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Endwave Corp. (NASDAQ:ENWV)

Q4 2009 Earnings Call

February 2, 2010 4:30 pm ET

Executives

John Mikulsky - President and CEO

Curt Sacks - CFO

Analysts

Nader Tavakoli - Eagle Rock Capital Management

Mike Sheahan -Empire Capital Management

Steve Ferranti - Stephens Inc.

Richard Greulich - REG Capital

Operator

Good day everyone and welcome to Endwave Corporation's fourth quarter and full year 2009 conference call, held February 2nd, 2010. On today's call will be John Mikulsky, President and Chief Executive Officer; and Curt Sacks, Chief Financial Officer.

I would like to remind you that this call is being recorded and simultaneously webcast on the investor's page at www.endwave.com. For opening remarks, I would like to turn the call over to Mr. Curt Sacks. Please go ahead sir.

Curt Sacks

Thank you, operator. Good afternoon, everyone, and welcome to Endwave Corporation's fourth quarter 2009 financial conference call. Joining me on today’s call is John Mikulsky, our Chief Executive Officer. Before beginning, I will make a brief statement regarding forward-looking remarks. During the course of today's call the company may make projections or other forward-looking comments regarding future events or future financial performance of the company.

We wish to caution you that such statements are predictions and actual results may differ materially. We refer you to the documents that company files with the SEC as well as the Safe Harbor included in today's press release.

Finally, to supplement the company's financial statements presented in accordance with Generally Accepted Accounting Principles or GAAP Endwave may discuss certain information that is non-GAAP.

These non-GAAP measures are adjusted from results based on GAAP to exclude certain expenses, gains and losses and are provided to enhance investor's overall understanding of the company's financial performance. Specifically, Endwave beliefs that non-GAAP measures provide useful information by excluding certain expenses that may not be indicative of its core operating results.

These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered as a substitute for or superior to GAAP results.

Turning to our financial overview. I will review the results for our fourth quarter and fiscal 2009 and provide forecast information for 2010. As you recall, during the second quarter, we sold our defense and security business to Microsemi Corporation for $28 million in an all cash transaction.

During the call today, please be aware that all comparisons will exclude the defense and security business. Our 2009 was a challenging year for Endwave, we’re pleased to see progress during the fourth quarter with an improving top line coupled with reduced operating expenses.

Today, we reported revenues of $3.6 million for the fourth quarter, a 14% increase over the prior quarter. During Q4 Nokia Siemens Networks and its manufacturing partner SRI represented 40% of total revenues.

Nera Networks represented 37% and E-band Communications represented 11% of total revenues. This is the first time E-band Communications has been a greater than 10% customer of ours, we are optimistic that they will continue to be an important customer.

Our non-GAAP gross margin for the quarter was 7%, down from 27% last quarter. Gross margin in the fourth quarter was significantly impacted by an $878,000 non-cash write-down of material related to a specific frequency of the legacy FlexiHopper product line of Nokia Siemens Networks. We believe this write-down reflects conservative adjustment to inventory in light of significantly reduced forecast of this single product from NSN. Excluding this write-down, our non-GAAP gross margin for the fourth quarter was 31% were four points higher than the third quarter as increased revenue and a mix shift towards higher margin products lead to the improvement.

During the fourth quarter our non-GAAP operating expenses decreased over $200,000 or 9% as compared to the third quarter. This reduction is largely due to the restructuring activity we under took in Q4 as we reduced both our general and administrative support staff and our senior management team.

Throughout 2009 we worked hard to resize the company to an appropriate level, taking necessary cuts across all levels and all groups. To that end we’ve reduced our operating expenses by 43% from Q4 2008 to Q4 2009. We will continue to watch our expenses carefully as we move into 2010.

Our non-GAAP net loss for the fourth quarter was $2 million or $0.21 per share compared to a non-GAAP net loss of $1.7 million or $0.18 per share during the third quarter. Our non-GAAP net less for the fourth quarter was $3.4 million or $0.36 per share and included restructuring related expenses of $1.2 million non-cash stock compensation of $32,000 and $191,000 final adjustments to write off the note receivable and related inventory associated with our former customer Allgon, who is currently in bankruptcy liquidation.

