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Aeroflex Holding Corp. (NYSE:ARX)

JP Morgan Small/ Mid Cap Conference

December 10, 2013 09:45 AM ET

Executives

Andrew Kaminsky - SVP, Corporate Development and IR

Analysts

Mark Moskowitz - JPMorgan

Ashwin Kesireddy - JPMorgan

Mark Moskowitz - JPMorgan

Good morning everyone. My name is Mark Moskowitz, the IT hardware analyst here at JPMorgan. And welcome to Day 1 of the JPMorgan’s Small/ Mid-Cap Conference here in Chicago. We definitely thank the investors today for brave in the elements. And more importantly I’d like to thank Andrew Kaminsky from Aeroflex. He is going to join me today for about 30 minutes or so. He is going to start out with about a 10 minute presentation and then we will kick it off with somebody, fireside chat Q&A from me and then also the investor audience. Andrew?

Andrew Kaminsky

Thanks Mark. So as Mark said, I’m going to briefly go through an overview of the company, see who might not be familiar with us. Here is our Safe Harbor Disclaimer. Aeroflex, we’ve been around since 1937. The company was public for 30 plus years until 2007 and got purchased by a group of private equity investors, and then we went public again in 2010.

Our core business, we’re a hi-tech company. We have two main divisions. We have our micro-electronics business, where we have RadHard, HiRel microelectronic predominantly used in Space applications and RF and microwave products. On the other side, our test business, we have two main businesses within test. One is our wireless test business, where we make infrastructure solutions that we sell into the infrastructure providers, into the wireless industry. And we have an Aviation and Communications business where we make test sets that test all radios into the military, avionics and communications.

As I pointed out, our business is about a 50-50, a little heavier on AMS in the recent years, $361 million for fiscal year ends in June ’13 in the last year with gross margins at 50%. You can see the diversity of our business; it’s predominantly Space Avionics and Defense, some in the wireless industry and some in medical and other markets in industrial.

On the test side, we got 45% in the business, $286 million last year, and again that’s pretty much about almost half and half in Space Avionics and Defense and in that communication sector as well. The markets that we address, we have very large markets we address. The Space market is a very big market, over $6 billion a year that we are address in that overall market place, anywhere from we make components that go on the satellite themselves, processors, power management products, all different types of components that have radiation tolerance of line space.

On the Defense and Avionics market, we address that in multiple ways. We address that through our test business, where we are selling into the military to test radios, whether those are handheld radios that troops carry with them, whether that is that radios that a pilot wears if has to emergency evacuate from a Plane. So we address that part of the market from test. And on microelectronics side, we make a lot of components in electronics that go into missile defense systems; that go into radar systems and other types of programs into the U.S. government.

Commercial wireless, the trends in LTE, in the growth of the wireless industry is really where we are. We play in that market on the infrastructure side. We make products in ATS that allow the base station manufacturers who develop these base stations, so they can effectively build a network for a service provider.

And then one of the newer areas is, we moved into medical a few years ago. We took our technology in our AMS side and said where else can we apply our technology, where you need radiation tolerant and radiation hardened devices, and medical was one of the areas; whether it’s through CAT scans or other types of areas where you need radiation tolerant components.

Our customer list is the tier 1 customer list. We basically sell to everyone on the Space Avionics and Defense side. Commercial wireless same thing, a who’s sort of list from the network and equipment manufacturers around the world to carriers as well, to handset manufacturers. Our business is very diversified from a customer perspective. So across the board, no customers more than 7% in 2013 and that 7% would be on the defense side of the customer, one of the defense customers and its multiple programs, multiple locations; it’s not concentrated in any one particular area.

Just to drill down a little bit more on the two businesses. In AMS, we’re about 1600 employees, about almost 400 people in engineering. So it’s a pretty engineering focused kind of organization. The key thing that we have here is we are a fabulous model, which is very low CapEx and we’ve been able to pioneer, taking anyone else’s foundry and anyone else’s base materials and making them RadHard with our technology on them. And that is a very good business model. It’s very low CapEx, very high gross margins, because it’s a very unique product, very unique intellectual property. We’re able to leverage an intellectual property into other components, in other circuits that go around our processors and around our other parts to allow us to gain more share per satellite as the business grows.

