Actel Corporation F4Q09 Earnings Conference Call

Feb. 4.10 | About: Actel Corp. (ACTL)

Actel Corporation (ACTL) F4Q09 Earnings Call February 4, 2010 4:30 PM ET

Executives

John East - President, Chief Executive Officer

Maurice Carson - Executive Vice President and Chief Financial Officer

Analysts

Richard Shannon - Northland Securities

Tom Claugus [ph] - Graham Partners

Operator

Welcome to Actel Corporation’s conference call regarding its results for the Fourth Quarter of 2009. A replay of this call will be available for one week at 1-800-642-1687, conference ID number 50401175. You can also access this call on Thomson CCBN through a link on Actel’s website at www.actel.com.

This call is being recorded. To ensure that the question-and-answer session proceeds in an orderly manner, participants will be return to the queue after one question and one follow-up question.

All forward-looking statements during this call are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in the forward-looking statements.

Information concerning factors that could cause actual results to differ materially from those projected in the forward-looking statements are contained in Actel’s most recent Form 10-K or 10-Q, which is available on Actel’s website. At this time, all parties have been placed on a listen-only mode. The floor will be opened for questions and comments following the presentation.

It is my pleasure to hand the floor over to your host, Mr. John East, President of Actel.

John East

Thanks, Carrie. Good afternoon. I’m John East, the President and CEO of Actel. With me is Maurice Carson, our Executive Vice President of Finance and CFO. After Maurice reviews the results for the quarter, I’ll talk about our current business environment and I’ll give you a brief update on the status of our restructuring plan and then we’ll open up the call for questions.

So now, I’d like to turn the call over to Maurice.

Maurice Carson

Thank you, John. Before I talk about the financial details for the fourth quarter, let me tell you how we will provide financial information regarding the first quarter of 2010. We will give guidance on the call today. The guidance will be our targets for sales, gross margin, operating expenses, other income, tax provision and share count for the first quarter of 2010.

Next we expect to provide a financial update in early March. In the absence of a material change, that will be the only financial guidance the company will give during the quarter. A replay of this call will be made available. Please access the company’s website for the replay information.

As will generally be the case, my remarks today will include non-GAAP measures as a supplement to our GAAP results in order to provide a more comprehensive view of our financial results. A reconciliation of non-GAAP to GAAP statement of operations is included in our earnings release and is posted in the Press Room of the company’s website. I’ll focus on comparisons of the fourth quarter with the third quarter.

Now to the financials. Fourth quarter sales were $49.7 million, which was near the high-end of the revenue guidance for the quarter. This represented an increase of 5.2%, compared with last quarter. Silicon book- to-bill was above one.

A few minutes on the income statement. Non-GAAP gross margin in the fourth quarter was 62.3%, compared with 60.3% in the third quarter. The improvement in gross margin is primarily driven by an increase in military shipments. Compared with previous quarters we continue to see the benefits of the cost reductions implemented earlier this year.

Non-GAAP operating expense for the quarter -- operating expenses for the quarter were $26.4 million, compared with $25.7 million in the third quarter. R&D spending was $12.9, compared to $13.4. SG&A was $13.5, compared with 12.4. This spending is in line with our guidance for the quarter and we are on track to meet our spending targets in Q3, something I will discuss later.

Other income was $0.1 million, compared with $0.7 million last quarter. We sold two bonds for a loss of $0.4 million in the quarter. Non-GAAP net income was $3.3 million, compared with $2.4 million last quarter. Diluted share count was $26.4 million and this all resulted in an earnings per share on a non-GAAP basis of $0.12, compared with $0.09 last quarter.

Cash, cash equivalents and investments were $152.7 million at the end of the quarter, an increase of $7 million. This is driven primarily by net income plus depreciation and amortization and other non-cash charges of $6 million. We generated $1.5 million from changes in working capital and spent a $1 million on CapEx.

Accounts receivable decreased by $3.7 million to $19.1. DSO decreased by nine days to 35 days and net inventory decreased by $1.1 million to $37.3. This includes $1.6 million of legacy wafers purchased as part of the last-time buy we have discussed in the past. We will continue to purchase more of these wafers for the next three quarters.