Before turning to the balance sheet, I’d like to briefly discuss the recent repurchase of our preferred stock. On January 21st, we took the action to repurchase all of our series B preferred stock for $36 million in cash including (inaudible) the total price of the repurchase was $36.2 million. This action allowed us to remove the overhang associated with series B stock and reduce our fully diluted common share count while maintaining a healthy balance sheet with $30 million in cash and no debt.

Turning to the balance sheet, at quarter end and prior to the repurchase of our series B stock, we had cash investments of $66.5 million. During the quarter, cash and investment decreased by $1.8 million, approximately $1 million was due to our loss from operations and approximately $800,000 was due to an increase in our working capital.

Turning now to accounts receivable, DSOs were 76 days, up from 60 days last quarter. This increase mainly resulted from our strong shipments late in the quarter, while outstanding receivables are primarily current and within terms, we do not believe we have any material collection issues.

Inventories at the end of the fourth quarter were $4.9 million, down approximately $1.3 million as compared to the third quarter, primarily due to the write down I spoke about earlier as well as a drawdown of our finished goods. Inventory turns were not 2.0 compared with 1.5 turns in the previous quarter.

Turning to 2010, past years has been challenging. 2009 we experienced falling revenue and encountered difficult economic conditions. Responding to these challenges with an aggressive campaign of restructuring and cost containment and as a result we are well positioned to experienced improved financial results as our revenue increases. We expect revenue to grow sequentially in the first quarter to $4 to $4.5 million and are currently projecting revenues to increase by approximately 15% for all 2010.

Finally, for our first quarter 2010, we believe that our cash excluding repurchase for our series B preferred stock will decrease between $1.5 million and $2 million due to a relatively even split between cash used in operation and an increase to our working capital.

For the full year of 2010 given our forecasted revenue levels, we believe that cash again excluding the repurchase of our series B preferred stock will decrease by approximately $6 million with $2 million of the decrease attributable to cash used in operations and $4 million due to a decrease attributable to investments and our working capital support our forecasted growth.

In conclusion, while we have been faced with challenging times, we believe we’ve remained well positioned for long terms success, and are taking those actions necessary to maintain our financial health. That concludes my summery. Now I will turn the call over to John for additional comments and other developments with the business. John

John Mikulsky

Thank you, Curt, and good afternoon, everyone. Today I’d like to focus by comments in three areas. A review of the strategic events of 2009, our going forward plans to build the value of the company and an update on our view of the status of the markets we serve. From a strategic standpoint 2009 was a watershed year for Endwave. You may recall that at the beginning of 2009 our board of directors engaged Needham & Company, a well respected high-tech investment banking firm to help U.S. determine what strategic alternatives were available to the company. Needham contacted several companies both U.S. and international to determinate if there was any interest in pursuing the possibility of a strategic transactions.

From those enquiries we entered into a number of confidential in-depth discussions. First, result of those discussions was the transaction announced in April of 2009 wherein Microsemi purchased our defense and security division. The $28 million all-cash offer resulted in a substantial gain on our investment and represented an amount larger than the market capitalization of the entire company at the time.

In addition, despite our substantial investment and efforts in the defense and security market, at the time of the sale the business was still generating substantial operating losses. And therefore we believe the sale increased the long-term financial well being of Endwave. After the completion of the defense and security transaction, we continued our discussions regarding the telecom portion of Endwave.

However, the environment for these discussions was quite muted, given the prevailing economic conditions and the challenges facing our telecom business. As we have discussed on prior calls during 2009 that while we believe the longer term prospects for the telecom businesses are improving significantly, the last half of 2009 represented a low-end business due to two factors.

Our historically flagship product modules for NSN’s FlexiHopper radio platform, we are experiencing a rapid and unanticipated drop in sales and sales of our new module designs supporting next generation high [Dbass] radios were just beginning their product ramp and our new MMIC product line had just been launched and was not yet generating significant revenues.

