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Atmel (NASDAQ:ATML)

Q4 2013 Earnings Call

February 05, 2014 5:00 pm ET

Executives

Peter Schuman - Director of Investor Relations

Stephen A. Skaggs - Chief Financial Officer and Senior Vice President

Steven A. Laub - Chief Executive Officer, President and Executive Director

Analysts

Craig Hettenbach - Morgan Stanley, Research Division

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Blayne Curtis - Barclays Capital, Research Division

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

John Vinh - Pacific Crest Securities, Inc., Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

Christopher Rolland - FBR Capital Markets & Co., Research Division

Liwen Zhang - Pacific Crest Securities, Inc., Research Division

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Operator

Good afternoon, my name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Third (sic) [Fourth] Quarter 2013 Earnings Conference Call. [Operator Instructions] Mr. Peter Schuman, Senior Director of Investor Relations, you may begin your conference.

Peter Schuman

Thank you, Sarah. Good afternoon, and thank you for joining us for Atmel's Fourth Quarter 2013 Earnings Conference Call. A copy of the press release issued today is available on our Investor Relations website. A replay of this call will be available after 5:00 p.m. Pacific today and will be archived for 48 hours. The webcast will be archived on the company's website for 1 year. Access information is provided in today's press release.

Joining us for the call today are: Steve Laub, Atmel's President and CEO; and Steve Skaggs, Senior Vice President and CFO. Steve Skaggs will begin the call with a review of our fourth quarter financial results, and Steve Laub will then provide additional information on the business. At the conclusion of Steve Laub's remarks, Steve Skaggs will discuss our financial guidance for the first quarter of 2014 and then open the call for questions.

During the course of this conference call, we may make forward-looking statements about Atmel's business outlook, including statements regarding our expectations for market growth, revenue, target gross and operating margins, product introductions and cost savings for 2014 and beyond. Our forward-looking statements and all other statements that are not historical facts reflect our expectations and beliefs as of today, and therefore are subject to risks and uncertainties as described in the Safe Harbor discussion found in today's press release.

During the call, we will also discuss non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release.

I would now like to turn the call over to Steve Skaggs for discussion of our fourth quarter financial results. Steve?

Stephen A. Skaggs

Thanks, Peter. Fourth quarter revenue of $353 million decreased $3 million or 1% from the prior quarter and represented better than typical seasonal performance despite being in the lower half of our guidance range.

During the quarter, we experienced high single digit sequential revenue growth within our RF and Automotive segment, offset by small sequential declines in our other business segments. For the full year 2013, total revenue was $1.39 billion, essentially flat with 2012 after excluding the impact of the divestiture of our Serial Flash business.

During 2013, our core microcontroller business performed exceptionally well, with revenue growing for the full year in the upper teens on a percentage basis, reflecting both new product introductions and market share gains.

Fourth quarter 2013 non-GAAP gross margin was 43.7% within our guidance range and 60 basis points higher on a sequential basis. This increase reflects continued progress on our previously articulated gross margin improvement plan. We are pleased to have increased gross margin for the third consecutive quarter while also driving significant reductions in our inventory balances. We expect further continued gross margin expansion next quarter and throughout 2014 as we continue to execute on our margin improvement plan.

On a GAAP basis, fourth quarter gross margin was 42.7%, up 240 basis points on a sequential basis. At the end of the last quarter, we experienced an incident in the nitrogen plant that services our Colorado Springs wafer fab that led to equipment damage and an unplanned shutdown, resulting in a $2.2 million loss. The fab was offline for almost 4 weeks, and although the facility is now back up and running, we believe it is appropriate to exclude the economic impact of the damage and shutdown from our non-GAAP results as it was a onetime event outside the normal course of operation.

Moving to operating expenses. During the fourth quarter, we reported our lowest non-GAAP operating expense in the year as we continued to realize savings from our previous restructuring and cost-reduction actions. Fourth quarter non-GAAP operating expenses were $110.8 million, down approximately $5 million on a sequential basis.

Stock compensation for Q4 was approximately $15 million, allocated around $1 million to cost of sales, $5 million to R&D and $9 million to SG&A. For the full year 2013, stock compensation decreased to $46 million from the $72 million in the prior year, primarily due to lower amounts earned under our long-term performance-based stock compensation program.

Non-GAAP operating income for the fourth quarter was -- 2013 was $43.6 million or 12.4% of revenue and excludes the previously mentioned loss from manufacturing facility damage and shutdown. Other excluded items includes stock-based compensation, restructuring credits and certain other charges described in further detail on our earnings release.

Our fourth quarter 2013 non-GAAP operating income compares favorably to third quarter 2013 non-GAAP operating income of $37.9 million or 10.6% of revenue into the non-GAAP operating income of $33.3 million or 9.7% reported in the same period last year. Fourth quarter 2013 non-GAAP income tax provision was approximately $0.9 million, down compared to the prior quarter's $1.6 million. As a reminder, our non-GAAP income tax provision approximates our cash taxes incurred.

GAAP income tax of $23.2 million in the fourth quarter 2013 was negatively impacted by significant reserves primarily due to a recently completed French audit related to the sale of our fab in 2010.

