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Matthew Hunt - IR, The Blueshirt Group

Peter Leparulo - Chairman & CEO

Ken Leddon - SVP & CFO


Matt Ramsey - Canaccord Genuity

Cobb Sadler - Catamount Advisors

Novatel Wireless, Inc. (NVTL) Q2 2013 Results - Earnings Call Transcript August 7, 2013 5:00 PM ET


Good day and welcome to the Novatel Wireless second quarter 2013 financial results conference call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Matthew Hunt, Blueshirt Group for Investor Relations. Mr. Hunt, the floor is yours sir.

Matthew Hunt

Good afternoon and thank you for joining us on our second quarter 2013 conference call. We will begin with the business overview and outlook from Chairman and CEO, Peter Leparulo, followed by a financial overview and guidance from Chief Financial Officer, Ken Leddon. We will then open the call for questions.

As a reminder, this conference call is being broadcast on Wednesday, August 7, 2013, over the phone and internet to all interested parties. The information shared on this call is effective as of today’s date and will not be updated.

During this call, non-GAAP financial measures will be discussed. A reconciliation to the most directly comparable GAAP financial measures is included in the earnings release which is available on the Investors section of our website. An audio replay of this call will also be archived there.

Please also be advised that today’s discussion will contain forward-looking statements. These forward-looking statements are not historical facts, but rather are based on company’s current expectations and beliefs. For a discussion of factors that could cause actual results to differ materially from expectations, please refer to the Risk Factors described in our forms 10-K, 10-Q and other SEC filings which are available on our website.

Now I would like to introduce Peter Leparulo, Chairman and Chief Executive Officer of Novatel Wireless.

Peter Leparulo

Thanks, Matt. Good afternoon and thank you for joining our call today. During the second quarter we made solid progress across both of our business segments. We grew revenue by 6% sequentially and improved our bottom line, driven by strong demand during the quarter across most of our portfolio.

In Mobile Computing, revenue from our MiFi product line grew 6% sequentially. This increase builds off the 35% sequential growth we saw on this product line in the first quarter.

Before I discuss specific products in this business, as we indicated may have in last quarter, the increase in demand that we saw for the new MiFi products in the second quarter exceeded certain components supplies, primarily due to supply allocations. So even while growth in this business was moderately tempered by the component shortage, we are still able to grow sequentially.

Now onto details from Mobile Computing business, at Verizon we experienced strong demand for our MiFi products in the second quarter. The second quarter was the first full quarter with our MiFi 5510L in the value position, and we are pleased with its performance.

This product is now being offered with the option for a prepaid plan by Verizon as well. The second quarter results of the first full quarter in which we have both a value and premium product, our MiFi 4620LE with extended battery pack in the channel with Verizon.

Looking forward we’ve been awarded a new design win with Verizon for a next generation MiFi for 2014 launch. During the second quarter shipments of MiFi 2 increased by almost 84% over the first quarter.

At AT&T our focused in the second quarter was to increase distribution of the MiFi 2 international retailers where a good chunk of activations take place. We have now expanded to most national retailers with the MiFi 2 adding distribution to some of the largest national retailers for AT&T.

The unit shipments of our AT&T MiFi 2 product increased over 100% sequentially. In Q2 we were approved by AT&T to deploy our power optimization firmware which is also integrated into other designated MiFi products. Depending on the platform this could increase usage time on a single charge as much as two days.

We recently announced the launch of our MiFi 500 LTE and available July 19th at Sprint. The MiFi 500 LTE is among the first triband devices to join Sprint’s family of mobile broadband devices providing access to Sprint’s 4G LTE network. The sleek and light weight product includes recent software enhancements to MiFi technology platform which enable longer use time to a more efficient battery capacity.

With this MiFi 500 LTE announcement we have achieved one of our strategic objectives in mobile computing that we outlined at the beginning of the year, launching 4G LTE MiFi products at each of the three major North American carriers. Last quarter we discussed in greater detail the extensibility of the MiFi technology platforms.

The mobility trends we see playing into the platforms capabilities and the more immediate opportunities that we see on mobile computing. We continue to see operators expand into new markets that 4G network infrastructure enables. These markets include fixed mobile convergence for SMV and in-home connectivity and in-vehicle connectivity which bring new categories of the used cases and services through new peripheral devices all over the 4G networks.

