion projects, we have our normal CapEx to neutral (inaudible), advanced technology equipment, and equipment deflation. Most of these projects are complete, and as we begin to wind down MFC1, based on our current product mix, we estimate our annual revenue capacity to be between $1.1 billion and $1.2 billion by the end of fiscal 2011.

As we assess our growth opportunities beyond fiscal 2011, we have significant flexibility to adjust capacity as necessary to meet demand. For example, we have the ability to expand within the MFC3 and Chengdu facilities. We can also probably time the wind down of MFC1.

In conclusion, we are very pleased with our operating momentum and we are continuing to generate solid financial results. Given our strong customer relationships, we remain very optimistic in the future earnings and cash flow potential of the company.

This concludes the financial review. I will now turn the call over to the operator so that Reza, Phil, and I can take your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Matt Sheerin with Thomas Weisel Partners. Please go ahead.

Alberto Mann – Thomas Weisel Partners

Hey, guys. It is actually Alberto Mann calling in for Matt. The first question I had was on the gross margin. There was a pretty big impact from the materials that you were able to offset by productivity gains. Going forward, as your mix gets into more material content, how much do you think you can offset with productivity gains and yield improvement? I mean, is most of that behind you or they are still away to go?

Reza Meshgin

Alberto, this is Reza. I will say that we still have room for improvement and also, the material content that we have right now is a very good representative as far as how sophisticated types of assemblies that we are making now would be and it is for the foreseeable future. So although the material content may go up slightly, it is not likely that it will go up dramatically. Now we get into programs and types of devices that require much higher material content, then obviously we will communicate that proactively. As far as how much more improvement can we make with our internal efforts, you can kind of look at what we have done in the last year, and I would guess that maybe a percent or so would be a projection for another year to go, but nothing much more than that.

Alberto Mann – Thomas Weisel Partners

Okay. That's helpful. And then, you spoke about the fifth OEM coming online in Asia. Can you discuss maybe if you are in multiple programs or just one program and then if any of that is shipping in volume yet?

Reza Meshgin

We are in more than one program and we are – you kind of have to put the volumes into perspective. We are shipping in volumes. But obviously, the count in volume of program matters from one type of model to the other. So the specific models are in volume production.

Alberto Mann – Thomas Weisel Partners

Okay. And just in terms of the Chengdu facility, is there any particular reason you selected Chengdu, is it to be closer to a potential customer and maybe if you can elaborate a little bit on the timing you expect to ramp up that facility.

Reza Meshgin

If you may remember, in the last Q3, as we evacuated, we actually took a number of places below volume, and based on our matrices that we put together, this particular location was very, very attractive to us for a number of reasons, some of which I wouldn't share for competitive reasons. But overall, we felt that this was a very good place for us to start up our new operation.

Our anticipation is that we would build the facility starting somewhere towards the end of this year and it would continue throughout next year. So it should be operational roughly towards the end of next year, next calendar year.

Alberto Mann – Thomas Weisel Partners

And that is going to be assembly only?

Reza Meshgin

We will start with the backend, typically and historically what we have done is as we start, we do assembly and then the backend of the flex operations and then as the requirements come up and we can either accelerate that if we need to or slow it down, but as we need to build up the flex capacity, we will time that accordingly.

Alberto Mann – Thomas Weisel Partners

Okay. And then just one housekeeping question on the tax rate. I know you said for the year it would be in the low 20s. Does that mean there is going to be a bit of a true-up in the fiscal fourth quarter?

Tom Liguori

You mean normalized?

Alberto Mann – Thomas Weisel Partners

On a normalized basis.

Tom Liguori

Q4 should be in the low 20s.

Alberto Mann – Thomas Weisel Partners

Okay, all right. Thank you.

Reza Meshgin

Thank you.

Operator

Thank you. Our next question comes from the line of Rich Kugele with Needham & Company. Please go ahead.

Rich Kugele – Needham & Company

Thank you and good afternoon. A couple of questions. Can we narrow down the fiscal 2010 commentary, a little bit on the timing of the capacity additions, just to understand the progression of when things come on versus just kind of the full year?

Reza Meshgin

Sure. If you are referring to MFC3, our expectation is that MFC3 will be operational roughly about this time next year, so within the fourth quarter of fiscal 2010. It will be operational.

Rich Kugele – Needham & Company

Okay. So really if there is going to be extra capacity between now and the fiscal third quarter of fiscal 2010, then it is really this other facility that you are leasing now, right?

Reza Meshgin

In Malaysia?

Rich Kugele – Needham & Company

Yes.