Other parts of AMS, we have an RF and microwave business and we also have a motion-control business. The RF and microwave business is, again it makes attenuators, all kinds of different products that would go into the military, into the wireless base stations. And motion-control is a mechanically controlled business where we make actuators, motor drivers. One of the things we had last year, which was very prominent is we’re on the Mars Rover. Anything that moves on the Mars Rover was developed by Aeroflex.

On the test side, a little over 1,100 employees in test, about 300 in engineering. This business is predominantly looking in two locations. We have it based in the United Kingdom in STEVENAGE. That’s where our wireless test business is headquartered. And in Wichita, Kansas where our aviation and communications business is located.

In the aviation and communications business, it’s made up of as I said test sets for the military, private mobile radio test sets that go into police emergency and fire, in testing the radios that are in those vehicles. But the higher growth part of that business is really in our wireless test business, where we address the market for LTE. That business has been doing quite well as LTE has rolled out over the last few years.

Just some key financial highlights. In most of our situations we are a sole source or primary supplier to our customers. Probably 70%-80% of our business is sole source or primary supplier. We have long standing relationships with our customers and we’re able to get into that position because of our unique intellectual property and because of the value we bring to those customers.

So all of them high margin business, specially on AMS when you look at the high-rail, business very significant margins for those products, same on the test side when you don’t have significant number of competitors in the marketplace and you have unique intellectual property, we’re able to get good gross margins which allows us to generate good cash flow.

We’ve very efficient R&D in our AMS side. R&D is driven really by our customers. Our customers give us direction as to what is coming and where are there needs, where do they need our products to go and that’s how we sort of dictate where we move our R&D budget going forward. And again, because we are fabulous on AMS side, there is a very low CapEx requirement in the business which allows us to generate a lot of strong cash flow.

Last slide here, just to give some brief financial highlights over the last few years. Obviously we peaked in revenue in 2011 and we had some issues in 2012 with our wireless business, which we did a reorganization of and then we have been impacted obviously by government spending. But with that said, we’ve been able to -- we've made adjustments, been able to hold EBITDA. We’ve sort of hit the trough and we’ve flattened that out and we’ll be able to make cost cuts and do a lot of reorganization around the business and we’ve -- as you can see, we’ve significant pay down debt through this process. So even as our revenues have fallen, we’ve been able to pay off a dramatic amount of debt. Over the last five years where our debt is down over $200 million on a net debt basis.

And with that I’ll take questions first from Mark and go from there.

Question-And-Answer Session

Mark Moskowitz - JPMorgan

Thanks Andrew, for the overview. Why don’t we kick off with some more specific questions from me and then we’ll open up to the audience thereafter. Maybe you could talk a little more about your HiRel business. You made lot of investments there over the years. It’s been a nice contributor to both revenue and margin growth due to the contents that you’re selling. Recently you guys did bring on a new COO to drive the greater efficiencies there from an operations perspective. Can you talk about what the new COO’s kind of mandates are and milepost for the investor audience?

Andrew Kaminsky

We brought, we brought him on -- he came from Linear Technology. He’d been at Linear for over 20 years, a very seasoned executive. And Aeroflex had grown through acquisition over the last 22 years. But we never really took a lot of these businesses and fully integrate them together and leveraged the resources in both locations. So one of his main goals is to take our locations in Plainview, our locations in Colorado Springs, and how that was starting to work more together, leverage the R&D a little bit better, leverage the sales effort and more modernize the way we’re doing business.

When things are going well, it’s very easy to let people continue to do things in a way that maybe not be the most efficient. So we’re going to leverage sales and at the same time we’re going to try to streamline some of the costs that go across the organization. And he’s been with us for just under 90 days and we’ve already made some good operational changes that are being able to drive things going forward, and he’s been very well received by customers which is always a good thing.

Mark Moskowitz - JPMorgan

What’s the target as far as just margin and cash flow for that business? Are you trying to have that become more of a above corporate average driver now of cash flow?