For example for operators the in-home connectivity market enables them to capture new customers, increase ARPU and create a stickier relationship with customers by offering a bundle of voice and data services using cellular as the backhaul for the entire bundle.

In the coming weeks, we will be officially announcing our expansion into the space, leveraging our carrier relationships and LTE expertise. After over 12 months of development work, we are readying our first product launch for this market in the third quarter, have a Tier I development partner and current backlog.

The product is MiFi tower and incorporates the MiFi technology platform and we'll deliver home connectivity, digital phone service and internet activity in one combined portable broadband device with the ultimate vision of migrating the entire bundle of voice and data routing to IT services when these become available.

This will be an integrated hardware and software solution and we saw broader system level issues between fixed line and cellular infrastructure and simplicity and ease of use will the at the core of the product. We look forward to share more details as we get close to the launch.

In our M2M business, we continue to make good progress led by strong growth in the second quarter of our integrated solutions for fleet management and asset tracking. We announced the availability of samples for two new families of next generation products during the quarter, continue to benefit from the more direct sales model and targeted high growth of vertical markets.

During the quarter, we had about 68% of M2M sales that were direct to enterprise customers. The transition to a more direct sales approach continues to provide greater visibility in to our M2M pipeline and results are better positioning us for a large scale deployments with enterprise customers. By the end of the quarter, we achieved our goal of having anchor development customers for our new products. We're now in the midst of final testing, pilot programs and trials on some of the larger enterprise M2M opportunities that we've been discussing for sometime.

Our M2M Asset Management Solutions grew sequentially by about 19%, principally as a result of the MT 4100 and MT 4000 for fleet management and asset tracking verticals. This growth came from new and existing tier 1 customers with mobile resource management appreciations. To-date, revenue from our M2M Asset Management Solutions Group has been almost entirely from fleet management and asset tracking verticals.

With respect to the other vertical markets we have targeted, we continue to actively work with development partners who will soon be offering commercial telematics and telemetry programs. We believe we have a competitive advantage in these verticals and as our customers roll out these programs, we believe we're at the center of growth prospects with these new customers in this space for the second half of the year.

We recently announced the details and sampling of our next generation MT 3060 family of OBD-II products, built for fleet management, asset tracking and other commercial and consumer telematics. The MT-3060 is an integrated system level solution that collects and controls critical vehicle data such as speed, location, heart breaking, cornering and acceleration and can reliably deliver that information to the cloud.

We are very pleased with the feedback we are getting from trials with large mobile resource management companies and we expect to launch for first of these new products in the third quarter.

During the quarter, we announced samples for another major product portfolio, the SA 2100 product family, which focuses both on commercial Telematics and fixed telemetry verticals. We are on track for launch the first version of this product with for commercial availability in the second half of the year.

Again we thank our development partners and expect to begin generating revenue from this vertical. To summarize on our asset management solutions, we are addressing a wide range of opportunities and increasingly with enterprise customers. We expect to our generating initial revenue from our newer verticals in the near future and most forward to these higher margin intuited products becoming a bigger part of our overall M2M revenue.

Going with license based for M2M cloud based software applications associate with our products remains a key initiative in M2M. At the end of the quarter, we had over 60,000 devices under license a 35% sequential increase. We are now starting to see good traction with our SAS based N4A device manager and CMS platform. We are increasingly bundling these software offerings with our asset management solutions and we are seeing increase deployment of the cloud based release of the N4A device manager platform, under paid license fee model.

At a high level N4A device manager is a robust environment for the management configuration and support of M2M devices. It allows our customers to view change and manage device configuration and formal updates. New devices history to assist and support an issue resolution, monitor device to help and operational status and have deployed devices check in to the hosted environment, and report device information.

In our M2M embedded business revenue was down slightly sequentially following a 100% growth in the first quarter. During the quarter we launched our embedded models with the wide variety of new customers such as Rand McNally for it’s truck navigation devices, Mesh Systems for it’s M2M solutions with OEMs. Capstone for small water meters and Night Hawk for its metering solutions. This diverse set of used cases and customer points to the breadth of the addressable market that we are servicing. We are also continuing to diversify the carriers certification our models. For example Sprint recently selected Novatel Wireless as a preferred supplier for expedite CDMA smart model which is now certified under network.