Reza Meshgin

That is true, partially, although we have really not leased and put that facility in place for a very high volume type of operation. We have actually moved the Pelikon operation there and some other types of assemblies we are doing in Malaysia. The majority of our expansion is now in MFC3 will be operational or will have to come between MFC1 and MFC2.

Rich Kugele – Needham & Company

Okay. So what is the right way to think about your – maybe your capacity heading into MFC3 coming online, like what would that revenue number generally be, assuming a stable mix?

Reza Meshgin

Well, with (inaudible) put in place, and this is kind of referring to our previous CapEx spending and also if you may remember towards the end of last calendar year, our Q1, we were pressed for capacity. So we did some expansion within MFC1 and MFC2. And that gave us somewhere between – primarily says like at that time it was $230 million to $240 million, based on the product mix that we had at that time. It would be relatively the same at this point of time and we can add some more incremental capacity between the existing facilities. You may also recall that we have leased some satellite operations, so we can still move some more of the assemblies to the satellite operations. And then the next big jump between what we have now would be in MFC3.

Rich Kugele – Needham & Company

Okay. That is helpful. And then, you talked about – even the press release, about how the ramps of the – call them the non-top tier guys as they move into smartphones, that you would expect to be participating in those programs. Should we – as we forecast down in our model, should we be thinking of a certain type of seasonality when a number of these could hit or is there a seasonality that is now starting to emerge within your business.

Reza Meshgin

I would say not anything particularly different from what we have had historically. We are still in the handset market primarily plus the other types of consumer handheld electronics. So it would follow the same pattern.

Rich Kugele – Needham & Company

Okay. Thank you very much.

Reza Meshgin

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Jones with RBC. Please go ahead.

Brian Jones – RBC

Hi, thank you. It looks like the contribution from consumer devices as a percent of sales was only 20% this quarter versus 25% last quarter and I believe, if my math is correct, that would imply about a 20% quarter over quarter decrease. I was wondering if you can comment on any weakness you are seeing on the consumer products side.

Reza Meshgin

That is only a measure of seasonality. It is a mixture of the timing of when the products come to the market and new programs starting up.

Brian Jones – RBC

All right. And so, if we kind of look historically as we get into the second half of the year and primarily into the December quarter, then can we expect normal seasonality around those types of programs, so maybe the normal 10% to 12% that we have seen in the last two years (inaudible).

Reza Meshgin

You would have to mix that with the rest of our products. But to answer your question, our expectation is to see the same seasonality as before. So we expect to see an increase in those types of products towards the end of the year.

Brian Jones – RBC

Okay, that is helpful. And then, I was wondering if you could comment on why – I think in your second quarter press release, you had mentioned that you had established the second piece of the 10b5-1, that is to give the second tranche of the stock repurchase and then I was curious, given that there is so much cash on the balance sheet, there is over $71 million available under the revolver, why you didn't choose to repurchase any stock this quarter.

Tom Liguori

We evaluate that at least quarterly, and I would not consider it inactive in anyway, we filed the 10b5-1. Plus when we like to add cash flow, cash needs, neutral and dilution stock price, we make decisions that we think are correct. By giving that, we are really not going to be disclosing much more than – throughout the end of the quarter.

Brian Jones – RBC

Is it better to think that most of the financing done for the expansions that are happening next year will just be cash financed and you won't need to tap any of the revolvers?

Tom Liguori

That is what we are hoping.

Brian Jones – RBC

All right, thank you.

Reza Meshgin

Thank you.

Operator

(Operator instructions) Our next question comes from the line of Jiwon Lee with Sidoti & Company. Please go ahead.

Jiwon Lee – Sidoti & Company

Thanks, good afternoon. Reza, I wonder if you can comment – similar to your comment on the small handheld devices, what was the percentage of the smartphones for the quarter.

Reza Meshgin

The 20% was relatively accurate for the other types of the consumer handheld and if you look at – this was 96%, so basically in that end, this smartphone if you subtract it, it is about 75% in the smartphone and the handset, 75%, 76%.

Jiwon Lee – Sidoti & Company

Okay, well that is very helpful. And then in your third-quarter revenue guidance, what would you make up the bell tie? Would there be just more of an allocation on the smartphone side, or the other handheld devices or perhaps the ramp of the new OEM that you discussed?

Reza Meshgin

Your question is why were we in the higher end of the guidance that we provided?

Jiwon Lee – Sidoti & Company

I am sorry. For the fourth quarter.

Reza Meshgin

For the next quarter?

Jiwon Lee – Sidoti & Company

Yes.

Reza Meshgin

Okay. Would you please repeat the question? Just to make sure I got you.