Andrew Kaminsky

Yes, well we don’t breakout projections by individual business units. But in general the gross margins in that HiRel business are the highest in the company. They far away exceed the overall corporate average. And because that is the business, that is fabulous from that business as well. There is very low CapEx investment into that business. So it does drive significant EBTIDA for the company as a total. And going forward we are going to see that path return.

Mark Moskowitz - JPMorgan

Is there any milepost around driving HiRel as a total contributor to revenue in terms of -- maybe you can refresh us, what HiRel is as a percentage of revenue today; where you maybe see that tracking over the next three to four years; just given the above corporate average for margin?

Andrew Kaminsky

Well, today it’s probably, as a total of Aeroflex it’s about a third of the overall company, I would say is HiRel. And part of the issue in that business today is it is tied to the government to a certain extent. It’s in the space business. So a lot of the business in space is tied to U.S. government and right now there is obviously a little uncertainty in that business. We have been holding our own. We continue to release new products. We continue to increase content per launch all. As these things have been positive in allowing us to at least maintain our business. That business used to exhibit double digit growth and now it’s in the single digit growth range. So we have new things that are coming to market over the next few years, which we think will accelerate growth over the medium term and it probably will become a larger part of the overall business. But our wireless test business continues to grow very nicely as well. So when you add those two together, those are two higher growth areas and both over time continue to be a larger part of the company.

Mark Moskowitz - JPMorgan

One last question on HiRel. Can you just remind us in terms of the competitive dynamics who are your major competitors and have you seen these sort of incremental investments by those competitors?

Andrew Kaminsky

The major competitors as I said before - when you’re sole source in a lot of these products, once you’re on a platform and the product works and doesn’t fail, it’s very hard to lose that business, unless maybe there is a new generation of platform or you do have a failure which we haven’t had any. So our competitors there typically in some areas are Honeywell and BAE, who both have fabs, so in that situation, BAE and Honeywell are also two of our larger customers, from the perspective that, there could be small runs of products that they can’t cost effectively built on their own. So they will come to us to do it for them on the fabless basis.

Other companies out there that compete in that market you see is Microsemi and Hittite and again in a lot of the key components, once you designed in, your designed in. So you don’t see a lot of churn in the overall platforms, but you do see the ability to as a new platforms come out to add more content and capture more circuits and that’s what we’ve been doing.

Mark Moskowitz - JPMorgan

What is the content per platform today? Can you give us a sense in terms of dollar size and where it was maybe five years ago?

Andrew Kaminsky

We look at this from our internal perspective. We clearly we can’t sell -- there are certain places obviously we can’t sell through due to ITAR restrictions. Anything in space is restricted to ITAR. On the satellites that we can address our currently is probably in the $7 million range per platform. About five years ago, we were probably in that $2 million per platform and that’s part of the strategy, is to continue to leverage that and increase the content per platform and we’ve been doing that and we’ve been doing that with internally funded products and internally funded R&D.

Mark Moskowitz - JPMorgan

Where could that $7 million go, to go $8 million to $10 million?

Andrew Kaminsky

Our goal is to get that to 10 in the medium term and we thought it would be a little bit ahead of where we are today actually and we’ve had -- over the last few years, we’ve had qualification issues on products that have slowed down some of the new product releases. A lot of those things have been resolved and we’re hoping that as programs continue to evolve and there is opportunity to get on them, that’s part of the delay as well. As I said, if you are a universal [ph] source, someone else probably is as well. So you have to wait for the next generation to come out or their platforms to turnover.

Mark Moskowitz - JPMorgan

Okay that’s great. Either way moving from $2 million per platform to $7 million is pretty impressive already. So keep it up. Maybe we can shift gears more to the operational efficiencies at the corporate level beyond just AMS and HiRel. The last few years Aeroflex has talked about driving better operational efficiencies as well as real estate consolidation. Can you talk about where you are in terms of that trajectory and specifically around the ATS, to be curious what’s going in ATS right now?