Overall we are pleased with the strategic direction of our M2M business and its potential for growth. We are seeing bigger opportunities which tier 1 customers in a variety of this cases and are now able to have a portfolio strategy around those customers by having a direct sales process.

Our target verticals in the M2M space are growing rapidly plan we remain uniquely positioned to capture this opportunities, controlling all the major touch points and the development chain and operating best in class product performance and customer support.

We feel very encouraging about our progress and are working on number of large imminent opportunities and are optimistic about the road ahead. And with that I would like to turn the call over to Kenneth Leddon in the financial and more detail.

Ken Leddon

Thank you, Peter. I will begin with a financial overview of the second quarter and then we’ll provide our outlook for the third quarter of 2013. Revenue for the second quarter was $91.1 million within the guidance range we provided last quarter and up 6% sequentially.

To break that revenue performance down by business segment, our mobile computing revenues in the quarter was $80.8 million, up from $75.6 million in the mobile computing revenue in the prior quarter. This include $68.5 million of MiFi revenues, $8.1 million of USB modems, combination cards and related products, and $4.2 million from our PC OEM business.

Our M2M products and solutions totaled $10.3 million, which is in line with the prior quarter, which had increased over 50% sequentially. From a geographic perspective, sales in North America accounted for approximately 96% of total revenue. Our net operating loss for the second quarter was $7.7 million and our net loss was $7.9 million or $0.23 loss per share, improved from a loss of $9.1 million or $0.27 loss per share last quarter

From here on I will discuss our results on a non-GAAP basis. Please see our earnings release for a reconciliation of our GAAP to non-GAAP second quarter results. The non-GAAP adjustments for the quarter totaled $1.2 million and included adjustments for share-based compensation expense, amortization of acquired intangible assets and certain income tax asset and liability adjustments.

Non-GAAP gross margin in the second quarter was 21.1%, up from 19.7% last quarter and within our guidance range. Our non-GAAP operating expenses totaled $25.8 million, up from $24.3 million in the prior quarter. The increase in the quarter was primarily due to higher legal expenses. Accordingly, looking at our operating expenses by category, R&D expenses were $12.7 million compared to prior quarter of $13.1 million.

Sales and marketing expenses were $5.7 million and compares to $5.4 million in the prior quarter. Our G&A expenses were $7.4 million, up from $5.8 million in the first quarter. The increase this quarter was driven by legal expenses related to IP litigation which remain high in the quarter and included two settlements. We expect legal expenses to moderate in the third quarter.

Our non-GAAP operating loss in the second quarter was $6.6 million and net loss was $6.7 million, or $0.20 loss per share, improved from an operating loss of $7.3 million and a net loss of $7.4 million respectively in the first quarter. EBITDA loss in the second quarter was about $4.6 million. Weighted average shares for the quarter were $33.9 million.

Now turning to the balance sheet. Cash and marketable securities including restricted cash and restricted marketable securities totaled about $59 million. Inventory levels decreased by $1 million to $29 million and second quarter capital expenditures were $900,000.

Looking ahead to the third quarter of 2013, we currently expect third quarter revenues to be in the range of $90 million to $100 million. The company is in various stages of launching three major new products, some of which are going to carrier certification. The timing of certification and launches can be uncertain. Our guidance reflects the risk associated with the commercialization of those products. We anticipate the non-GAAP gross margins in the second quarter will be in the range of 21% to 22% of sales and we expect non-GAAP EPS to be in the range of $0.14 to $0.02 loss per share. These estimates are based on approximately 34 million shares outstanding.

Now I will turn the call back to Peter for closing remarks.

Peter Leparulo

Thanks Ken. In summary, we are making good progress in both of our business segments. Our products are increasingly integrated, platform leveraging devices with wider extendibility, resulting in wider customer applications and compelling value prepositions. Even our product pipeline bookings and customer forecast were excited about the opportunities we are seeing.

And with that, Ken I would be happy to answer your questions. Operator, please open the call for Q&A.

Question-and-Answer Session


Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) The first question we have comes from Mike Walkley of Canaccord Genuity. Please go ahead.