This inventory will support our customers with these very key products for approximately 10 years. Even with this purchase, net days of inventory decreased by six days or 181 days when compared with the third quarter. I mentioned earlier CapEx was about $1 million during the quarter and we recorded $3.1 million of depreciation and amortization expense.

As we told you last quarter, we had a reduction in force of 33 people during the fourth quarter, mostly in the U.S. We did add 19 people to our India design center and the cost of the reduction was about $1.2 million, in line with our guidance.

Now, I’ll give the financial outlook for the first quarter of 2010. Taking into consideration all of the information currently known by us, we are projecting revenue to be up about 2% to 6%.

For the rest of the P&L, please remember that these are non-GAAP numbers. Gross margin is expected to be about 62%. Although this is flat to Q4, we do believe there is more upside than down side in the margins.

Operating expenses are anticipated to come in around $27 million, which does not include non-cash charges for equity comp, amortization of intangibles or restructuring costs.

Other income will be about $0.5 million. The non-GAAP tax rate for the quarter is expected to be 30% and the fully diluted share count is expected to be $26.5 million shares.

I would like to spend a couple of moments on this talking about the spending reduction effort. We have previously given very specific guidance concerning the financial model for the third quarter of 2010. We committed to reduce our overall spend by $6.5 million. Originally we estimated that $1 million would cost from cost of goods sold and $5.5 million would come from operating expense.

We are on track to meet the $6.5 million in savings in Q3 and we now have a better sense of how the savings will be reflected on the income statement. Approximately $4.5 million of the savings will show up in operating expenses and $2 million in COGS.

The key point is this, the savings in COGS is coming from the fixed cost portion of COGS in achieving the $2 million in savings is not dependent upon any specific product or market mix.

Another way of looking at this is to say, no matter what our product or market mix is in Q3, gross margin will be $2 million higher than it would have been without this cost reduction effort.

To sum up, we are on a good trajectory. Revenue is up this quarter and it looks like we’ll be up again in the first quarter. Gross margin is high reflecting excellent work by the operations group in cost reductions. Spending is significantly down over the last year; all in all, it is a compelling financial picture.

Thank you. And I would now like to turn the call back to John.

John East

Thanks, Maurice. First let’s talk about Q4. I’m going to throw in as an aside though I’m suffering from a cold. It seems like I always get one at conference call time, so you may have to put up with some throat clearing and coughing and what have you.

As Maurice told you, our sales are up about 5% from the prior quarter. Bookings followed what I’d call a typical Christmas quarter pattern. They were relatively strong for most of the quarter and then they slowed down towards the end. When the dust had settled, Silicon book-to-bill was a little better than one but bookings so far this quarter have been very strong.

Maurice also told you that we came in over our margin forecast and we came in under our expense forecast and all that feels pretty good.

Now what happened in the quarter? Why didn’t we grow as much as the competition? I think the best way to look at this is by looking at the market segments. As you know, we do not participate in the communications market to a significant degree, and that market grew very, very well, but it didn’t help us. We did have a very nice quarter in military but to some degree that was canceled out by a decrease in our satellite business. Our Flash business was roughly flat.

Looking forward to Q1, we expect to see very nice jumps in Flash and satellite but we’ll probably see a seasonal drop-off in military. So the bottom line for all of that looking at Q4 and Q1 combined, we expect a bulk of our growth to come from flash and satellite.

Another way to look at the question why we didn’t grow as much as the competition is to recognize that our customer base tends to move more slowly than the customer bases of our competitors. We generally see the downturns a quarter or so after they do and it’s possible that this applies to this up turn as well, only time will tell in that regard.

Now a few more details on Q1. Our backlog shippable in Q1 as we entered the quarter was considerably higher than the equivalent Q4 beginning backlog. Now it’s important to remember that we take sales when our distributors ship to the end customer. That means that our increased distributor backlog pays off when the distributors ship the product, not when we ship it.