Andrew Kaminsky

I mean most of these changes are in ATS. As I said, we look for acquisition and in the AMS side just to touch on that briefly, the engineering is really the key thing across the business. So we’ve never consolidated those businesses. It didn’t make sense just to move engineers and you lose the intellectual capital that you’ve purchased.

On the ATS side overtime, wireless business in the UK was one of the biggest disappointments in fiscal ’12 which created our financial issues and we wound up consolidating first of all everything in Europe and we took all of the extraneous offices we had in other countries like Germany and France and we consolidate everything back into UK. There was real estate savings, there was headcount savings and there is also efficiencies that we gained just from being at one location.

In the U.S. for ATS, we’ve been very focused on, this is where our avionics and communications business is headquartered. It’s headquartered in Wichita, Kansas. And we are tied to the government for that business for that business to a certain extent. There is a lot of business that goes for the government, but there is a lot on the private mobile radio side and in that business we had an office in Cupertino, California. And in Cupertino, we had a broadband product line, just didn’t have enough scale to maintain that business out in that location.

We consolidated manufacturing into Wichita, Utah. We got rid of a large facility out there. We have a very small design center. We kept some of the engineers in a very small area that cost dramatically less than it was before. That action was completed over this past summer and now we’re working on consolidating our avionics business which in Lenexa, Kansas. And we’re doing the same exact strategy that we did there. We are moving manufacturing into Wichita, will be one unified manufacturing hub domestically for the avionics communications platforms.

We are leaving a small design center and engineering center just in Lenexa but existing the larger real estate and moving everything to one area. So we’ve really tried to eliminate facilities where we can. Unfortunately that means losing people as well, but we’ve made these tough choices and we’ve been really garner a lot of leverage on that Wichita facility and grow from there. And this positions us well not only in soft times like we’re experiencing now but as business starts to turn, we can leverage those facilities and garner a lot of stronger bottom line results because we don’t really need to add resources as we move forward.

Mark Moskowitz - JPMorgan

Earlier this year, Aeroflex led us to the business ATES, the test equipment services business. What were kind of the main factors there and what would have been the financial implications. And then how should investors think about the potential for incremental divestitures going forward.

Andrew Kaminsky

So ATES was Aeroflex Test Equipment Solutions and it was basically, we were servicing, it was a legacy business that came with an acquisition we had done about 10 years to 15 years ago. And this business basically was a third party service business. We would pick up service or calibrate and repair other peoples test equipment. It was domiciled in the UK and Steven Engineering was in an adjacent building to our main facility, separate management, separate everything for that business. No technology, very low margin, really can't expand it because you need physical infrastructure to actually do the repair work.

We had an inbound interest in that business that was quite compelling. We had had other interest in the past and we basically went out and we found out what it was worth. We were able to structure that transaction in a way where it was tax free to the company. We kept the money overseas through a unique structure we had in the United Kingdom and we sold that business for $19 million. It was about $17 million of revenue on an annual basis and just under $3 million of EBITDA.

It didn't really grow much, didn't really shrink much, probably about the same all the time. And it was really non-core, with no intellectual property, no growth dynamics to it, very low margins. It wasn't really a core asset and we were very opportunistic in the sense with the tax structuring that we could sell this business very efficiently.

And we continue to look at all those kinds of opportunities around the business as our two core businesses that we're looking to, that we grow is that HiRel business in AMS and the wireless business in ATES are really -- our longer term growth dynamics have much higher growth profiles than the rest of the business. They have higher margins, they generate the most EBITDA.

There is a lot of money out there looking at transactions. We have a lot of small businesses around our company that have been around for a long time. They are all good businesses but if they are worth more to someone else than they are to us, we're going to be opportunistic and do that. We still are highly levered and if we can use the proceeds more effectively to pay down debt and focus more on the growth dynamics, that's what’s we're going to do. So we continually look at those opportunities.

Mark Moskowitz - JPMorgan

In terms of M&A, are there any sort of key metrics that investors should be aware of in terms of how you evaluate the assets? Is it really based on revenue contribution? Is it more for a market adjacency or a new market entry?

