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Xyratex Ltd. (NASDAQ:XRTX)

Q4 2009 Earnings Call

January 12, 2009 4:30 pm ET

Executives

Brad Driver – Vice President Investor Relations

Richard Pearce – Chief Financial Officer

Steve Barber – Chief Executive Officer

Analysts

Aaron Rakers – Stifel Nicolaus

Keith Bachman – BMO Capital Markets

Glenn Hanus – Needham & Company

Operator

Welcome to the Q4 2009 Xyratex earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today, Mr. Brad Driver, Vice President, Investor Relations.

Brad Driver

Good afternoon everyone. Thank you for taking the time to join us this afternoon. I’d like to welcome investors, research analysts and others listening today to talk about the fourth quarter and full fiscal year 2009 results conference call.

On our call today are Steve Barber, Chief Executive Officer and Richard Pearce, Chief Financial Officer. Today’s call is being recorded and will be available for replay on Xyratex’s investor relations home page at www.xyratex.com.

I’d like to remind everyone that today’s comments including the question and answer session will include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in Xyratex’s filings with the Securities and Exchange Commission including the company’s 20-F dated February 18, 2009.

Also please note that in addition to reporting financial results in accordance with general accepted accounting principals, or GAAP, Xyratex routinely reports certain non-GAAP financial results. These non-GAAP measures together with the corresponding GAAP numbers and reconciliation to GAAP are contained in our earnings press release. We encourage listeners to review these items.

I’d now like to turn the call over to Richard to review the financial details of the quarter and fiscal year.

Richard Pearce

Thank you Brad and good afternoon everyone, and thank you for joining us today. Our press release is available both PR newswire and our website.

I’d now like to provide you with some commentary about our results for the full year and the fourth quarter. Please note that all numbers are in accordance with GAAP unless stated otherwise.

Revenue for the full year was $867.9 million, down 17.3% compared to fiscal year 2008. Revenue for the fourth quarter was $243 million down 14.9% compared to the fourth quarter of last year and down 1.3% for our prior fiscal quarter.

Sales of our Networked Storage Solutions products in Q4 were $203.4 million representing a decline of $18.9 million or 8.5% compared to the fourth quarter of last year and down 2.5% compared with $2.6 million in our prior fiscal quarter.

The fourth quarter results were impacted by a number of component supply constraints primarily related to semiconductors that prevented us from meeting our customer’s demand requirements. During the quarter we were impacted by both unexpected delay and key component lead times extending beyond expectations following the production capacity scale backs and working capital initiatives implemented by our suppliers earlier in the year.

Revenue for the full year decreased by 11% to $762 million in 2009 compared to $855.8 million in 2008 accounting for 84.7% of total revenue and 77.6% of gross margin.

In addition to the economic factors affecting both the fourth quarter and full year ’09 over 2008, it should be noted that both periods were affected by our arrangement with our largest customer which commenced in January 2009, whereby up to 25% of their quarterly product volume can be manufactured under license by an alternative supplier.

The fiscal year performance for our NSS division reflects the significant decline in demand we experienced as a result of the global economic downturn in the first half of the year impacting the overall storage market and our OEM customer’s business.

Whilst we did see a relative recovery in demand in the second half of the year our ability to meet customer’s upside demand was impacted by key component supply constraints affecting not only Xyratex but the wider electronic sector.

Sales of our Storage Infrastructure product were in line with our expectation at $39.5 million down 37.4% compared to a year ago and up 4.9% versus our prior fiscal quarter. For the full year 2009 revenue for this business was $105.9 million down [break in source audio] compared to fiscal year 2008 accounting for 12.2% of total revenue and 22.4% of gross margin.

The fiscal year performance for our SI division reflects the challenging HDD CapEx spending environment that we experienced in 2009 as the HDD industries scaled back production capacity due to the highly uncertain HDD demand environment. The environment has however, changed significantly over the past few months as will be evidenced in the outlooks which I’ll provide in a moment.

For the full year 2009 gross margin was 14.4% as compared to 15.1% in 2008. Gross margin for 4Q ’09 was 15.6% compared with 12.5% for the same period a year ago and 16.7% for the full year.

Gross margin in the Networked Storage Solutions business was 12.9% compared to 12.5% in fiscal 2008. The gross margin for the fourth quarter was 13.2% compared with 8.4% in prior year and 14% last quarter.