On a non-GAAP basis, for the fourth quarter 2013, we had net income of $43.6 million or $0.10 per diluted share. This result compares favorably with third quarter 2013 non-GAAP net income of $37.7 million or $0.09 per diluted share and non-GAAP net income of $29.4 million or $0.07 in the fourth quarter of 2012. GAAP net income totaled $4.5 million or $0.01 per diluted share for the fourth quarter 2013. This compares to $5.4 million or $0.01 per diluted share for the third quarter of 2013 and a loss of $12.3 million or $0.03 per diluted share for the fourth quarter of 2012.

Turning to the balance sheet. We continued to improve the strength of our balance sheet while also generating considerable cash. Accounts receivable totaled $207 million at the end of the fourth quarter, an increase of approximately $9 million on a sequential basis. Day sales outstanding were approximately 53 days, an increase of 3 days from the prior quarter and well within our normal range.

Inventory decreased by over $12 million to $275 million. This represents our lowest absolute inventory level since the third quarter of 2010. Days of inventory increased slightly by 1 day from the third quarter, and now stand at 124 days and remain within our target model of 120 to 130 days.

We had another quarter of strong operating cash flow, driven by improvements in our operating margin and the further reduction of inventory. Cash flow from operations totaled approximately $49 million in the fourth quarter. We are pleased to report that operating cash flow for the second half of calendar year 2013 exceeded $130 million.

Looking forward, we expect to generate -- to continue to generate significant cash from operations. Capital expenditures are approximately $9 million in the fourth quarter, down from $14.5 million in the third quarter. For the full year 2013 CapEx was $37 million, consistent with the $38 million in the prior year. Depreciation and amortization in the fourth quarter 2013 was approximately $18 million, flat compared to the third quarter of 2013 and down slightly from the $20 million in the fourth quarter a year ago.

Combined cash balances, including cash equivalents and short term investments, totaled $279 million for the fourth quarter, representing a sequential increase of approximately $8 million. This increase was after the return of $24 million to shareholders through stock repurchases.

During the fourth quarter, we repurchased 3.3 million shares of common stock in the open market at an average price of $7.36 per share. For the full year 2013, we repurchased 12.2 million shares, at an average price of $7.20 per share.

Since the inception of our buyback program in the second half of 2010, we have repurchased approximately $651 million of our stock. Finally, we added further flexibility to our balance sheet during the fourth quarter by closing an oversubscribed $300 million senior secured revolving credit facility. This revolver provides us additional liquidity on very attractive fundamental terms.

Now let me turn the call over to Steve Laub for a commentary on our business. Steve?

Steven A. Laub

Thank you, Steve. 2013 was a year of substantial progress as we improved our non-GAAP gross operating margins and earnings per share each quarter on a sequential basis, while we're able to reduce operating expenses significantly from the beginning of the year.

From a competitive standpoint, we increased market share in our core microcontroller business, achieved strong momentum in our new products, implemented structural improvements in our operations and made key executive additions to our organization. These changes have substantially improved our competitive position and set the foundation for a successful 2014.

Revenue for our microcontroller business increased during 2013, but the core microcontroller business generated robust growth in the upper teens on a percentage basis, which resulted in substantial gains in market share. In addition, we introduced a record number of new 32-bit core microcontroller products and design activity during the past year for these products was at record levels.

While the touch business had a challenging year, our touch product portfolio is now revitalized and we have the start of a renewed growth cycle for this business. Our new T series of touchscreen controllers raised the bar in product performance and positions Atmel to expand its leadership position in large screen applications and to regain significant market share in smartphones and small-to-midsized tablets.

In automotive applications, maXTouch is a preferred solution with wins in excess of 100 car models, with product introductions which began during the second half of 2013 and will continue into the foreseeable future. We are pleased with the high level of design activity and are experiencing renewed momentum for the touch business.

Also during 2013, our XSense metal mesh sensors commenced volume production to multiple customers, including Tier 1 OEMs, HP and ASUS. Moving to a discussion of Q4 results, we continue to deliver improved operating performance as we had better than seasonal revenue and expanded our non-GAAP gross and operating margins. Most business segments' revenue declined slightly with the exception of our RF and Automotive business, which continued to exhibit healthy growth.

From an end-market perspective, industrial, our largest end-market, grew sequentially for the fourth consecutive quarter and increased double digits year-over-year, while consumer, our second largest market, was down slightly sequentially after a very strong third quarter, but improved significantly year-over-year.

Automotive recorded a fourth consecutive quarter of steady growth and communications and networking was slightly softer after a strong third quarter. As anticipated, revenue from the mobile market was down sequentially, due to typical year of inventory rebalancing at some of our smartphone customers while sales into tablets grew for a second consecutive quarter.

Looking at the results by business segment. Our microcontroller business generated revenue of $224 million, down 2% sequentially and year-over-year. By product family, during the fourth quarter, our 32-bit microcontrollers increased 3% sequentially and were down 12% year-over-year. Our 8-bit microcontrollers were down 4% sequentially and up 3% year-over-year.

For the full year 2013, our 32-bit microcontrollers grew an impressive 19% from the prior year. If you focus just on the core microcontroller business, we are very pleased with the outstanding performance of this business in 2013. It grew in the upper teens on a percentage basis and gained substantial market share.