Andrew Kaminsky

Historically one of the main dynamics behind M&A for us has always been supplementing intellectual property. We always look at that as a way to maybe jump ahead without actually having to spend the money. So it’s man years as well as dollars. But if we're looking at M&A these days, we do look really again in those two main areas. It would be in our ATES business and wireless and how can we expand our market opportunity there, how can we expand our margins, how can we broaden our footprint and advance that business?

And then on the HiRel side we would look at things at would be in that radiation tolerant market, things that could be contributors to the HiRel side. And because of the leverage that we still have from the private equity deal, we're very particular when we look at M&A. We have balance the recourses we have. We’ve been very good at deleveraging over the last few years. It is -- the main goal of the company is to continue to deleverage. But we need to be able to continue to grow the business at the same time. So it is a big balancing act when we do see acquisitions opportunities.

Mark Moskowitz - JPMorgan

Speaking of leverage, what is the turn target per year in terms of the leverage ratio? Are you trying to take it off quarter turn, half turn, how should we think about that?

Andrew Kaminsky

We don't look it necessarily on the term. We look at the business model for the year. We look at what free cash flow do we have available and what's the availability to pay down debt. We have been targeting about $60 million a year in the past. This year it probably won't be as great. As we mentioned on our last conference call, we're now a cash tax payer. We haven't been for the last six years. We had a lot of NOLs that we had from the interest expense, from the acquisition. We had a lot of R&D tax credits that we were able to carry forward. We had depreciation of certain tax deductible amortization from the acquisition as well.

We have utilized all of those things and unfortunately we now have become a cash tax payer to a certain extent. So that is a use of cash that we didn't have before. So when it comes to deleveraging, you have to factor that in. But the goal would be, the long term goal is to get us to a 2:1 kind of ratio. And that's the target when we went public three years ago and that's still our target and we have been very aggressive in trying to achieve that.

Mark Moskowitz - JPMorgan

Speaking of M&A activity, or just broader competitive dynamics in test and measurement, one question we often get from investors recently is just what's going to happen when Agilent spins off the test and measurement business next year? Will they be able to be more focused, maybe even a little more nimble in terms of how they interact in the marketplace and does that present competitive risk for you and as well as your other peers in test and measurement?

Andrew Kaminsky

I don't think from an operational perspective it changes much. I think they run a very good business today, even on the communication side as well. We don't really go head to head with them as much as we used to. We went head to head to them more on the PXI side of the marketplace. And we have to deemphasize that as part of our business as we -- and that has become much more of a competitive market. There is about four or five players in that part of the market these days and price becomes much more important than anything else. That's not where Aeroflex is really successful as in price completion with larger companies.

So, when we’ve more to focus on the infrastructure market where we don’t see Agilent, Agilent’s not really a competitor on that side of the marketplace. But I think when they come out and they have the ability to run their own company and maybe they’re more aggressive on the M&A front that could change the dynamic a little bit from their end. But from an operational perspective, I don’t think anything is going to change too dramatically for any of the competitors in the market.

Mark Moskowitz - JPMorgan

And what are the barriers to entry, if company like Agilent or even National Instruments wanted to get into infrastructure versus manufacturing test and how big of a chasm must they cross and the reason I asked is because we’re seeing this now in wireless manufacturing test where it used to be Agilent Tektronix/Danaher [indiscernible] but now you have Teradyne with Live Point and National Instruments entering the market and really just turning the economics upside down. Could they do that in infrastructure as well or the competitor barrier is much higher?

Andrew Kaminsky

The competitive barrier is lot higher and another bigger dynamic is market size. On the manufacturing side as I just mentioned, with all those people getting into the market, you’re looking at a market that could be $2 billion on an annual basis. The infrastructure side is maybe $300 million a year market size.

So, you have to weigh your investments. So to invest dramatic amount of money, and we are years ahead of many of our competitors in that area, to make any of investment to catch us or even surplus us in that marketplace for what’s the return for them. And I think that’s more of the competitive dynamic here is the investment and we’re definitely years ahead. We do have the market leading product. If you go to any of the -- on the infrastructures, whether its Nokia Siemens or Ericson or Alcatel Lucent or even now in China, it’s going to be very hard for them to catch us from that perspective, if you are not in that market today.