The situation we’re in this quarter is that our distributors’ resale forecasts are not as high as their demand on us. If you did the arithmetic, you would think that they were planning to build quite a bit of inventory, but I don’t think that’s the case. I think they’re uncertain. The uncertainty is causing them to put sizable backlogs on our books in case they need the product. But when it comes to committing to a much bigger resale number, they’re hesitant. And since we run in the neighborhood of 75% or so distribution, this matters a lot to our overall billings number.

So on balance, we’re going to call Q1 revenue at somewhere between up 2% and up 6%, compared with last quarter and to make the mid-point of that range we will need fewer turns than last quarter.

There are those in the company who think I’m being too conservative with this guidance but the numbers that have been given to me over the last six weeks or so have been jumping up and down quite a bit, so I think it’s prudent to be conservative until we sort out the uncertainty.

Before I talk about new products, let me remind you of a few of the nuances relating to our gross margins. Maurice has told you that we expect to make our $6.5 million per quarter spending reduction goal and he’s told you that you’ll see part of it in the form of increased margins. And over the last couple of quarters, already our margins have risen nicely.

The biggest reason is that the bulk of our above the line expense reductions have already been made. It’s not the only reason though; as we’ve told you before mix matters a lot. We have quite a variation in the margins of different product lines, generally speaking our old products have better margins than the new ones.

Military products have better margins than commercial ones and consumer products have lower margins than the other products. And that means that mix is an important ingredient in determining our overall margins and Q4 mix had a positive affect on our overall margin.

Now I’ll talk briefly about some new developments in our product portfolio. In 2007 and ’08, we had good years for new product announcements. To remind you, we introduced Fusion, IGLOO, Nano, we won a lot of awards with those products.

But if you put aside our RTAX-DSP introduction, 2009 was a slow year for us with respect to new product announcements. We worked on several products but didn’t get to the stage of announcing them and that was expected. That’s the reason that our expense reduction plan was spread out over two years. We wanted to complete the projects rather than to flush partly completed ones down the drain.

Maurice has already told you that we’re on track with the expense reductions. Well, we’re also on track with the products. Our plan is to introduce two major new products this year, one in the first half of the year, another in the second half, and we’ll keep you posted on that.

One final note of interest, it’s particularly interesting to me, I should add. Two weeks ago, I celebrated my 65th birthday. Now that’s not something that you should look forward to because when it happens to you, it means you’re in for some soul searching, and here is what I came up with when I searched my soul.

After 21 years at Actel, it’s time to move into the next phase of my life. Accordingly, we’ll be starting a search this week. We’re going to look at all the good candidates inside and outside of Actel and once we found the right person, I’ll pass the reins.

How long that will take is open question. In my experience, six to 12 months is pretty typical but every search varies. You don’t know for sure but our plan is that I will remain at the helm until the new CEO is on board, and at that time I’ll switch to a consulting role. I will remain as a consultant until August of 2011 and that means there will probably be plenty of overlap.

Now it’s possible, maybe even likely that in the long run, the new CEO will have a lot of ideas that are different from mine; in the short-term though I’m confident that he or she will share my views on our new financial model. Our board is as dedicated to this new model as I am, so I expect the new model to weather the CEO transition absolutely in tact.

And that concludes my formal remarks. Carrie, would you please open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And you’re first question comes from Richard Shannon with Northland Securities.

John East

Hello, Richard.

Richard Shannon - Northland Security

Hi, John. How are you?

John East

I’m great. How are you doing?

Richard Shannon - Northland Security

Just fine. Congratulations on your announcement. I know we’ll have a few more quarters with you on the calls but congratulations on that well deserved retirement for you.

John East

Richard, thanks a lot. Yeah, I’m pretty sure you’re right. You haven’t seen the last of me. So it won’t be the way Dick Nixon said it, what did he say? I haven’t seen…

Richard Shannon - Northland Security

You won’t have me to kick around any more.

John East

Yes, that’s right. I hope you didn’t mean it that way. But I don’t want to be frivolous. What is your question, Richard?

Richard Shannon - Northland Security

Well, I’ll miss your pontifications on the call. (inaudible) until then.

John East

Right.

Richard Shannon - Northland Security

I guess my first question is, as I ask typically on the calls, John, in terms of your forward guidance, can you kind of handicap the end market puts and takes in terms of how you get to that plus 2 to 6 revenue growth guidance?