For the full year 2013, our core 32-bit microcontrollers grew over 40%, while our core 8-bit microcontrollers grew in the mid-single digits percentage. For new microcontroller products, we continued to accelerate the pace of 32-bit product introductions during 2013, as we delivered over 125 new 32-bit core microcontroller products, a record for the company. The products introduced include ARM-based Cortex-M0+, M3, M4 and A5 devices, along with new 32-bit AVR products.

In the fourth quarter, we expanded our portfolio of ARM Cortex-A5 microprocessors with the addition of our new set SAMA5D3 devices, which deliver smaller packaging, extended temperature support and enhanced peripherals, while maintaining high performance and low power operation. These devices support customers in industrial applications such as home and building automation, medical electronics and consumer applications, including wearables such as smart watches. We also continued to expand our line of sensor hub solutions.

At the Consumer Electronics Show in January, we announced the new family of ARM Cortex-M4-based microcontrollers that integrate high-performance and ultra-low power in a small form factor. These devices are ideal for battery-powered consumer applications, including smartphones, tablets and Ultrabooks, as well as wearables, health care gateways, bridges and audio devices.

Furthermore, Atmel recently expanded its sensor partner program with the addition of Hillcrest Labs to enable turn-key sensor hub solutions. With more than 30 billion devices projected to be connected to the Internet by 2020, drove an increased need for sensor hub solutions for smart connected devices beyond those needed for smartphones.

Turning to connectivity and the Internet of Things. Atmel has one of the industry's most extensive portfolios of technologies for IoT applications, including ultra-low power microcontrollers, wireless connectivity, security IP and expertise. Atmel is also uniquely positioned to deliver these technologies through easy-to-use software development tools in a worldwide application service and support network to our broad customer base.

Recently, Turtle Beach selected Atmel's ultra-low power Wi-Fi SoC for their Ear Force 300 and Ear Force i60 gaming headsets. Atmel's new Wi-Fi SoC is the leading solution to overcome the battery life, cost and compatibility issues that have limited the broad adoption of Wi-Fi for human interface applications. Building on our market-leading ZigBee solutions, highlighted by our flagship design in the Philips Hue lighting system, last quarter Atmel introduced its second generation ZigBit wireless modules. This new solution is based on the latest versions of Atmel's wireless transceivers and wireless microcontrollers, arguably the most advanced features and market-leading lowest power consumption.

In 2014, we'll be launching several ultra-low power low-cost and easy-to-use turn-key IoT solutions to simplify our customers' product development and enhance their time to market.

Turning the discussion to our touch products. We are excited that during the fourth quarter, we made available to our customers our entire maXTouch T Series product line, which encompasses support for touch screens from 1.5 inch to 23 inches. More recently, at the Consumer Electronics Show in January, we announced Atmel's second generation active stylus, which is now shipping in volume quantities. MaXStylus is now Windows 8.1 certified and delivers a near perfect pen-to-paper writing experience on a touchscreen with superior responsiveness.

MaXStylus supports touchscreens up to 15.6 inches using Atmel's industry-leading maXTouch controllers without additional hardware components or design changes. This integrated solution limits the need for an additional sensor layer, lowering overall system cost for OEMs by approximately $10 to $30, without compromising performance.

Stylus is the next dimension of interaction with smart devices as consumers are seeking a more intuitive experience on their smartphones, tablets, notebooks and Ultrabooks. maXTouch is also an important differentiator, opening doors for maXTouch into the business and the educational markets.

In the market for large-screen Windows devices, Atmel is currently Win 8 and 8.1 certified in over 135 different tablets, notebooks and Ultrabooks, and is actively engaged in well over 225 different Windows 8 and Windows 8.1 programs. We have won multiple designs and are expanding our presence in the small-to-midsized tablet market, as a result of the superior performance of our new T series products. We continue to win numerous Windows 8.1 designs, including being selected by ASUS for the Vivo Tab Note 8, Toshiba for the Encore WT8, Nokia's Lumia 2520, the HP Omni 10 5600us tablet and the HP EliteBook Revolve 810 G2n notebook that converts into a tablet. Other tablets include Intel's education 10-inch tablet, the Lenovo ThinkPad 8 and LG Electronics' Tab-Book H160 and Z160 tablets.

As the largest touch supplier for large-screen systems, including both Android and Windows 8 and 8.1 systems, we remain well positioned to benefit from the continued growth of tablet, Ultrabooks and convertible systems as users convert from traditional PC-based systems and accelerate their transition to touch-based technology.

In the market for smartphones, our design pipeline for smartphone products has substantially improved. Our T series products are gaining momentum in the marketplace from Tier 1 OEMs from mid- to high-end smartphones as they had compelling performance advantages, including support for our second generation maXStylus, hover and superior multi-finger performance when wearing gloves. These devices also provide improved touch performance for a single-layer sensor and on-cell designs and we begin -- and we expect increasing revenue and to regain market share in smartphones and small-to-midsized tablets.

In additional markets for touch, we are rapidly expanding touch beyond smartphones and tablets into our traditional industrial consumer and automotive markets. We are pleased that during Q4, our revenue in markets outside of smartphones, tablets and computing, hit another all-time high as a percentage of our overall touch revenue.

In the consumer market, maXTouch is now powering the touch with the new Sony PlayStation 4 DUALSHOCK 4 wireless game controllers game pad, which launched during the fourth quarter. A new market for Atmel is touch pads for both Android and Windows 8 systems and we won several new touch pad designs for Chromebooks and Ultrabooks.