Mark Moskowitz - JPMorgan

Why don’t we shift gears to government. Obliviously in years past it was probably nice to be overexposed to the government relative to some of your peers, just given the way the government kind of subsidizes their business and provides for good margin and revenue stability for their suppliers but right now obviously with the government budget impasse, I know one has its views on the current government administration policies, but how should we think about Aeroflex navigating them to 12 months, are there certain parts of the business that are actually immune to further or incremental government pressures from a budget perspective?

Andrew Kaminsky

I mean the word immune is always a challenging word. Any given year it could be up to a third of our businesses. It’s somewhat tied to the government, whether that’s direct sale or through prime contractors for the government. Our HiRel business, when you look at the time period to launch satellites and you look at the value that we provide on the communication side, I wouldn’t say those are immune to the government, because it’s changed the business dynamics. The certainty of spend is not there, the advance ordering. They are very concerned about what happens long term. So a lot of the decisions are made on shorter time periods than they were before. But the necessity of the satellites and the necessity of communications is not going away anytime soon unless there is world peace that doesn’t change, I need to have eyes and ears looking at things all the time.

So we do feel that over time it is tougher. It is tougher to do business with the government. It’s tougher when you do business when anything tied to them but you’re going to continue to move forward. The things that we’ve seen more on the where we can be more impactful is on the outcome side, because on the outcome side, on some of these test things where we had the Grimits [ph] contract, where we sold direct to the Marine Corps.

There are lot of programs right now with the government that have been installed or have been postponed due to the government issue that would not -- we're holding our own. Our private mobile radio business is doing well and we have the ability to grow that business but to really grow outcome business, we need some of those other programs to come back online. And some of these opportunities are quite large and quite large for us on a relative scale as well.

So, we’re not immune and do feel that business environment pressure is very different than it was before and that’s really what you struggle with, is there is the lack of clarity on a day-to-day basis versus what the longer team view is, because longer term, they have to replace some of the stuff that we do. It’s just a matter of when and how much money they’re going to have to do it.

Mark Moskowitz - JPMorgan

More of a philosophical question, especially for the investors in the room who may not be as familiar with your story. Test and measurement obviously has its challenges with the government issues right now but tech in general is definitely slowing due to maturations, as well as just better efficiencies. We have some of the innovators [indiscernible] in tech.

So I think investors are prepared protect to exhibit kind of GDP like growth going forward versus what used to be two times or even three times GDP growth. For the investors in the audience and on the webcast, what is Aeroflex’s approach now? Are you going to be target anymore top line growth or more bottom line growth or even cash flow growth? What’s kind of the priority now?

Andrew Kaminsky

The top line growth is always a priority and in some of our businesses I would agree with you as to where technology is going and when you look at our RFMW business, it’s similar to that. It’s going to be very hard to grow that business higher single digits in any given year, just because of the end markets that they serve and a need for their products. But when you look at our HiRel business and you look at the new technology and you look at the demand for some of these areas that can still exhibit double digit growth. Same in our UK wireless test business. They can still exhibit double digit growth. So, revenue is always a very big focus but as we’ve had some struggles over the last few years, we have definitely turned to focus on the operations as well and take out cost where we can, be positioned at and when we do have growth back, even if it's GDP like growth, we can still leverage more cash flow, more EBITDA out of that GDP growth and those are the changes that we've been making during this trough in the market cycle. So I don't like to prioritize one over the other. Both are priorities, and especially when you have a debt burden, clearly generating cash is a very important thing.

Mark Moskowitz - JPMorgan

Why don't we stop here and let the investor audience ask questions. I do have a favor, just for those on the web if you could walk up to the mike to ask your question, that'd be really appreciated.

Ashwin Kesireddy - JPMorgan

My name is Ashwin Kesireddy from JPMorgan. I have a question on your wireless business. I think you short it down $4.9 billion for the wireless admin. I assume that's in the testing business primarily?

Andrew Kaminsky

I'm sorry the 4.?