For the full year gross margin in the Storage Infrastructure business was 26.6% versus 27.1% in 2008. In 4Q ’09 the gross margin for the Storage Infrastructure business was 28.2% compared with 27.3% last year and 32.4% last quarter.

Gross margins have been affected throughout the year by the significantly reduced revenue in this business. Thus we have taken actions to reduce our fixed costs through this period, we chose consciously not to take any actions that would limit our ability to recovery our capability when product demand returns as we expect in 2010.

For the full year non-GAAP operating expenses decreased by 14.2% to $122.8 million compared to $143.2 million in 2008 following the cost reduction exercises undertaken by the company. For the fourth quarter non-GAAP operating expenses totaled $29.6 million compared to $37.2 million in Q4 of last year and $30.3 million in the previous quarter.

We do anticipate increased expense levels in 2010 to support the significant increase in business particularly in the SI division.

For our fourth quarter 2009, GAAP net income was $1.5 million or $0.05 per diluted share compared to GAAP net loss of $55.7 million in the same period last year. For the fiscal year 2009 GAAP net loss was $16.4 million or $0.56 per diluted share compared to a GAAP net loss of $47.9 million for fiscal year 2008.

On a non-GAAP basis for the fourth quarter 2009 net income was $7.9 million or $0.26 per diluted share compared to non-GAAP net income of $.4 million in the same quarter a year ago. For the fiscal year 2009 non-GAAP net income was $1.5 million or diluted earnings per share of $0.05 compared to non-GAAP net income of $16.2 million or $0.54 per diluted share for fiscal year 2008.

Turning our attention now to the balance sheet, cash and cash equivalents at the end of the quarter were $39.9 million up from $38.3 million at the end of Q3. Cash flow generated from operations was $39.3 million for the year and $16.7 million in the quarter.

Inventories increased by $8.6 million to a total of $108.6 million in the quarter. Inventory turns were 7.5 compared to 8.1 for the prior quarter.

Accounts receivable decreased by $20.7 million to $124.7 million in the quarter. Day sales outstanding were 47 compared to 54 in the previous quarter affecting the timing of revenues in the quarter.

Head count at the end of the fourth quarter was 1,645 permanent employees, an increase of 30 or 2% as compared to the prior quarter, the majority of this increase being in our Malaysia facility where we are working to increase our engineering and purchasing capability.

Overall I am satisfied that the measures we took during 2009 where necessary in light of the economic conditions. I am pleased that we are able to deliver profitability on a non-GAAP basis and our focus on the balance sheet resulted in inventory reductions by $20 million and cash increasing by $24 million, providing a strong financial base to pursue the growth opportunities we see in 2010.

Before I turn the call over to Steve for his comments, I would like to provide you with our business outlook for our fiscal first quarter 2010 ending February 28, and our projections for the full fiscal year ending November 30, 2010.

Our business outlook is based on current business expectations. It should be noted that there are a series of forward-looking statements in today’s guidance that involve risk and uncertainty. Actual results may differ materially from our statements or projections. In order to clearly understand the risks involved it is recommended that each investor review the risk factors outlined in our Form 20-F filing dated February 18, 2009.

For our first fiscal quarter of 2010 we are forecasting total revenue to be in the range of $245 million to $285 million, up 33% to 55% as compared to 1Q ’09 and up 1% to 17% compared to 4Q ’09. This is represented by revenue in Storage Solutions of $205 million to $225 million and from Storage Infrastructure of $40 million to $60 million.

The size of the range reflects the uncertainties in the supply of semiconductor components as previously mentioned.

For our full fiscal year 2010 we are projecting total revenue to be in the range of $1,125 million or $1.275 million representing year over year growth in both divisions but more significantly in the SI business.

Unlike the normally – SI business towards the back end of our fiscal year, we are projecting relatively linear revenues across the first and second halves of the year with approximately $140 million of revenue in the first half of the year of which over 70% is currently underwritten by customer PO’s. This is primarily as a result of our customers deferring capital expenditure from our fiscal 2009 year.

For 1Q ’10 gross margin is expected to be 17.5% to 18.5%. We are estimating non-GAAP earnings per share to be between [break in source audio] and $0.60. Non-GAAP earnings per share excludes non cash equity compensation, amortization of intangible assets, related taxation expense and other non recurring items.

The number of shares outstanding at the end of Q1 on a weighted average treasury method is expected to [break in source audio].

Our cash position at the end of Q1 is expected to be slightly reduced from year end as we increase inventory to support the SI business in Q2.

I will now hand over to Steve for his comments.