Given the challenging economic environment, the challenges facing our traditional telecom products and the unrealized potential growth of our new module and semiconductor products. Our board of directors after discussions with numerous parties and an in-depth analysis of the situation, included that it was in the best interest of our stockholders to discontinue the strategic alternative search and instead aggressively pursue our growth strategy.

A likelihood of an attractive transaction was remote and it no longer made sense to have of management team [developing] enormous amount of time and attention the process required. Of course we always remain open to considering any potential sale transaction that a bona fide buyer may wish to propose.

Now let me turn to this going forward plan. During Q4 we concluded that we needed to focus on three objectives, one, increasing our revenues by ramping our new IP based radio modules and by driving the market launch of our new MMIC product line; two, reducing our cost structure even further; and three, pursuing a transaction with our series B preferred shareholder to eliminate the preference overhang on both our common stock and any potential future transaction.

Good progress has been made on this plan. As indicated by our guidance for increased revenues in 2010. We’re moving forward with rebuilding our revenue streams. This growth is driven both by the delivery ramp of our new IP based radio modules that we provide to NSN and other and the growth of our new MMIC product line.

We’ve booked significant orders for these new module types and we have also booked initial orders for our new MMIC products. Looking forward, we these new revenue streams replacing the sales of our declining legacy products. In this financial discussion today, Curt, outlined the steps we have taken and are continuing to take in order to reduce our cost structure.

As reported a few weeks ago, we concluded the transaction with our series B holder to repurchase those shares at a 20% or $9 million discount to their original price. We see these events as key steps in building the value of the company.

Our strategy going forward has three components. First, aggressively exploiting opportunities to supply modules to the point-to-point microwave radio industry. Second, building a MMIC business focused on specific high value application segments; and third, enhancing both of these business areas with carefully chosen and carefully executed acquisitions. While it is certainly possible that a strategic transaction involving the entire company could happen in the future, our focus today is to stick to our knitting and build corporate value.

As to the state of the telecom market we serve our view remains cautious, but more certain than it was during the most of the 2009. The long-term underlying market drivers for our telecom business continue to remain intact. Mainly, the continuing mobile telephone subscriber growth in developing countries that is driving build outs of new backhaul networks in those areas and the increasing level of smartphone usage that drives upgrades to existing backhaul networks in order to support the backhaul demands of such devices.

As we talk to our customers in the telecom industry, they report that the commercial environment is one of the steady flow of orders, which should translate the business for Endwave. Technologically, it is clear that IP-based backhaul is the preferred solution going forward and this is driving the production ramp of our modules for that class of radios.

Additionally, we are finding that our MMIC products, which have been optimized for IP-based radios are proving to be attractive to those radio OEMs that build their own modules. With our combined module and MMIC product lines, we now have something to offer all radio OEMs.

Before we go to the Q&A period, I'd like to say that we continue to operate in a difficult environment and one that is experiencing significant technological change. This situation has presented us with serious business challenges and I wish to thank all of our employees and partners for their diligent efforts during this time.

As we go forward, I’m believed by the knowledge that we have a strong balance sheet that both gives us a strength to weather the storm and to make strategic investments where others may lack such flexibility.

We have a team that truly has profound knowledge of the industry we serve and that is committed to making this enterprise a success. And we are part of an industry that serves a real demand for communication services around the globe.

Now, I'd like to turn the call over to the operator for questions. Operator?

Question-And-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Nader Tavakoli with Eagle Rock Capital Management.

Nader Tavakoli - Eagle Rock Capital Management

I don’t have too many questions on the operations, it sounds like maybe you have turned the corner here and that’s sounds like good news. My question is not a pleasant one, the transaction that resulted in the sale of the defense business last year was roundly criticized by almost all of your shareholders, it made no sense at the time and with the benefit of subsequent developments mix, absolutely no sense in hindsight. I'm just curious whether the Board is willing to make more disclosure with respect to why it agreed to enter into that transaction and whether there were any relationships between officers or board members between the two companies that the board would like to disclose to the shareholders to try and help us understand why the company entered into this horrible business judgment?