Matt Ramsey - Canaccord Genuity

Yes. Thank you very much. This is Matt Ramsey on the call for Mike today, good afternoon guys. Just want to say to start off with a few questions on the mobile computing business, I guess first obviously congratulations on the launch of new products and diversification of the carrier relationships there and also I think you guys mentioned in the prepared remarks that next generation win for 2014 MiFi Verizon which is obviously encouraging.

And maybe you can walk us through the incremental opportunities at carriers outside of Verizon and maybe a percentage of the MiFi revenue mix going forward relative to the size of the MiFi market going forward in total given that they are completing solutions from WiFi solutions from smartphones and Tablets and include this type of feature that has been kind of rest to the group for a while, thanks.

Peter Leparulo

Excuse me, sure if I read correctly let me go through this Matt. At Verizon I believe that lead we have in certain Q2 a very strong talent position because the both the premium swap and the value swap at that operator that is only subject to change but and certainly right now we have a very strong talent position over there.

I am just sticking with MiFi external devices, At AT&T there is certainly dual sourcing at the operators and we expect that to continue but what we basically have done is develop products so that going forward, we aim to get the value position and the more highly promoted channel position at those operators.

So you may have noticed that at Sprint for example we have Sprint is putting a time promotion behind our product in its channel right now, but I do expect dual sourcing at those operators to go forward.

One of the things that we have seen historically happen though as you migrate from 2G to 3G and 3G to 4G the market not only expands but it everybody in the channel. But nevertheless, we expect there to continue to be dual sourcing and our challenge is to make sure that we get the lion share as much as we can with each operator.

In terms of competing devices for things like this, we have not seen the laptops and tablets going to be a threat to the MiFi product line and I think it's really for several reasons. Among the OEMs we have really not seen a motivation to migrate the market with a lot of force behind it if you will to 4G.

So we still see fairly disrupt pricing between 3G and 4G, but we don't see a subsidy, strong subsidy model behind 4G outside of some branded products at the operators. And then there is also the greater functionality of a mobile hotspot in terms of being able to connect to mobile devices simultaneously.

So that my change, but we have not seen tablets with cellular connectivity and laptops with cellular connectivity, let it be up begin to cannibalize the external devices. In terms of smartphones, we've talked about this before really smartphones really there are several reasons, the data plans in smartphones you feed into the smartphone data plan. So it really historically has not been robust enough even without some type of premium for additional data usage on it.

The data plans really aren’t as robust as you would do with an external device. And then as we've talked about 4G, the user experience in terms of power management, in terms of usability and basically they have not been optimized for mobile broadband. So in terms of smartphones, we believe there will be some level of co-existing, some people might go for that, but we still think that there will be a strong segment that use MiFi products.

Matt Ramsey - Canaccord Genuity

In addition, if I am doing the math right, it looks like your PC OEMs sales were up pretty dramatically on a sequential basis, I mean, still down year-over-year, but up sequentially when you guys have talked about relatively recently the plan to exit that business. Maybe you can talk about the dynamics of what throw that increase in the quarter given the change in strategy and what could happen to that business over the next couple of quarters?

Peter Leparulo

The PC OEM as you say, we decided to exit the PC OEM in terms of future product development unless we saw a different business model emerge from that and it really was because that business, because of them with dispersion was very extensive structurally to develop for and we simply didn’t see the take up in terms of forecast.

There have been some catalysts in that business and what you are seeing right now is sort of the same business with the same products simply continue and some of the catalysts that have happened in that business are, number one, family plans have helped encode multiple devices within a family plan. Win 8 has in some sectors we see has been a catalysts and that’s really what we’re seeing now. Some of that is also still 3G and as we've talked about, we've not been a big motivation to migrate to 4G by using that, the pricing differential between 3G and 4G.

So that’s ebbing and flowing but it still is, we are pleased to see it, I would expect that to start to take up going but to be replaced by some of the newer markets that we believe have better opportunities for us in the future.

Matt Ramsey - Canaccord Genuity

Great, that makes complete sense. On the M2M business sales were flat sequentially, but obviously a pretty heavy investment going on in that business given in your release the operating loss in that segment and then it sounds like some pretty exciting opportunities potentially ramping in the back half for the year and into next year. I mean Peter is that, what you guys think is a realistic breakeven level for that business on the revenue line given the margin profile on the gross margin side of that business and when could we think about it’s not breakeven point?