Steve Barber

Thank you Richard. Good afternoon everyone. Thank you for joining us today. From the beginning of 2009, I’m pleased with our results for the full year. For the fourth quarter our results were materially impacted in the NSS division by the component supply issues Richard highlighted in his comments.

However, the demand for our products in both the data storage sectors we serve are strong, especially in the storage infrastructure business as we look forward to 2010. Although 2009 proved to be a challenging year for Xyratex, we delivered both revenue and earnings per share above our expectations from a year ago.

Against the backdrop of constraints in our industry we did a good job in both executing to our customers demand requirements and aggressively reducing our cost base to align our costs with the business environment throughout the year.

Looking forward to 2010 we are currently seeing significant improvement in the SI business from 2009. We anticipate our two major customers expanding their CapEx budgets to both catch up production capacity needs and well as adding new capacity to meet new demand.

Demand for our NS products is expected to also improve as our Tier one customers and major Tier two customers continue to see strong demand from their end user customer base. We are taking proactive steps to establish future supply of key components in the supply chain to minimize the component supply constraints that impacted our fourth quarter revenues and our ability to support our customer’s demands.

For the full year ’09 we executed on a very aggressive cost realignment strategy to match our cost base with anticipated revenues we out looked for the first half of 2009. The results of these actions were to reduce our permanent head count by 14% and overall costs by 20%.

Throughout the process of identifying areas to reduce costs, we have strived to ensure that we protect our investment in core product and process development as well as customer support capability to ensure we remained well positioned for when our customer demand improved.

We accelerated specific internal program to improve operational efficiency, continued to reduce our break even position, improved our overall cash management and improved our strong competitive position. As a result of these actions, I believe we are well positioned to benefit from the business growth we are anticipating in 2010.

I’ll now look at our two business areas separately starting with Networked Storage Solutions. Despite the challenging economic and business conditions through much of 2009, I’m pleased with our performance for the year as well as encouraged by the strong demand environment we are now seeing for 2010.

Demand visibility has continued to improve through the second half of 2009 and we saw repeated demand increases throughout this period from our customers. After managing demand reductions through the first half of ’09, our focus switched to managing the significant component supply constraints that limited our ability to meet our customer’s increased requirements in the third and fourth quarters of 2009.

We shipped 436.9 pedabytes of external disk space storage in our fiscal fourth quarter representing a .8% growth over the prior quarter and 24.1% growth [audio break]. Based on recently published data, on the total pedabytes shipped in calendar third quarter ’09, we estimate that Xyratex once again maintained its position as a leading player in the market supplying 16.2% of capacity on an annual basis.

[break in source audio]

On an annual basis, we continue to see phenomenal growth in shipped capacity in this business. For the full fiscal year, we shipped a total of 1,533.5 pedabytes or more than 1.5 exabytes storage to our customers.

We’ve seen strengthened demand across the majority of our major customers this year [break in source audio] and responded to the end user demand in the second half of ’09.

Our success in supporting these companies’ requirements represents a major achievement for the NSS division in the past year. The success in diversifying our customer base and providing product and delivery solutions that meet [audio break] provides a significant part of our 2009 plan.

As Richard previously mentioned, the 2009 results reflect our arrangement whereby a proportion of their quarterly volumes can be manufactured by an alternative supplier. This proportion will remain at a maximum of 25% for our next two fiscal years but will increase in future periods.

We’re also cognizant that other Tier one customers may seek to utilize contract manufacturers as part of their future product strategies. It is important therefore, that we continue to evolve our operational capabilities in addition to our design and technology capabilities to support our Tier one customer base.

At the same time we continue to develop our technologies and relationships with our key Tier two customers as they grow their business in the data storage market. Our one store family of storage products which we recently began shipping to [break in source audio] much of the customer base.

We reduced total cost of qualification and after sales support, are proving to be compelling factors behind the interest we’re seeing in the one store products and customers can take advantage of the commonality provided in different capacity configurations while reducing support costs by leveraging a common capability.

We anticipate more customers migrating their products to this storage system platform in these tough economic times driven by their increased needs to focus on reducing the cost of bringing new products to market. By way of example, this is evidenced by recent transitions by a number of our customers to six gig NSDV controller formats.

Overall, we remain optimistic as to the business outlook for this division in 2010. We will continue to drive ongoing demand for external disk space data storage systems. In addition we believe our business model may become even more compelling for a number of our target customers as they consider areas to optimize their business, reducing fixed costs and partnering with Xyratex for their storage system needs.