John Mikulsky

Well, I guess there is two parts of the questions, one were there any relationships that I can say unequivocally no. Microsemi and the people of Microsemi were not people that any of us knew it was simply one of the companies that Needham contacted in their market search and we had discussions with them and they made it clear that they were very interested in our defense and security business.

As to the prudence of the transaction while the course, one always can look back on any transaction and wonder whether in the light of hindsight that was the best choices or not. I think the only response that I can get is that the board members at that time concluded that was the correct choice, of course it was an attractive offer in the sense of it being all-cash. It was more than the total market capital of the company at the time and of course we had the issue that we were both having to try and fund operating losses of our defense and security and suffer the costs of building this new MMIC product line and the combination of those two was not something that we felt we could effectively continue going forward.

Nader Tavakoli - Eagle Rock Capital Management

I mean all of those statements can be debated and it was not bigger than the enter market cap of company when you include the capitalization of the preferred and the company had sunk lots of cash into it and was not in a position where it needed cash, can I infer from your answer that there have been no subsequent transactions between anyone at the company and anyone at Microsemi, including no officers having moved over there or got some consulting agreements.

John Mikulsky

The only officers that moved with the transaction was David Hall, who was our General Manager of the defense and security business, and he moved with the transaction to Microsemi, no other relationships of consulting agreements what have you, have taken place. We are aware of that have been reported to U.S., so...

Nader Tavakoli - Eagle Rock Capital Management

I don’t want beat this to death, but we will be conducting an internal investigation of the transaction this company not in a position to fund law suits, so it would be a shame as those are representations and that are not being the case. This is not hindsight, we criticize the transaction what has happened, almost all of your shareholders did it made absolutely no sense and it continues to make absolutely no sense. This company did not need meet the liquidity and it didn’t solve anything, in fact they put you on an inferior position vis-à-vis negotiating a transaction with your preferred shareholder.

So it made then, it makes no sense now. I know that there has been a management change here, so you guys are taking criticism for decisions you may not necessarily made, but certainly is the same board, and in terms of shareholder confidence going forward does not lend itself to any confident in terms of this company’s transitions going forward. So we will be looking into it and it just the same to finance a (Inaudible) legal fees.

Operator

Thank you. And our next question comes from the line of Mike Sheahan with Empire Capital. Please go ahead.

Mike Sheahan -Empire Capital Management

This one seems little different talent so rather than looking back, looking forward, you had guided for 15% top line, is that coming from one customer or multiple customers.

John Mikulsky

Multiple customers. Certainly one of our focuses of moving forward is to both in the module business and in the MMIC business to get a broader slot of customer, I think the volatility of the industry that we see going forward suggest that the right approach is to have a number of substantial customers. So we are seeing growth across the board

Mike Sheahan -Empire Capital Management

Would you hope to exit the year with profitability or what are we looking at as we look at 2011, I know that’s looking far out, but how should me model that?

John Mikulsky

I’ll let Curt handle that one.

Curt Sacks

In the time of 2010, I guess given the forecasted revenue increase to the 15% from 2009 to 2010. We don’t believe we’ll be breaking even from the entire year. But whether we get to the breakeven point in any particular quarter, I think it’s certainly dependant on the top line growth. And we expect to see growth throughout the year, but I can’t say if we’ll get to the point of breakeven, a cash breakeven point in any particular quarter. I talked about in the last call that our cash breakeven point was somewhere in the range of $7 to $7.5 million on the top line and that’s about right as we going into 2010.

Mike Sheahan -Empire Capital Management

And you’re giving more visibility than you typically do on a call, what gives you confidence in that, is it just talking about the forecast with your customers or and you’re seeing the pipelines improve et cetera or is there one thing in particular that’s giving more confidence as we going to 2010?

John Mikulsky

I think there is a number of factors just across the board and the industry, I think there is more positive scenes that we see. As your earlier question sort of related to we see growth with a lot of customers I mean this isn’t a single horse that’s the whole race and we actually have been pretty successful at booking orders as we go forward.

Mike Sheahan -Empire Capital Management

Okay. Just to recap, you said you’re going to exit the year with 26 million in cash ballpark was that correct?