John East

Sure. Having been accused of pontification, I may as well go ahead and earn the title. So let’s do both end markets and technology. I’m going to integrate everything out for Actel and others as best I can over two quarters because I think if you look just to Q4, it can be a little distorted and just Q1 is a little distorted.

But if I look at Q4 and Q1 together, what you generally see in Q4 is a nice military quarter and then that often drops off in Q1 and I think that’s what will happen to us. So Q4 for military was great, Q1 I think will drop off some, my gut feel is our competitors run into the same thing.

So if you say military over the two quarters isn’t the thing that’s driving the growth anyway, then what is? And my gut feel is, for the competitors, they’re going to be driven strongly by the communications market because as I see that, that’s in for a really nice roll. I think wireless data is coming on strong and I think China is coming on strong, India not that far away. So for our competitor, I wouldn’t be surprise if you integrate out two or three quarters, they have really, really nice quarters in the communications area.

As you know, Richard, we don’t participate to a very high degree in communications, but we’re looking for good quarters in our satellite. Those numbers look very encouraging to me right now and even though it’s not a market segment, still in the technology of Flash, I’m looking for a good quarter or combined good quarters.

And then to tie the Flash in with the market segments, what you just saw was our Flash was flat in the quarter we just finished and most things in the FPGA world were flat, so you could say, what’s going on there. And I think what happen there is, in Flash, we gained well in the consumer market, but one of our notable industrial customers in Flash didn’t take much of anything from us last quarter.

So the result was that Flash was flat. Overall our consumer was up and our industrial was down. But I think that was kind of a short-term aberration anyway in the industrial and I expect the industrial will come back. So if and when it does come back then what you’ll see is our industrial looks sort of okay, neither great nor awful. Our consumer is growing and the biggest reason our consumer is growing is because our Flash is growing. So that’s for the first approximation anyway to answer that question. But you have a follow-on, Richard?

Richard Shannon - Northland Security

Yes. I do. One of your competitors in the public ground as well as a private company has talked about some opportunities in low power and mobile applications, which should be particularly well suited to your PA3 and IGLOO and Nano lines. I’m kind of curious what you see in terms of design wins and design win activity for those types of applications going through 2010. How significant can that be?

John East

Well, low power is what we’re all about, low power and analog, if you put aside the satellite, and I always like to put that aside for the purposes of that kind of a question. So I would say a large fraction of the design wins that we’re getting deal in to one degree or another with the fact that we have a lot of advantages in power.

Now you narrowed down to 2010, even in the consumer line, designs that I’m going to win this quarter wouldn’t be much in the way of sales in 2010. There is more lag time than you think. But I just mentioned to you we had a nice up quarter in consumer last quarter and that I don’t expect to give that back this quarter.

A good fraction of that is because of power. I think power is a good place to be. I’m glad we’ve staked out our territory in power and I just look forward to that as being a steady growth mechanism for, I don’t know, half a decade anyway, I don’t think we’re going to have a time that February 28, 2010, the whole world changes and our orders jump up sharply. But I think for the next five years people are going to be worrying more and more about power and I’m glad to have staked it out. So, I think, I gave you your follow-on, but you’re going to have to come back, Richard. Carrie, do you have another question?

Operator

(Operator Instructions) At this time, there are no further questions.

John East

Wow! I hate to go out with the shortest conference call on record here. So let me ask a question. Maurice, if you look at your spending, you have committed or as best we can commit to get the spending numbers down to a much lower level in Q3.

But it didn’t look like they came down much this quarter, it doesn’t look like they’re coming down much in the quarter that you’ve given guidance, so rational worry for somebody might have -- might be that, gee, you’re just trying to pull all the Q3 expenses in and it’s going to be short-term. Why don’t you address that question?

Maurice Carson

So, I told John before the call that nobody would really ask me that question, and he thought somebody would…

John East

I assured somebody would.

Maurice Carson

And he’s making sure that somebody did. Okay, so to make it clear, there’s a couple of things going on here. Spending by nature is lumpy, meaning that there is no continuous piece of straight line down, the stuff that comes in, stuff that comes out. In Q4, we did have some normal year-end type expenses. We had accrued some bonus. We have some sale commissions that are annual in nature and we got hit with those in the end of the quarter.