Moving on now to our Storage Infrastructure business, for the fourth quarter revenues in this business were $39.5 million slightly above the third quarter results and in line with our expectations. As anticipated, after a period of significant constraint within the disc drive industry, our two major customers have now resumed CapEx investment.

Seagate announced within the quarter a potential $200 million increase in their fiscal year CapEx while Western Digital announced a $60 million increase in their fiscal year CapEx. Xyratex will benefit from this increase in spending in our first and second fiscal quarters of 2010.

We view this increased CapEx spending in the first half of our fiscal year as primarily catch up in investments from the historically low levels of CapEx spending by our customers during 2009.

As a result with the constrained investment by the disc drive industry and subsequent recovery in the demand for disc drives through the second half of 2009 the storage industry has experienced supply constraints of a number of disc drive models through third quarter and fourth quarter of ’09.

In support of this resumption, we’re seeing evidence of the disc drive industry now seeking to invest CapEx in overall production capacity. In addition, looking forward, based on our current market view, we believe that the disc drive industry will aggressively invest in technology to maintain the rate of innovation as well as extend capacity to improve capital productivity.

We’re optimistic about the underlying fundamentals of the disc drive industry. Digital content creation, replication, distribution and archiving have achieved over 49% annual growth rate over the past 29 years. Growth in digital content has accelerated to over 62% compound annual growth rate.

This growth rate is being driven by a number of factors, but more recently as a result of consumers becoming more directly involved in managing as well as creating personal digital content. As an example, U Tube recently disclosed that 20 hours of content is added from its viewers every minute of everyday.

During the economic slowdown [audio break] have not reduced their demand for digital storage, but in fact have been the primary force behind the growth in digital storage requirements throughout 2009. Consumers are becoming much more hands on in managing their digital content particularly within their homes.

We anticipate that home storage appliances that enable consumers to personally manage replication, distribution and archiving of additional content that they have created will be a primary growth driver for the disc drive industry.

This rapidly emerging new market for home digital storage appliances will create new opportunities for Xyratex. As a result of this emerging trend, we anticipate going forward that demand for 3.5 inch form factor disc drives will resume growth and potentially match the 2.5 inch disc drive growth rates.

We are well positioned with our back end test product portfolio to benefit from this emerging market. The introduction of our 2.5 inch disc drive dedicated platform has been favorably viewed by the industry and we are pleased with the adoption rates.

In addition, our incumbent back end test platforms are the only commercially available systems capable of handling both 2.5 inch and 3.5 disc drive form factors providing production flexibility to our customers in meeting demand for both these form factors.

From Xyratex’s standpoint, we believe that we remain well positioned in the back end test market. Our business has been built on 30 years of disc drive manufacturing and process development and is supported by a solid base of key patented intellectual property.

Our strong track record of innovation and technology allow our customers to optimize their production processes to meet the needs of a highly volatile market demand environment.

In December we reached a settlement agreement with Teradyne related to our U.S. patent infringement law suit as well as Teradyne’s two U.S. counter law suits. The settlement agreement is now under seal with the U.S. Federal Court and its terms are confidential.

The significant professional expenses incurred in respect to this matter have ceased and we do not expect the settlement with Teradyne to have any significant effect on our operations during the coming year. We remain committed to protect our intellectual property worldwide.

The objective for our Storage Infrastructure business during 2009 fiscal year was to focus on adjusting the business model without sacrificing critical long term investments. This objective included our core disc drive back end test technology as well as key new technologies aimed at strengthening our presence in the disc drive component markets of heads and media.

We have been successful in executing both these objectives. We reduced our fiscal break even sales by more than 10% since fiscal year ’08 whilst maintaining the gross margin percentage level at the significantly lower revenue level.

We also successfully launched a number of new products in addition to the Optimist platform. We have not shipped the first Titan system, our inspection platform to a major glass substrate supplier. We have also successfully completed customer and factory qualifications of Phoenix, our next generation media platform. We expect to ship our first Phoenix system within this fiscal quarter.

Finally, we have [audio break] system at a custom location so the new technology and system capability can be fully evaluated. The objective for the Storage Infrastructure business during the coming fiscal year is to increase investments in our incumbent product portfolio focused on the disc drive assembly while accelerating investments in the disc drive component segments of disc drive fabrication and disc drive substrate and media manufacturing.

Storage Infrastructure’s strategic intent is to broaden Xyratex’s CapEx influence within the disc drive industry. We anticipate the fiscal year revenue for the Storage Infrastructure business will come from product development programs initiated in the 2009 and 2010 fiscal years.