Curt Sacks

More like 24 to 25.

Mike Sheahan -Empire Capital Management

24?

John Mikulsky

I guided to $6 million usage of cash during the year, about 2 million of that from, a loss from operation is about 4 million to increase our working capital growth to support the growth that we’re talking about on the top line.

Mike Sheahan -Empire Capital Management

So, you’ll end the years with about $2.50 of cash, ballpark?

John Mikulsky

Yes. Somewhere in the neighborhood, that’s right Mike.

Mike Sheahan -Empire Capital Management

So you’re trading blow that. Right, and the law suit or the transaction that last, gentlemen referred to was back in April, correct?

Curt Sacks

Correct.

Mike Sheahan -Empire Capital Management

And can you just walk through everyone the changes in management since then?

John Mikulsky

Well, at the beginning of the year we actually had a total of 10 officers, one of those 10 as I mentioned earlier, moved with the transaction, of the remaining nine only four are still with the company.

Mike Sheahan -Empire Capital Management

Great. So I just want to clarify because we’re talking about $23 million market cap company with 25 million, 24 million of cash by the end of year, that’s someone is going after legally. Okay, I appreciate it, good luck.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Steve Ferranti with Stephens Incorporated. Please go ahead.

Steve Ferranti - Stephens Inc.

I wondered if you might be able to share with us what inning you think we’re in of this product transition at Nokia, in other words the legacy FlexiHopper going to the IP product. Whereabouts are we in terms of that product transition within Nokia?

John Mikulsky

I would say on the legacy FlexiHopper, we’re probably in the top of the ace. Everything we hear is that by the time we get to the end of 2011 that product will probably go on to end of life. In terms of the new design the flexi-pack of the IP based, we’re in, I guess I’d say maybe the bottom of the first (inaudible) or the top of the second, we’ve gone through HS, NSN these are of course ending up to be joint development and qualification program, we’re done with that work and they are out getting orders and we’re ramping those products in our factory to support those service.

Steve Ferranti - Stephens, Inc.

Is that FlexiPacket product all IP here is it a hybrid [CDM]?

John Mikulsky

This actually has a hybrid capability. The two things that these new radios have to have are high capacity, probably 100 megabit or so shear capacity and they clearly have to be a radio that handles IP very well, but they also have to have front-ends that can deal with legacy telephony of protocols as well, which the flexi packets does.

Steve Ferranti - Stephens, Inc.

Okay, great. And it sounds like you are little more optimistic on the order side. Do you have any read through into sort of geographically where you think some of the improving demand maybe coming from or do you not get that level of visibility?

John Mikulsky

Well, we get some sense of that as we look at the frequency. We don’t get anything directly. What we know is that that’s in the higher frequency band it tends to Western Europe, it fits in the lower band it tends to developing countries. And I’d say that we’re seeing full in both.

Steve Ferranti - Stephens, Inc.

Okay, that’s very helpful. Okay and then I guess just a sort of close the loop on that, do you think that some of this improved environment is end market demand related or is it just the fact that we’re now sort of moving out of this product transition in Nokia and maybe we’re out of that sort of inventory correction phase and maybe you’re making some gains at other customers as well. Do you get any read on whether this is end market demand picking back up or is it either share gains or the end of the inventory correction?

John Mikulsky

Let’s see, I think it may be a sum of all three. What we know is that in developed areas of the world the carriers, the mobile carriers are clearly improving their backhaul systems, we see that certainly in Western Europe and there is of course a lot of discussion about enhances backhaul systems here in North America. So that certainly is one I guess end-demand as more and more people are moving to smartphones and all of that implies.

In terms of the transition, clearly that’s a major factor for us. Basically the traditional legacy radios are falling by the wave side and we are seeing these new designs that we’ve been working on, in some cases more than a year, I mean the whole cycle of designing developing qualifying ramping production takes a solid 12 months or so and we are now seeing those things really getting some legs. I think another factor is certainly as many of the radio companies have reported in the last few days is, the capital market seem to make capital more available to operating company so they’re being a little more aggressive in their build outs.