In the automotive marketplace, rapid adoption of maXTouch solutions continues. We more than quadrupled our maXTouch revenue in the automotive market during 2013 compared to the previous year. We have European, North American and Asian car manufacturers using maXTouch on the road today.

Within the automotive marketplace, at CES we showcased a futuristic curve touch-centric automotive center console concept featuring Atmel's XSense flexible touch sensor technology. Our maXTouch controller for 2 10-inch touchscreens and our AVR microcontrollers running our touch libraries which replace mechanical buttons and sliders and adding proximity sensing. We named this new trendsetting concept AvantCar. This fully functional demonstration integrates several of Atmel's market-leading technologies that offer drivers an advanced contemporary experience in the automobile.

In industrial markets for touch, Siemens Industry Automation selected maXTouch to power a 19-inch touchscreen for Siemens' Simatic industrial flat panels. MaXTouch meets all the stringent requirements for industrial environments, delivering seamless touch performance, even when subjected to the high temperatures, vibrations, impact and the electromagnetic interference. MaXTouch technology supports users with gloves, water resistance and multi-finger touch even in adverse industrial automation environments.

Our work with Siemens and other traditional Atmel customers highlights just how ubiquitous touch has become and the market's need for intuitive touch interfaces with superior performance, whether for consumer, industrial or automotive applications.

Turning our discussion to XSense. During the fourth quarter, our XSense product was prominently featured in Hewlett Packard's Omni 10 5600 Windows 8 tablet. The Omni is also powered by our maXTouch touch controller, as well as our AVR microcontroller for the home key button underneath the Microsoft Windows logo. This quarter, HP released a second system featuring XSense, the EliteBook Revolve 810 G2. It's an ultra-thin business notebook that rotates to become a tablet in an instant.

In addition to support for Android systems, our groundbreaking XSense flexible metal mesh touch sensor achieved Windows 8 certification at a system level during the fourth quarter. The Microsoft certification ensures the innovative touch material, addresses the markets for Windows 8 smartphones, tablets, Ultrabooks and other PC and consumer devices. Our XSense sensors will enable a variety of touch-enabled products that are lighter, thinner and faster with superior touch performance on any Windows 8 operating system.

As a leader in metal mesh technology, with strong IP and manufacturing expertise, Atmel stands to significantly benefit from the adoption of metal mesh technology in the overall growth of the touch sensor market. While the XSense revenue ramp has been slower than anticipated, customer design activity is steadily increasing and we anticipate multiple new designs, including with additional Tier 1 customers who will roll out throughout the year. We expect a substantial number of these new designs will take advantage of the unique features of our technology, including narrow bezels, wider thinner stack-ups, curved surfaces and faster touch response.

Looking at the RF and Automotive business segment, revenue of $49 million in the fourth quarter of 2013 was up 9% sequentially and up 24%, as compared to the fourth quarter of 2012. We had strong sales across most product lines with significant strength in our high-voltage products during the fourth quarter. We also have last-time buys on certain products, which improves -- which provided a onetime benefit.

Moving to our Non-Volatile Memory business segment. Total revenue was $29 million in the fourth quarter, down 7% sequentially and down 9% as compared to the fourth quarter of last year. Adjusted for the Serial Flash divestiture, Non-Volatile Memory was down 3% year-over-year.

We do see the PC market stabilizing, which should benefit future memory demand as we go forward. Turning to the ASIC business segment, fourth quarter revenue of $51 million was down 3% sequentially and increased 15% as compared to the fourth quarter of 2012. Our Aerospace business had strong performance, offset by softness in our Advanced Products Group.

Looking at the fourth quarter revenue by geography. Our largest ship to location was Asia, representing 58% of revenue, EMEA was 26% of revenue, while the Americas were 16% of revenue. Asia decreased sequentially during the fourth quarter, while EMEA strengthened and the Americas remained about the same after a very strong third quarter.

In regard to our management team, we are pleased to announce that during November, we appointed Stan Swearingen to the position of Senior Vice President and Chief Technology Officer. As Stan's name sounds familiar, part of his joining Atmel, Stan served as CTO and Senior Vice President of Advanced Development for Synaptics. Stan has a strong background in the semiconductor industry, including positions in corporate strategy, mergers and acquisitions, corporate development and general management.

In summary, we entered the New Year with a substantially improved market and competitive position, product portfolio, operating model and organizational strength. The changes we have made during the past year have set the foundation for a successful 2014.

Through our core microcontroller business, we are well positioned for continued market share gains as we accelerated our new product development with over 125 new 32-bit products released during the past year, which has led to record 32-bit design activity.

The Internet of Things is an enormous growth opportunity for the industry and for Atmel. We are uniquely positioned to enjoy substantial success as we provide industry-leading ultra-low power microcontroller, connectivity solutions, software stacks and development tools, the fundamental building blocks necessary to win in this attractive market.

We are regaining momentum with our next-generation maXTouch T Series for smartphones and midsized tablets, which should allow us to recapture market share during 2014. We expect to benefit from our leadership position in large screen applications, due to the increasing adoption of new Windows 8.1 devices and the continued growth of Android-based tablets. Our leading position in automotive touch will translate into greater revenue during 2014. And we continue to see increasing penetration of touch into new markets such as at consumer and industrial.