In summary, I feel very positive with our strategic position in the disc drive market. We’re a key partner and making early but encouraging progress with further key companies in the disc drive and disc drive component space.

I believe our technology and product road map will allow us to maintain a leadership position in the areas where we currently provide capital equipment. Our investment in technology has positioned us well to expand our footprint within the capital equipment processes of our current customers as well as allowing us to access new customers.

I’m confident that the focus and experience will allow us to execute well in meeting the requirements of our customers over the coming years.

In closing, I believe we delivered a solid performance in the business against the backdrop of a severe economic slowdown. Our prompt actions to significantly reduce costs, tighten our focus on cash, narrow our strategic customer base and develop investments at the start of 2009 was effective in enabling us to weather the economic storm and exit the year well positioned for growth as the market recovers.

As a result of the component supply issues affecting our NSS business, our results for fourth quarter ’09 were below our expectations. We continue to see very tight supply constraints as a result of historically low inventories. Semiconductor manufacturers have driven dramatically lead times through the actions they took during 2009 to reduce manufacturing capacity.

Whilst we have taken steps to minimize further impact to our ability to meet our customer’s demand, component material supply constraints remain our highest risk for the first quarter of 2010. Further delays in supply could result in a push out of revenue across planned fiscal quarter shipments.

With these strong signs of a more positive economic outlook for our industry in 2010, we begin the new year under pressure from many of our customers to further increase our efforts in supporting their strong end user demand.

We believe our actions to secure key component supply will assist us in meeting this demand and maintain our focus on costs, albeit supporting incremental hiring in key product development areas through the course of 2010 to support the technology and innovation needed to support our customers requirements of performance and costs.

I would like as always to take this opportunity to thank all our employees’ world wide who contributed to our performance in the quarter and through 2009. Our employees remain focuses, committed and fully supportive of our strategy through the year despite the personal impacts to themselves and to many of their colleagues. For this I am very grateful. Here’s looking forward to a more positive year ahead for all.

That concludes our formal comments. I would now like to open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Aaron Rakers – Stifel Nicolaus.

Aaron Rakers – Stifel Nicolaus

The first question would be can you talk a little bit about how much of an impact you saw from the supply constraints this last quarter? How much revenue do think you could have done?

Richard Pearce

There is a significant amount of backlog in the NSS business and I wouldn’t want to put a number on it. However I think that it’s safe to say that we would easily have made the numbers which are out there in terms of consensus.

Aaron Rakers – Stifel Nicolaus

Can you talk about what the lead time is on your systems, your Storage Infrastructure equipment is at this point that production test equipment in particular as well as some of the other pieces.

Steve Barber

It’s not changing significantly. We are taking actions and we are putting in some buffer stops, a lot based on the increases which we have expected and now we’re obviously seeing in terms of the purchase orders which I mentioned earlier. We still have lead times generally of eight to twelve weeks on those from Xyratex perspective but that is with us taking significant actions in terms of making sure that we have got some inventory of some of the longer lead time components.

Aaron Rakers – Stifel Nicolaus

You had mentioned that as we progress in the 2010 there would be some re-investments back into the model. As we think about what you’ve laid out top line for this next year and it sounds like the gross margin structure is pretty much in check, how do we think about the operating expense structure with that comment in context?

Steve Barber

We are looking at the majority of the increase as going to be in people and that will be a mixture of both permanent employees and also some contract staff that we’ll require for specific projects. As you can imagine hiring people does actually take some time. So we’re not expecting a significant increase in the OpEx in Q1. We have been hiring people so I would expect maybe $1 million to $1.5 million increase in Q1 over 4Q.

As we move through the year and obviously we’ll consider where the revenue outlooks are at that time, but I could see operating expenses increasing towards as we go toward year end by anything up to 10%.

Aaron Rakers – Stifel Nicolaus

Can you make a comment on how big your largest customer was as a piece of your network systems business?

Steve Barber

For the full year it was 54% which is down from 66% in the previous year and for the quarter once again it was slightly less as a proportion from the previous quarter. I think we were just under 50% last quarter, but slightly less of a percentage than the previous quarter, so still that trend.

Operator

Your next question comes from Keith Bachman – BMO Capital Markets.

Keith Bachman – BMO Capital Markets

I had a couple as well and some of it’s going to be clarification because we had a bad connection. Richard, I think you said the revenue for the year was $1,125 million to $1.275 million. Is that correct?