Ken Leddon

This is Ken speaking. Argue the business and looking at the pipeline in that and looking into the future indicates that that business as a separate segment will evolve into a higher margins and currently – we're currently experiencing what legacy product is until recently primarily GPRS product and heavily laden with GPRS modules.

As we’ve gone into CDMA and 3G and then in the future of on the LTE possibly we see the margins going up and the cost structure that business continues to come down as we continue to integrate it with the mobile computing business. So we think that somewhere in the range of $14 million to $15 million in the two or three -- in a couple of quarters or so. I mean I don’t give any guidance, but it looks to be taken that gross margin profile up we believe it’s probably be around $14 million, $15 million in time. So I think we will be approaching that as the pipeline continues to materialize and convert concepts in the revenue.

Matt Ramsey - Canaccord Genuity

Great, and the last question from me and then I will pass it on, Peter you made the interesting comments in your prepared remarks about so the fleet vertical which is obviously a very strong vertical in the machine to machine market but different segment of the vertical and over the rope (inaudible) tucking and assets tracking but it sounds like for me your products are here more just from the features that you laid out towards the insurance usage based insurance market and maybe you could talk a bit about the opportunity there is been a high topic and some consequences of point that we just been recent?

Peter Leparulo

Sure, I will separate both of those I don’t want to minimize the historical fleet and we see the free market and let me just speak to that first. We see that the core fleet market that is been running for while growing across in terms of long haul fleet as well as smaller fleets of less than a 100 vehicles, and the reason really is that is very its lucky that now will show an ROI to fleet management companies that offer either applications or the services in fleet. And then in turn for that ROI is seen by the actual the fleet itself and the reason really just because there’s some put to you with ease of use with [OVD] it’s much easier to installed and letting to outside professional to do it.

So the ROI is much crisper and readily apparent to them and that is certainly one more thing that we are addressing and what you are seeing with our MT3060 is what we bring to market is a full OVD portfolio is that they will address geographic market as well as attach different operator networks. That said as and that's where we, that's one of the places that we believe, we're growing.

The second place really as you suggest is in what I would call the overall aftermarket commercial and consumer telematics and that includes usage based insurance and driver behavior as well. And then some of the applications are mentioned in that space, for driver behavior monitoring, remote diagnostics, road side assist. Those are the ones that we're addressing as well. I have talked on a couple of earnings calls, that the sales cycles on these is long, because these programs in and of themselves either systems integrators or the actual insurance companies or the insurance ecosystem has a long sales cycle. And then that in turn at somewhat of a downstream sale cycle to the existing customer base.

That said, we've been doing this for quite a while and what I hope to suggest in my prepared statement was we're closing in on these and we expect to complete the trials that we are on right now, complete the pilot programs in fairly short order and start to table to talk about these in a much more specific way as we complete the sales cycle towards the our own launches and then with the insurance companies and systems integrators that we've been working with have then start their downstream programs. So hopefully a telegraph that this is a stage that we're pretty enthusiastic about right now when and we're in large opportunities, we believe we are at the center of the growth in it and I really hope very much to be able to talk about with much (Inaudible) as we announced in tandem with our customers partners on it.

Matt Ramsey - Canaccord Genuity

Okay, great. Thank you very much for taking our questions look forward to seeing you at our conference next week


(Operator Instructions) Next we have the location of Cobb Sadler with Catamount Advisors. Please go ahead.

Cobb Sadler - Catamount Advisors

Just had a question on, I may have missed this. How much of revenue was component constrained? Can you quantify that?

Ken Leddon

Yes, debenture (inaudible) there is some uncertainty as you shift your components to try to make up for but I would say we are probably have been at the high end of our guidance except for the component constraints.

Cobb Sadler - Catamount Advisors

So it's significant then?

Peter Leparulo

It was fairly significant.

Cobb Sadler - Catamount Advisors

Got it and just moving on to new product with Verizon for 2014, will that be low end or high end because you got a relatively new product to low end. I am assuming it's the high end replacing the 4620 jet pack. Is that right? Any special features or functionality?