Our XSense product is in volume production and the touch sensor market continues to represent a substantial opportunity for Atmel. Although the business has ramped slower than anticipated, we expect significant growth for this business in 2014 and beyond.

From an operational standpoint, we are committed to achieving our long-term operating model targets and expect major margin expansion during 2014. The operational initiatives undertaken during 2013 and ongoing into 2014, combined with the conclusion of the take-or-pay supply agreements, position us well for enhanced operating performance.

During 2013, we returned approximately $88 million of capital back to our shareholders in the form of share repurchases. We expect to continue to return capital back to our shareholders in 2014 as well.

Now let me turn the call back to Steve Skaggs, for our first quarter financial guidance. Steve?

Stephen A. Skaggs

Thank you, Steve. For the first quarter, traditionally a seasonally slow quarter for Atmel and our industry, we are experiencing stronger than seasonal demand. And prior to our unplanned fab shutdown, the midpoint of our revenue forecast would have been approximately $343 million. However, the shutdown of nearly 4 weeks at our Colorado fab has resulted in a supply gap that cannot be fully offset with inventory and expedites. Consequently, we expect first quarter revenue to be between $320 million and $330 million. Due to the unique nature of the supply disruption, we also feel it is constructive to provide preliminary revenue guidance for the second quarter. We currently expect revenue of $356 million to $366 million for the second quarter of 2014.

Despite lower anticipated revenue in the first quarter, and disruption to our wafer manufacturing operations, we expect further expansion of gross margin during the first quarter as we continue to execute on our improvement plans. Non-GAAP gross margin is expected to be 44%, plus or minus 100 basis points. Non-GAAP operating expenses are expected to be approximately $118.5 million, with a range of $117 million to $120 million. The sequential increase in expenses reflects the seasonal impact of higher payroll taxes and vacation accruals, as well as the absence of European government grants and R&D tax credits.

For the first quarter, total stock compensation is expected to be approximately $16 million. We expect depreciation and amortization of approximately $15 million and capital expenditures of approximately $10 million. Other expense is expected to be approximately $1 million and acquisition-related charges are expected to be less than $2 million for the quarter. We expect our non-GAAP tax provision to be approximately $1 million to $2 million.

And finally, for modeling purposes, please assume a non-GAAP share count of around 430 million -- 435 million shares.

This concludes our prepared remarks. We'll now open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Craig Hettenbach with Morgan Stanley.

Craig Hettenbach - Morgan Stanley, Research Division

If I can ask on the fab shutdown. Anything in terms of that business that you expect to recoup it? Or do you think there is some potential that business is lost and you're not able to regain it?

Steven A. Laub

Yes, Craig, this is Steve, Steve Laub. Our anticipation right now is that we'll probably recoup about 75% of what is lost. And we think that about 25% will probably be lost, and not recoup because primarily that will be in multiple source products that a competitor or alternative supplier could take care of. For example, memory and those type of things. We also expect out of that, roughly, of the amount that would be recouped, approximately 2/3 of it would be recouped in Q2 and there'll be another 1/3 of the amount recouped probably, this is, again, rough approximations will be recouped in Q3.

Craig Hettenbach - Morgan Stanley, Research Division

Got it. And then as my follow-up, you highlight the strength in 32-bit and new product introductions. Can you talk about plans for this year and your ability to kind of sustain the growth momentum in that market? And are there any particular segments that you'd highlight where you've seen the strongest growth in 32-bit?

Steven A. Laub

Sure. As far as sustaining it for this year, from a new product standpoint, our plans this year are actually to increase the number of 32-bit product releases. So we actually expect to actually increase to a new record of new products. With respect to design activity, we would expect that our design activity this year would also grow beyond the current record levels to even higher levels for those products as well. With respect to areas that we're seeing it, I don't like to necessarily share specifics, because it tends to focus our competitors in those same areas. But I would say that predominantly, industrial marketplaces and customers are significant, very much traditional Atmel customers. I would also say that some of the IOT area, some of the wearables area, wireless areas, and also, I think it's part of that continued Sensor Hub area as well.

Operator

Your next question comes from the line of Anthony Stoss with Craig-Hallum.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Steve, can you talk about your view on inventory in the channel? And also what kind of visibility or lead times you're seeing right now, especially in the MCU marketplace?

Steven A. Laub

So our inventory in the channel is roughly -- it's probably roughly about 8 weeks of inventories, across both to that globally, that we have. We are seeing lead times for most products are probably fine. We are having some stretch out on a few products, where lead times have pushed out and they will be primarily for just replenishment of inventory due to the disruption of supply at our fab. But what we're doing is we're managing the channeling of that supply so that we can assure that's really taking care of customers first. So we'll be taking care of customer needs before we worry about replenishing inventories, so the parts just sit there. So we are directing this to -- first priority to REM customers, second priority is to make sure there's sufficient inventories in the channel, to take care of customers that go through the channel. And third priority will simply be to replenish inventories.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Okay. And then secondly on the gross margin front, you gave us a glimpse at June revenues. Any gross margin thoughts on June? And also just gross margin by the end of the year. I know you've given that in the past.

Steven A. Laub

Steve, do you want to take that?