Richard Pearce

That’s correct.

Keith Bachman – BMO Capital Markets

And then you said SI we understand is $140 million for the year, excuse me, the first half of the year. You said something about the second half of the year and I wasn’t sure what you said.

Richard Pearce

I was saying that normally in that business obviously we expect the SKU towards the second half of the year but we’re expecting relatively linear revenue between the first half of the year and the second half of the year. So the second half we would envisage being at similar levels to the first half.

Keith Bachman – BMO Capital Markets

So basically $280 million for the year then.

Richard Pearce

Yes, approximately that number. And that’s in the range that we’ve given for the whole company in the $150 million so there’s a reasonable range within that, but having that as sort of our mid thoughts within that.

Keith Bachman – BMO Capital Markets

For gross margins for the February quarter, did you say 17.5% to 18% gross margins?

Richard Pearce

Yes.

Keith Bachman – BMO Capital Markets

Is that the level of gross margins given the mix looks pretty healthy that we should be thinking about for the year?

Richard Pearce

I think you’re not too far off on that mix. I think consistent with previous calls I would say that margins from my perspective, the aim in there is around 30% and we’re continuing with that as our objective. That said, because of the additional revenue that we’re seeing this year, we would expect to get some benefit in terms of the fixed cost base and therefore we may see margins going slightly up from 30%, 31% type, that sort of range in there.

And then on the NSS business again looking at previous statements we’ve made, in the sort of mid term we’re looking at 12% to 13% margins in that business. We did see slightly better margins in Q3. In Q4 I guess we’re at about the high end of that range from an NSS perspective and also we were impacted by additional manufacturing costs because of mainly parts constraints both expediting the parts and also not having fully efficient factoring whilst we we’ve been waiting for parts.

So we’re towards the higher end of that currently and it’s looking to stay at those levels. If you extrapolate that into the projections that we’ve given for 1Q, but as we look further out I’ll continue with the consistency of the 12% to 13% projection in the mid term in that business.

Keith Bachman – BMO Capital Markets

So on a weighted average basis, on a gross margin around 18% is how we should be thinking about the year plus or minus.

Richard Pearce

I think obviously you’ve got to look at everything together and you will make some decisions in terms of where you see the proportions of revenue going, but probably if you look at the proportions and you extrapolate from the information I’ve given you, maybe slightly under those levels you just mentioned, but not too far from that.

Keith Bachman – BMO Capital Markets

On the OpEx, for the quarter or the August quarter you were at $30 million OpEx on a non-GAAP basis and it will go up by $1 million to $1.5 million here in the February quarter. When you say an increase of 10% from there, is that relative to the February quarter or relative to what you just booked. And then I thought last call you identified that you thought OpEx would be relatively flattish for the year, that you would be investing but that foreign currency would serve as an offset against that, or at least a portion offset against that.

Steve Barber

That is correct and without going into the full details of the ups and downs as part of this call, there is still some expected benefits from the Forex rates and that is actually going to be circa a couple of million a quarter. I think based on the projections that I’ve just given and since the last call, therefore we have made some decisions to make further investments in products, so over and above that now, where we were expecting one to cancel out, now we’re just going to slightly tick those up a little bit based on the opportunities we see.

Keith Bachman – BMO Capital Markets

So end of the year your OpEx will be kind of $33 million?

Steve Barber

$33 million to $34 million, yes.

Operator

Your next question comes from Glenn Hanus – Needham & Company.

Glenn Hanus – Needham & Company

The impact of the component issues was that felt evenly across your NSS customer base or were there one or two customers disproportionately impacted?

Steve Barger

It was pretty even across the base. There was no one particular customer which felt the impact more than others.

Glenn Hanus – Needham & Company

What were the legal expenses running?

Richard Pearce

It was somewhere between $1 million and $2 million a quarter over the last couple of quarters.

Glenn Hanus – Needham & Company

What was the share count at the end of the first quarter?

Richard Pearce

We’re expecting 31 million.

Operator

There are no further questions at this time. I would now like to turn the call back over to Brad Driver for closing remarks.

Brad Driver

Thank you again for joining us this afternoon. We apologize for the phone connection and if you have any further questions on the details of what was presented in our transcript, please feel free to give me a call and I can follow up with you on that. In the meantime, just logistics, we’ll be at the Needham conference this Thursday and then we will be reporting our next earnings call in March. So thank you again for joining us and we’ll speak to you soon.

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