Steve Ferranti - Stephens, Inc

Last one from me, over your 10% customers, are those obviously (inaudible) module customer, the other two buy modules from you or MMICs.

John Mikulsky

They are buying primary modules.

Operator

Thank you. Our next question comes from the line of (Inaudible).

Unidentified Analyst

I was wondering if you could give us a little more color on your guidance for next year, the environment where the backhaul spending should be pretty robust and some of the small vendors are rally ramping rapidly, I’m little surprised that you’re only going to be a little over 20 million next year, which is still down 45% from 2008, has that mostly due to losing some customers or is that share loss [adds] to customers or that more than your customers are losing share overall in the market and I’m also curious how much of your guidance anticipates design wins of new customers that’s only from basically NSN Nera and E-Band?

John Mikulsky

Three different questions in there. In terms of the revenue growth, I think I don't know if I could cast it in any of the kind of options that you are preceded, I think it's an issue that as these new products are ramping they are really just beginning their ramp this year and they simply are not drilling the hole that was left by the demise of the FlexiHopper this year. The FlexiHopper program was very large, very successful program and it’s really going through its end-of-life cycle, really much quicker I think than anyone anticipated. So we’re just having to build backup from that. In terms of our growth through the year some of it is with the existing larger customers that we have and some of it certainly is new customers that were pursuing with both modules and chips.

Unidentified Analyst

Little more difficult towards the main problems that FlexiHopper transitions, does that mean that using Nokia Siemens Network is losing a lot of share overall in the backhaul market?

John Mikulsky

They couldn't be there aren’t really terribly good statistics for that available, there are few people that provide some information, but it's certainly a competitive market space for them and as has been reported they have had some market share difficulties in mobile networks and some if they don't win the network it's unlikely they are going to win the radio business, the backhaul radio business. So that probably has been a factor in the situation at NSN.

Unidentified Analyst

Okay. Last quick question, I’ll let it go. Are you sole sourced? Are you kind of multi sourced in the new Nokia Siemens Networks platform?

John Mikulsky

As a practical matter when you’re providing a module you are sole sourced because for any given frequency it's a unique design, the process of designing and qualifying a module it's unusual to have a situation where it makes any economic sense for the OEM to qualify two suppliers for a given frequency it happens on occasion, but generally that is not the case in our marketplaces, we’ll have specific frequencies maybe one of our competitors will have other specific frequencies.

Unidentified Analyst

So you’re saying you’re probably multi sourced overall in the platform, but within some of the frequencies you are single sourced?

John Mikulsky

Petty much, yes. There is the occasional place where we have a direct frequency on frequency competitor, but it’s the unusual pick.

Unidentified Analyst

Okay. Well, can you give me a sense for your share within the FlexiPacket platform, if you look at all the frequencies?

John Mikulsky

We don’t have a really good feel for that. We know that we have launched a lot of the really launch frequencies the ones that, we have the frequencies that are at the launch frequencies and that are particularly interested in Western Europe. So we have the higher frequencies. I think as that entire product line rolls out and as the market dynamics turn out to be what they will be, we’ll get a better sense over the course of the year as to just what part of that we have.

Operator

And our next question comes from the line of Richard Greulich with REG Capital.

Richard Greulich - REG Capital

What was the backlog at the end of the year?

John Mikulsky

We generally don’t talk about backlog. We break it out on our 10-K, because we have these sort of long contract wins. It’s not a metric that we look at it and disclose. That’s one prompted by the 10-K.

Richard Greulich - REG Capital

How would you compare the orders you received in the fourth quarter with those in the third?

John Mikulsky

In what sense, I mean?

Richard Greulich - REG Capital

Magnitude?

John Mikulsky

Magnitude. We certainly saw some up-tick in either actual orders or from any of the customers, more importantly the forecast during Q4. From any of the large OEMs, the nature of our contractual arrangements is that we have a multiyear purchase agreements that establish prices and various terms and conditions. And then on a rolling basis, usually once a month, we get a forward-looking forecast. Some portion of which is basically committed, but the larger portion of which really is only a forecast and it’s clear that as we were getting those numbers in December and early January that there is clearly an uptick in what’s going on in these new products, hence our increased guidance.