Stephen A. Skaggs

Sure. This is Steve Skaggs. So, our gross margin goal and plan remains unchanged. And to reiterate that, we would expect to be at 49% gross margin for semiconductors by the end of the year, assuming a revenue level consistent with what we achieved in Q4. So that's approximately $350 million. So no change to that target that we articulated last call. No change to the plans to get there. We gave guidance for gross margin in Q1, which I would suggest being on lower revenue levels is an improvement over where we currently are. So we are planning continued progress on that front despite lower revenue levels. And we would see continued progress throughout 2014 on driving towards the goal we've articulated.

Operator

Your next question comes from the line of Rajvindra Gill with Needham & Company.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Just a question again on the fab -- the shutdown or the supply disruptions. Could you maybe elaborate a little bit further what was the cause of that? And you had said that the revenue would have been, for Q1, $343 million. What would it have been in Q2 as well? Do you have any idea?

Steven A. Laub

Sure. So, the cause of it was equipment damage within the nitrogen plant itself. Nitrogen is a key item that serves into the fab, and to the equipment in the fab is part of the processing of wafers. And there was very -- the damage to that particular item damaged also, I would say, a lot of the piping and tubing. A lot of equipment got surrounded that as well. It was apparently due to excessive heat. And so, that had to all be replaced. And it took some time to be able to replace it and to rebuild and then requalify all the equipment in the fab before we can resume operation. So that's what happened there.

With respect to the revenue for Q2, the expectation there is that our seasonal -- and again, we're getting approximations, because obviously, we don't typically give out guidance more than one quarter in advance, but I'm trying to give you guys a sense for that. Right now, our expectation for Q2 is that you probably see, our seasonal is probably mid-single-digit growth. We were anticipating that it'd be just below that, probably sort of low-single digit growth, primarily due to we're seasonally down in our Aerospace business in Q2 and we also expect that we're going to be -- see a decline in our Sensor Hub business during Q2. We actually expect the rest of our businesses will actually be consistent with seasonal or above seasonal during that timeframe. But that's what we see right now. We want to give you guys the best guidance on that.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

And what would have been the margins for Q1?

Steven A. Laub

Steve, do you want to go ahead?

Stephen A. Skaggs

Sure. For Q1, we would have expected higher margin levels. We would've also expected to run the fab at a higher overall average utilization for the current -- for the full quarter. And that would have a positive impact on our gross margin of approximately 50 basis points above our current outlook.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

And last question on -- with respect to XSense second convertible to book from HP rolling out. Are you still kind of thinking about $100 million of capacity-type of figure for this year as well?

Steven A. Laub

So we -- what we did is given that the ramp has been slower during the end of last year, we actually slowed the deployment of some of the capital and some of the capacity as part of that. And so what we're going to do is we'll be outfitting the capacity consistent with the kind of ramp we see. The business is steadily increasing and actually, we do expect a significant ramp in the business, but as I mentioned, I think, during the call last time, we're not going to give out any specific forecast on the business. It remains to be a significant growth opportunity for us, and we're seeing both designs and revenue grow as part of that. And just to give you guys a little bit more color on that, we are focusing -- we're not going after, I would say, the commodity sensor business. Our focus on this is to go after where we can differentiate our product and there's a number of places. Now, for example, the narrow bezel, you're going to see some customers coming out with different form factors, that would be one of them. Places, where, for example, the curve surface is important to customers. Places where very thin and light stackups are for certain products and obviously provides a better touch performance generally. But we're going after where customers appreciate, differentiate and will pay for greater value as part of that.

Operator

Your next question comes from the line of Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

I was wondering, it looks like OpEx is up a decent amount in March quarter, I was wondering, what are the drivers for that? And then how does that relate back to the cost savings you've been talking about for the year?

Stephen A. Skaggs

Sure, Blayne. This is Steve Skaggs. The number that we achieved in Q4 I think was consistent with our outlook and consistent with the outlook we introduced way back in about Q2 of 2013. So all the restructuring initiatives and cost initiatives came in at or slightly above plan. With regard to the change from Q4 to Q1, we're impacted, as most companies are, by increases in payroll taxes in the U.S. that occur mainly in the first half of the year. Also, the first quarter is a quarter where most employees don't take a lot of vacations. So the vacation accruals is higher. In addition, we have a number of items, but typically credits to our operating expenses in the second half of the year associated with the Europe portion of our business government grants and some R&D tax credits that really don't occur in the first half. So it's all those 4 things, which drive kind of the change in our operating expense and it's a normal change in our operating expense in Q1 versus Q4.

Blayne Curtis - Barclays Capital, Research Division

Okay. You mentioned the flow start...

Stephen A. Skaggs

I would just address that further, looking forward, we would expect to have another quarter of operating expense growth in Q2, I mean, we'd expect flat operating expenses in Q3 and Q4 going forward, for the 2014 period.

Blayne Curtis - Barclays Capital, Research Division

And then on XSense, you mentioned the flow start with the one customer, but then you mentioned some wins that you have for this year. I was just wondering if you'd give us any kind of direction on the slope here. Is this going to -- is it going to be more back half loaded? Or will you get some benefit in the first half? And could XSense actually grow off of these more depressed levels in the second...