Peter Leparulo

I am sorry, Cobb. You are talking about the design win in my part or are you talking about the products that we're seeking to as a new product introduction?

Cobb Sadler - Catamount Advisors

Actually, both of the question was on the MiFi.

Peter Leparulo

Sure, the MiFi, I hesitate to describe the product and where we are positioning it this far ahead of time but we believe that it will be a product that will have a good channel position at Verizon and regardless whether it's of the high end or low end, we try to bring as much in to the user experience and functionality as we can.

Cobb Sadler - Catamount Advisors

Got it and just on the enhanced software, the increased battery life. Why is that doesn’t have a huge differentiator, I mean how your customers respond or competitor responding to that. Because it seems like you are really differentiates you in the space?

Peter Leparulo

I think it is a differentiator and a couple of things that it does is, one of the, if you look at the market data for user experiences, really what business users want to do is to be able to go through at least one full business day without recharging the device and we with that brought two business days depending on the batteries capacity, that’s in it. We’ve also been able to reduce our product thoughts on that because with a lower battery capacity we can still get the usage time up higher.

I would say customers, the reception has been very good to it, it is a differentiator, but I will say this is, caveat is that customers measure usage time in a variety of different ways and so you don’t necessarily get the apple-to-apples comparison amongst different operators in terms of how they do it and that in terms of reflects on how they are able market it. But overall, I think it even without within market is a differentiator when you look at the usage time on our products you will see like-for-like batteries and we’ll have a great usage on certainly to the end users it’s been experienced and feedback that we’ve seen on it there is very good.

Cobb Sadler - Catamount Advisors

Great and then on Verizon product, I believe you [scrub] is a home gateway type product, what, could you talk about what the application would be there, is it fixed line replacement and the margin on these new products I mean how do they look versus what we are seeing now corporate wide?

Peter Leparulo

So I don’t believe, I’ll get an operator for it for the product. I did say that we would be launching a new mobile computing product. In terms of over the application is for what the product really does is as you have suggested leverages the fixed infrastructure together with solar infrastructure and the applications are really for the operator allows them to offer them services things like in connectivity as a base line, replacement as the base line and analog to digital voice.

So all of these are home or fixed and then also will be a portable device that can be taken to different locations. The interesting demand is well for us as we believe that there is a Trojan horse element that we developed into this, making it extensible into different types of home automation and again all build around sort of core MiFi technology which is able to abstract the connectivity for different devices and different local environments to different areas and levels of local connectivity and control routing of that data and voice in one device.

I described the product but I am not, your questions was about what is the sort of operationally good for the business, I guess several things, number one we believe that products along this line that we are developing really fit into what we are trying to do overall in the company which is get products which much longer lives into them products which put us in a more defensible position because of the complexity and yet solving issues at a systems level, and not really been so device centric but relying on bringing solutions to the complexity of interaction between fixed line and cellular.

On these particular products, they also fit into our the business model that we're attempting to get to really in all of our segments with all of our product lines which is a greater gross profit contribution to the company. So the absolute gross profit dollars that the gross profit contribution on this is greater than some of our historical products at their corporate gross margins.

As well it also brings the amount of things that we're trying to do into our business model which is to leverage R&D from a core engine, which is the MiFi technology platform out to some of these additional used cases. So this will make R&D much more efficient, because the use of the same in common core engine.

So, it does several things operationally for our business model.

Cobb Sadler - Catamount Advisors

Got it. And as far as time to market, when were these products impact your revenue stream and I guess the usual suspects in North America all are (inaudible) could you give us an update on where you stand?

Peter Leparulo

We are in certification, I think we said in our remarks that we've been developing the first one for a 12 months and that is generally what our product development life cycle will be for this. So we hope that you will see this in the near future. Certainly, the first of these you should see in the near future.


Well, that will conclude today's Q&A. To access a digital replay of this conference, you may dial 1877-344-7529 or area code, 412-317-0088 beginning an hour after today's conclusion today, August 7, 2013 until Thursday, August 15, 2013 at 9’O clock AM Eastern Time. You will be prompted to enter a conference number, which will be 100-31-415. You will be prompted to record your name and company when joining. The conference call is now concluded. We thank you all for attending today’s presentation. At this time, you may disconnect your lines. Thank you and have a great day.

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