Ashwin Kesireddy - JPMorgan

4.9 billion in market opportunity.

Andrew Kaminsky

Well, when we issued a wireless market opportunity, it's what market are we addressing, it's not necessarily just wireless tests. On the ANS side also our RFMW business does address that market as well. So we look at the overall dynamics of that market size. But as I said on the infrastructure side of the marketplace, we look at that market as probably a $300 million plus a year annual market. On the handset test side, you're probably in the $1.5 billion to $2 billion market. So on HES from wireless, you can look at that as $1.5 billion to $2 billion overall addressable market.

And then on AMS front the components that we're selling in wireless, they're more on the base station side. So we look at them more -- it's very hard to define since we have a variety of different businesses to say this is the market overall. So when we took it on market size, we look at the overall wireless market of stuff that we could address. If we were to sell every component out there, which obviously we're not going to, that's where we would be going.

Ashwin Kesireddy - JPMorgan

Okay, then I got one more question on competition. How much do you see JDSU on the field?

Andrew Kaminsky

Well JDSU on the contest side is not a huge competitor of ours at this point. They focus of other parts of network tests that we’re just not in. The main part of their business is not direct head on with us.

Unidentified Analyst

Can you weigh in Andrew, geographically in terms of how investors should think about some of the growth drivers going forward? If we do start to see stabilization out there, what's kind of your view on China, in emerging markets versus the developed regions?

Andrew Kaminsky

Well on the wireless test business in China I mean LTE is really, there's a lot going on in that market right now and we're looking at 2014 and '15 to be very good strong years in wireless in China. The other markets we address, we don't look at it necessarily that way. We can't sell most of our HiRel products to China. They're restricted by the government. So that market is predominantly U.S. based and a little bit in Europe, and that's really our main exposure in China, is the wireless business and I think there is a lot more growth there than anywhere else at this point.

Unidentified Analyst

And LTE clearly has become very commonplace in the U.S. You're starting to hear more about it in Europe in terms of the rollout of the wireless networks. When do we see the second cycle of investment where the U.S. and others have to kind of expand or further build out their networks? Are we still a few years away from that?

Andrew Kaminsky

Yes, that's hard to say, we're starting to ship LTE advanced technology now. So when we sell stuff, we're selling it to the R&D facility. So we are a little bit ahead of the overall infrastructure spend in cycle. So we are at the forefront of where the carriers will be going, but that time horizon, I think you're right, when you look at the networks here in the states, they're relatively getting to the point of saturation. But we, our products though continue to evolve as more devices come on to the marketplace, as quality of service becomes more of an issue. So we do address other aspects of the market instead of just the buildup. But we do see that there will be -- there's always insatiable demand for bandwidth, with all the applications that are coming out now. So the next generation will really be determined by when the carriers feel they need to make that decision. But when they do need to make that decision, we’re positioned to be able to capitalize on the next cycle as well.

Unidentified Analyst

I'd like to ask a question about mix. It seems like a lot of investors today are looking for models that can maybe introduce more stability, particularly around services. Do you feel that you can talk about Aeroflex in terms of your services component growing over time to maybe build out a little more stability? Is it possible within test and measurement? We don’t really hear about it too much but just kind of curious if there is that angle.

Andrew Kaminsky

Well as we just talked about earlier, we just sold the third party services business. It's not -- the basic service piece that we keep today is we service our own equipment that comes in. It's not really, there's not much. We're not looking to grow that. That we provide as something that is a necessity to run the business. When you sell hardware to customers and there is a failure or a problem with it, they come back and they want it serviced. But we do not emphasize that as something. Really that's just not the business model that we’re in.

Mark Moskowitz - JPMorgan

Do we have any more questions from the audience? All right, well we’re butting up on 35 minutes. So in the interests of time, Andrew Kaminsky of Aeroflex, we really appreciate you taking time to meet with us today. Thank you.

Andrew Kaminsky

Thanks Mark.

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Source: Aeroflex Holding Corp's Management Presents at JP Morgan Small/ Mid Cap Conference (Transcript)
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