We wrote off a software project that we took a hit for but it wasn’t going to return what we had expected returns to be, so we jumped into and took that out now and that will be reflected in future savings.

We have some other kind of normal one-time, I won’t say one-time, but unique expenses that came through. You’re right, Mr. Investor, that it’s not going down in the next quarter and we’ve explained I think in the past that we didn’t anticipate a straight line down.

Beginning of the quarter does have some payroll type expenses that come up. We do have the things I talked about last week, some of the engineering costs that come through. It is a -- it is lumpy, but we have either committed or specific action items that will bring that number down to now the $4.5 million that we’ve guided to. There is nothing that’s pushed out or moved around. These are real new spending levels that we’ll achieve.

John East

So our bottom line is, it’s our expectation we’re going to make those numbers and stay at them, as Maurice points out. So you give raises, spending can go up in the long run, but we have no intention of getting there in some sort of a weaker where we get down there and jump right back up. It’s not the way we see it. Carrie, are there any further questions now?

Operator

We do have a question from Tom Claugus [ph] with Graham Partners.

John East

Tom, how are you?

Tom Claugus - Graham Partners

Hey, how are you doing?

John East

Good.

Tom Claugus - Graham Partners

I’m just wondering on your -- all of your savings stuff, the 65-nanometer transition, can you go through the timeline for that, please?

John East

Yeah. I can. I mentioned before that we’re working really hard on 65-nanometers and I mentioned today that we intend to have two exciting new announcements this year. I’m going to stop short of telling you which is which, but it won’t be very long and you’ll find that out anyway.

Now one of the reasons that the expenses seem to be staying up and then are going to take what looks like a step function down is that as we get closer to the tape out of some of those 65-nanometer products, we have to get the IP that we’re buying from third parties to put into them. And in some cases, the IP is amortized over five years, but to whatever degree, we need to get custom changes made to suit our product. Those custom changes look just like engineering and they are written off in the quarter we do the work.

So we’re trying to get all of that done by the end of the second quarter. By the way it’s not a slam dunk to get it done. My intent is to be at the new spending levels for all of Q3 but it would be possible that we get there sometime during Q3, so you wouldn’t see the whole affect during Q3. But anyway my intent is to get there for all of Q3 but we’ve got to make some schedule and get some work done and it’s not a slam dunk.

But by the time we get done with Q3, we think we’ll be done with that, then you could say, well, you’re just going to repeat that again with your next generation, aren’t you? And the answer is, yes, to some degree that’s right. But remember we only -- or historically, I don’t want to make a prediction of the future here, but historically we’ve only done every other process technology. We just can afford to do every single one of them.

So that would say it would be a number of some years, not some months, before we run into those expenses again. I think, I’ve answered the question the way you asked it, but you have a follow-on if I didn’t quite get it right.

Tom Claugus - Graham Partners

Yeah. My follow-on is inventories, I always have been a little bugged by how high you guys keep inventories at 180 days. Is there any way to get that down over a longer period of time? I mean, I know you took the write-off which I assume was going to happen, but even here, I was -- I’m always hoping for the inventory to be lower than what you guys carry.

John East

Yeah. Perfectly reasonable thing to ask for, I’m hoping for it as well. So what are the ins and outs of it? We actually have a model and the model says that we should run never any less than four months and not more than five. And you could say, well, that’s a crazy model, why so much?

We run a custom process. If we are to run out of dies, if we’re to run out of wafers and a customer gives us a big order, we’ve to go back to the fab, our total lead times from the time we go to the fab and say, we want to start wafers until the time we are ready to ship are about five months.

So we do not want to run into the situation where that has to happen because commercial customers just don’t want five months lead time. That’s just not something they’re willing to listen to.

So we have to feel like we have enough good die inventory to weather ups and downs in demand. And at our size, we’re just not big enough to have everything average out where you look at every product and say, well, every quarter runs about the same amount. We are just -- well, the law of large numbers doesn’t apply to us.