Jiwon Lee – Sidoti & Company

I wonder when you put out the range of guidance, the 190 to 205, what will make that bell tie, is it more of the smartphone allocation there you are hoping to get or the non-smartphone or the ramp up of the new OEM?

Reza Meshgin

It is mainly the ramp up, and primarily in the handset market.

Jiwon Lee – Sidoti & Company

Okay, so the ramp up of the new OEM and the smartphone?

Reza Meshgin

No, I didn't say that. The ramp up of the handsets and the smartphone. If you are referring to the new OEM that I mentioned, that is not what I meant to say.

Jiwon Lee – Sidoti & Company

Okay. I got it. And then, how much have we spent so far on the MFC3 project? What would be the organic CapEx for fiscal 2010?

Reza Meshgin

We spent I guess today about $10 million; we spent about $8 million in the first quarter, Jiwon, and the total through the end of 2010 would be about $65 million to $75 million.

Jiwon Lee – Sidoti & Company

Okay. Thank you, that is helpful. That is all for me.

Reza Meshgin

Thank you.

Operator

Thank you. Our next question is a follow up question from the line of Matt Sheerin with Thomas Weisel Partners. Please go ahead.

Alberto Mann – Thomas Weisel Partners

Yes, hey, it is Alberto again. I was just wondering if there was any update from WBL, the stock has relatively low liquidity in the market and if they were – they have talked about possibly selling stake in the company or anything. You could update us on there.

Reza Meshgin

We don't generally update the market on behalf of WBL. They are a public company and so you can certainly approach them. As far as we are concerned, we have no news about the investment activities or decisions.

Alberto Mann – Thomas Weisel Partners

Okay. And then just similar to Jiwon’s question, on the guidance, looking at the gross margin, there is a 200 basis point swing and it is typically the range you provide, but what are the biggest drivers to get you to the upside versus the bottom of the range?

Tom Liguori

Where we end up on the revenue? Obviously if we are at the high end of the revenue has relative (inaudible). We have a lot of improvement in ramps going on and if we do very, very well, if it yields, then we – it will be very, very good if it yields, we have higher revenues, higher absorption, we will be at the high end of the range.

Alberto Mann – Thomas Weisel Partners

Okay. And then the last question from me is, on the sales and marketing, you mentioned briefly the new commission structure. Can you maybe flex it out a little bit more just because it has swung, even though sales were flat, just trying to understand how to model that going forward?

Tom Liguori

Once we hit term volumes (inaudible) commission percentage going forward, we would use it. So when you look at Q4, Q4 will be very similar expense of marketing to Q3, with the exception you will have the higher volume. Okay? So to model Q4, (inaudible).

Alberto Mann – Thomas Weisel Partners

Okay, thank you.

Operator

Thank you. Our next question is a follow up question from the line of Brian Jones of RBC. Please go ahead.

Brian Jones – RBC

Yes, just one final question. I was curious on how far along you are right now on the product ramps that you have that will be active in the final quarter of this year. In other words, do they tend to occur at the end of the quarter or are they pretty even and linear throughout the third quarter?

Reza Meshgin

The products that are usually in the market towards the end of the year ramp up toward the end of this quarter, Q4.

Brian Jones – RBC

So there was really no impact yet from those ramps yet, is that correct?

Reza Meshgin

In Q3?

Brian Jones – RBC

Yes.

Reza Meshgin

So we have some overlapping, so yes, the worst on them perhaps in Q3, but that will continue through Q4.

Brian Jones – RBC

All right, thank you.

Reza Meshgin

Thank you.

Operator

Thank you. Our next question is a follow up question from the line of Jiwon Lee with Sidoti & Company. Please go ahead.

Jiwon Lee – Sidoti & Company

Yes, hi. I forgot to ask about where we stand in terms of – with your new OEMs, when you feel the interest with the Pelikon, are we sampling now or when should we be expecting some more meaningful progress on that?

Reza Meshgin

We are sampling the Pelikon to a number of OEMs. It will be a long cycle for the updation of the designs. So I would say that we are looking at at least six months to a year before we would see production on such products and it will depend on how fast the customers may adopt the design.

Jiwon Lee – Sidoti & Company

And that will also be in the smartphone arena, yes?

Reza Meshgin

All over handheld electronics, primarily smartphones, but not just limited to smartphones.

Jiwon Lee – Sidoti & Company

Okay, we will be watching the traction. Thank you.

Reza Meshgin

Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

Reza Meshgin

Thank you, again, for joining us today and we look forward to your ongoing interest in MFLEX. Goodbye.

Operator

Thank you, ladies and gentlemen. That does conclude the MFLEX fiscal 2009 third-quarter conference call.

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