Richard Greulich - REG Capital

The orders or the interest perhaps in the MMIC products, at this point are those four customers who are going to be designing those into new modules or are those plugging into sort of existing module design?

John Mikulsky

Some of both, some of MMIC products are pin-for-pin replacements for existing industry devices. So, we can immediately incorporate them in our customers design generally they go through a qualification process to verify the performance of the part once that’s done we’re immediately able to start supplying product. Some of the devices are the more custom nature and those tend to be going into new designs that OEMs are building to be developing.

Richard Greulich - REG Capital

Would you expect to be receiving revenue from the MMICS, let’s say over $1 million per quarter in the 2010 year at some point?

John Mikulsky

Well, at this point we have been broken down what the MMIC revenue would be for 2010, we talked about the 15% overall growth for the company on the top line and we expect the MMIC product line to be a driver of that growth particularly in the second half of the year, but at this point in time we’re not going to break it out, but it will important driver of the growth as we get towards the latter half of the year.

Richard Greulich - REG Capital

If you look out 18 months are now, what kind of gross margins does the MMIC product line likely to be, let's say versus your historical module margins?

Curt Sacks

Typically in that MMIC space you would expect to see gross margins approaching 50% that’s sort of the typical pattern. Although when you get into it, it obviously depends as to how unique an individual part number is, what the competitive situation is, but I think on average we would expect to have mimic gross margins that our closer to 50%.

Richard Greulich - REG Capital

And is there any particular reason why your module margins would vary significantly from historical going forward?

Curt Sacks

I mean we’ll continue to see pricing pressure on the modules as John talked about the IP based radios, some of those products have a bit higher margin as the newer products that we have. But I would think overall there is some give and take there, but module margin should be fairly confident as we go out in the future. Typically what we done is gone through as a module go through its production history and it’s a frequency and a program that needs a good market success, we’ll typically go into a cost reduction program, designed for cost program. I will go back to the FlexiHopper over the years, when we did that we went through several design for cost cycles.

Richard Greulich - REG Capital

Actually, I would applaud your maneuvering to buyback the preferred at a discount, because to me it adds like $0.75 to $0.80 a share value to the common shares remaining. So my next question then is, would you consider and if not why not at least instituting some kind of a share repurchase with the stock where it is today?

John Mikulsky

Well, let’s see. Yes, you are right Rich. The deal we did, certainly we believe increased shareholder value and added the cash value per share of our common holders. Last quarter in my prepared remarks, I noted that a dividend buyback were repurchased, we weren’t able to do that with the preferred shareholder, and obviously that’s not an issue anymore. But at this point we’re really looking towards focus on growth, whether that’s organic or a few selective acquisitions. We’ll continue to think about the dividend or a repurchase, but I think in the near term we’re going to move forward with the plan for growth in growing the business organically and using our working capital to grow the business organically in selective acquisitions along the way.

Richard Greulich - REG Capital

I mean I understand the attraction given the size of the company and that’s sort of the clause of being in business, you want to get larger, but if your stock was at 4, 4.50, I can understand that, but at this point, realistically, you are not going to find an acquisition priced as attractive as your own stock is today. It doesn’t help you in the growth part, but it does increase the value?

John Mikulsky

I understand what you are saying and it is something that we will continue to keep in mind and look at both. It’s definitely an option available to us.

Operator

And our next question comes from the line of (inaudible).

Unidentified Analyst

Actually, all my questions have been covered, I would just reiterate as well, that commend you on buying back the preferred, and you did create some value for shareholder. So good job, thanks.

Operator

At this time we have no further questions. I’ll turn it back to management for any closing remarks.

Curt Sacks

Thank you, operator. Thank you everyone for your continued interest in Endwave. And we hope you’ve found this call informative. Please join us again for our first quarter financial conference call currently scheduled for April 2010.

Operator

Ladies and gentlemen, this concludes the Endwave fourth quarter 2009 financial results conference. Thank you for your participation. You may now disconnect.

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Source: Endwave Corp. Q4 2009 Earnings Call Transcript
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