There is a lot of jumping up and down in various products, so we may have what we think is a rational inventory of everything and we’ll go a couple of quarters with hardly any orders on another product. And by the way, more wafers will be coming in, so our inventory is too high on that product, but on the other hand, demand for everything we got on the other product will came in.

So our model just calls for having more good die inventory than a company that’s bigger than us would have. Now today, we’re above that model. And we’re working hard to get it down. The most important thing that’s happening to us today is for the next, the next about eight months, we’re going to be buying inventory of our old ACT 1, ACT 2 and ACT 3 products, because that fab is now shutdown, and they’re bulldozing it down. Actually they’ve already built the inventory, but we got them to agree that we could accept it over a period of time and we would not have to take it all right away.

So that’s a little bit of a headwind we’re running into. In order to keep our inventory down, or in order to keep our inventory flat, we have to make everything else go down by roughly $2 million a quarter. In the quarter we were just in, I think we made it go down by a couple of million, something like that, which says that, really we got it down by about $4 million and then we had to give up about $2.

So you’re asking a good question. My answer is the truth and may not make it acceptable to you. But clearly we all want to have inventory be a source of cash over the next year or so.

By the way, once we get all of the ACT 1, ACT 2 and ACT 3 built, it’s clearly a source of cash then over a period of time after that. But again that’s eight or nine months away. Okay, I think you had your follow-on, but great question. Thank you. Carrie, do you have more questions?

Operator

You have a follow-up from Richard Shannon with Northland Security.

John East

Hello again, Richard.

Richard Shannon - Northland Security

Hi, John. I think it’s a busy earnings day here, so that might be the reason why it’s a little bit slow for you.

John East

Yeah.

Richard Shannon - Northland Security

But I’ll add another question…

John East

Okay.

Richard Shannon - Northland Security

Kind of bigger picture question here. You know, as you look at your Flash product family, your PA3 line of products have been out in the market for a while. IGLOO and related products are a little bit more recent. Where are we sitting in terms of the design win momentum with the older ones and the revenue patterns, as opposed to where we’re sitting with IGLOO now? Is that becoming material, is it still pretty low, how should we see that transition throughout 2010?

John East

IGLOO, I’m trying to remember if I have my years right. But round figures, a couple years old, two and a half old, and it’s at a point now where it’s kicking in a lumpy fashion in the consumer kinds of companies. Lumpy fashion means that there are not many, many, many that buy enough that it all kind of averages out. It means one quarter somebody orders enough, that really feels good, and then the next quarter they don’t need any more and there is not a new guy that’s comes along, so it’s still pretty lumpy.

Now, as you know, historically, we’ve been about military, medical, industrial, that batch. Those guys have not really kicked in yet in order patterns with IGLOO, and I didn’t expect them to. You’ve heard me number of times the speeches about how long it takes those guys to come in.

So, I think, in fact, I’m sure you know that our overall plan is to not forsake our traditional customer base, military, industrial, medical, we are always going after. Those people love low power, we’re winning plenty of designs in the low power area with those guys, they haven’t kicked in yet, I wouldn’t expect them to kick in. In order to get our sales to come up sooner on new products, we’ve spent quite a bit of effort over last two, three years trying to get the consumer guys to come on board.

To some degree they have come on board, it’s still a little bit on the spotty side, good one quarter, bad the next. I look for continuing growth in that next six months or so where I think I have visibility, I think, I’m expecting good things to happen.

In fact for the whole year plan, I’m expecting good years to happen. If you listen to the sales guys, they are very optimistic about it. But I would stop way short of actually giving you anything like tangible guidance in that area. So, did I get the question, Richard? Do you have a follow-on.

Richard Shannon - Northland Security

You got the question and that’s my only one. Thanks, John.

John East

Okay. Thank you. Carrie, are there more questions.

Operator

At this time, there are no further questions.

John East

Wow, you took it easy on an old man on the brink of retirement, I don’t know if that’s good or bad. But I’m with 99.5% confident of looking forward to seeing you one quarter from today. I can’t imagine how we are going to hire another guy that fast. So one quarter from today I’ll look forward to talking to you. See you all then.

Maurice Carson

Thanks everybody.

Operator

This concludes today’s conference. You may now disconnect.

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