Steven A. Laub

The anticipation is that you'll see sequential growth in the business each quarter during the year. The business is at a -- it's at a size where seasonality doesn't impact this kind of business. It's just consistently more and more design wins. And so a lot of the function -- a lot of the designs that actually we were beginning the work on the second half of last year, will be falling into place with production in the first half. And then of course, things that we're working on now will fall into production to the second half. So, yes, it will definitely be sequential increases each quarter.

Operator

Your next question comes from the line of Hans Mosesmann with Raymond James.

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

This is Brian in for Hans. Just a quick question on the fab issue this quarter. Are you qualified with all of your customers with regard to that? I mean more specifically, any issues with XSense customers for the Colorado fab?

Steven A. Laub

So, first of all, second question. XSense wasn't impacted at all. So that's not an issue there. With respect to the first question, when you say qualified, what do you mean by that?

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

Well, just do you have any -- will there be any potential issues with the wafers and the products that are there, with customers having to requalify product?

Steven A. Laub

No, there won't be an issue how to requalify product, but we do have some -- we have a number of products that are multiple sourced with outside foundry. And so a number of things are being taken care of or supported that way as well, for our customers. And, of course, obviously, inventories take up a lot of it. There's no -- there will not be any significant requalification that need to occur. There may be a little bit, but they're really minimal.

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

And any color on -- for the March quarter guidance by segment that you could give?

Steven A. Laub

Sure. So what we're going to do, we anticipated there maybe this question. We're going to give you some color, reflecting what we would have expected and what you can expect in light of the fact of the supply situation. So for the MCU business, we would've expected the business to be relatively flat on a sequential basis. Our anticipation now is it'll be probably down in the mid-single digits. For the ASIC business, we felt it would have been down in the low double-digits before. And now we would expect down in the mid-teens. RFA, down low-double-digits, either high-single to low-double and now down mid-teens. Memory, down mid-single-digits before, down low double digits now and that covers it for you.

Operator

Your next question comes from the line of Jim Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

One more question on the OpEx -- excuse me, the gross margin front if I could for Steve Skaggs. Steve, relative to the 500 to 600 basis points of operational costs reductions you had talked about before, how much of that have you already realized at this point? And how much of that is embedded in the Q1 guidance?

Stephen A. Skaggs

I would say in 2013, we realized less than half of that and we have the remainder to go this year. We can't really breakout or aren't breaking out our guidance by the various components of our gross margin improvement plan, but we're working to continue to realize operating cost and improvements according to the overall plan throughout the year.

James Schneider - Goldman Sachs Group Inc., Research Division

That's helpful. And then for Steve Laub, a question related to touch. I guess, first of all, what's your level of confidence that you're going to be able to increase your share in touch controllers for smartphones in 2014? And any estimate around that? And can you maybe just remind us what maXTouch revenue did in Q4? And would you expect it to be up or down in Q1?

Steven A. Laub

So, I don't think we actually break out specifically between sort of our MCU business and maXTouch. I can tell you that the business in Q4 was, I think, slightly down with respect to Q3. We expect they'll be relatively flat in Q1 as compared to Q4. With respect to our confidence level that we'll be regaining will grow faster in the market to regain share in smartphones, handsets and so forth. Actually, our accounts bubble is pretty high, that's based on the design pipeline that we have, the designs that are being converted by our customers, we're winning a number of designs with customers, some of which we had not won before. So in that regard, the accounts bubble is pretty high, but until it actually happens and we're pretty close to booking it, we're not going to put it to our guidance.

Operator

Your next question comes from the line of Jeff Schreiner with Feltl and Company.

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

I was wondering if you could talk about the 10% customers during the December quarter?

Steven A. Laub

Could you repeat that please?

James Schneider - Goldman Sachs Group Inc., Research Division

Yes. Steve, I was wondering if there were any 10% customers during the December quarter?

Steven A. Laub

The only customer of the 10% level was a distributor in the quarter.

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

Okay. And then, when we talk about gross margin operating improvement and some controls on operating expenses, or looking to try to control those as they move to the second half of the year, how should we think about non-GAAP operating margin? Can this move back towards fiscal '10-type levels? Is that -- and maybe remind us of the goals that you have for non-GAAP operating margin?

Steven A. Laub

Non-GAAP operating margin will definitely improve with revenue growth. Over time, we'd like to drive our overall expenses to under 30% of revenue. And with the gross margin improvement plans, that will drive a nice growth in operating profit through the year.

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

Okay. Do you guys have any targets?

Steven A. Laub

The target that we've articulated is to get to 49% gross margin to get under 30% in operating expenses on a non-GAAP basis. And you can do the math for what that means for operating income.

Operator

Your next question comes from the line of John Vinh with Pacific Crest.

John Vinh - Pacific Crest Securities, Inc., Research Division

First, a question on XSense. You said that you're no longer going to be focused on kind of the commodity market. We were under the impression that maybe the XSense metal mesh technology has a much lower cost base than traditional ITO? Is that not the case anymore? And then, on the gross margin outlook for the year, you guys indicated that the 49% target was for semiconductors. How was the gross margins for XSense right now? Is that having any sort of impact on your overall gross margins? And how should we think about that for the year?

Steven A. Laub

So with respect to the cost, XSense cost, as compared to ITO, which is a traditional solution to these in the marketplace, XSense and metal mesh is lower. So, in that regard, it does provide, in addition to the performance advantages, additionally does provide a cost advantage of vis-a-vis traditional ITO sensors. The reason I stated that we're going to be targeting more place with differentiation, it's a huge market. And from our standpoint, the best place to target is a place you can garner the highest margins and the highest value from your customers. And so that, just wanted to give you guys some perspective on that as well. With respect to the gross margins of XSense, we don't typically break out gross margins by business line, but I can tell you, any impact, as it compares to the overall corporate numbers is immaterial, as far as XSense gross numbers as part of gross margin.

John Vinh - Pacific Crest Securities, Inc., Research Division

Great. And then my follow-up, you guys also indicated that the sensor fab revenues were expected to decline in Q2. Can you talk about what's driving that? Is that due to share shifts? Or is that seasonality? Or if you could give us more color, that would be great.

Steven A. Laub

Yes, I think the best thing -- we'll probably talk about that more when we have our conference call at the end of next quarter, but we wanted to give you guys a perspective on the business. And just as clarification to make sure, while we were, from an articulation standpoint for revenue, that we gave you our target, we understand best today and the reason why we stated that the underlying business will probably slightly below seasonal, it was for the reasons that I gave earlier.

Operator

Your next question comes from the line of Chris Caso with Susquehanna Financial.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Just clarification on the 49% gross margin expectation for the year. You mentioned that was in the semiconductor business. Could you just clarify that comment a bit? I assume that comment to mean that it excludes any impact of XSense, as that ramps through the year? Is that the right way to think about that?

Steven A. Laub

That's correct.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

So what would we assume on XSense, if it ramps? What -- that, that would be a positive margin impact or a negative margin impact? What can you tell us on that?

Steven A. Laub

I think the best way to think about it and we have commented before, that we think that the XSense business from a gross margin standpoint is likely to be a bit below the overall corporate gross margin numbers, we would expect that the op margin numbers would be consistent with those for the company generally. So that is our perspective right now. There's lots of ways for us to enjoy the benefit of this business. One of the things that we're doing currently today, just to share with you, we're doing the manufacturing of that today. There are a number of people who would like to partner with us, with this business, on the manufacturing side, obviously deferring -- different ways to go about the business in different ways to participate in that. So, I think, one thing I would state to you guys, is don't get overly concerned about gross margin impacts and so forth, because I think you'll tend to get -- you'll tend to get yourself in the wrong place, with respect to what's likely going to be the impact for Atmel on that.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay. And as a follow-up, I guess as we look forward with your production plans, as we go through the year, in light of the fab shutdown, I -- as you provide us pro forma gross margin guidance going forward, I guess, are there any benefits to increase production levels, as you need to replenish inventory, or kind of catch up from the fab shutdown? How should we think about that, as we look at your gross margins going forward over the next couple of quarters?

Stephen A. Skaggs

The best way to think about the gross margins right now is to do as Steve described, which is we're targeting to have semi conductor gross margins at 49%, assuming a revenue consistent with that of Q4 that we just completed. To the extent revenue is higher, we'd expect to have a higher gross margin as well. With respect to what happens because of the supply disruption and what it means for how we run the fab, conceptually what you say is true. We'll give you guys an update on any impacts from that in our next conference call.

Operator

Your next question comes from the line of William Stein with SunTrust.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

I'm hoping you can comment about design win traction in your Sensor Hub product, both with the one that's a very prominent win in terms of that repeating and then with new customers or different products with the same customer?

Steven A. Laub

So, I think, what I can tell you, is that we continue to win lots of new designs with our Sensor Hub products, both in mobility applications, as well as now. Many things that are outside of traditional sort of smartphone and tablets. So that marketplace continues to expand very readily for us. I'm not going to comment on a specific customer or a specific project design, it's inappropriate for me to do so until actually these programs are shipping.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Great. And then if you can talk about your view as to the attach rate of touch in notebooks in the coming year. I think, in 2013, there was a view that we'd get to 20%. And I think it's pretty well understood that we didn't get there. Can you talk about where you think we are today and what the trajectory is for 2014?

Steven A. Laub

The best I can tell you is I think based on conversation we have with our customers, they believe that we probably ended 2013 closer to 15%, from an attach rate standpoint. They all expect the attach rate to go up very considerably in 2014, primarily because they believe that the cost of implementing touch has come down substantially over the past 12 to 18 months. And so therefore, many more of their models will be incorporating touch this year. And so, therefore -- you see a very substantial increase. I think everybody who's been doing these forecasts the last couple of years have gotten them very wrong, so I won't give you specific numbers. Probably the best way to do that is to get it from some of the, sort of, PC manufacturers themselves.

Operator

Your next question comes from the line of Suji De Silva with Topeka Capital.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

Just want to clarify real quick. Is the take or pay inventory impact, is that all washed through now?

Steven A. Laub

No, it has not. But we'll be seeing the impacts of that both this quarter and next quarter and will pretty much wash through by midyear.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

Okay, great. And then, in terms of the mobile and touch markets, just generally, do you expect those to be steady sequential growers throughout this year? And then, by implication, the touch market being up year-over-year for you guys, the touch segment?

Steven A. Laub

I'm not going to get into how I expect it to be, because it tends to be a business that can be seasonal. But as we look at the business right now, it would be something that we do see certainly through, I would say, we have some supply issues, obviously, this quarter, but certainly as we look forward into the year, we do see sequential growth in that business. But through Q2 and Q3, it's a little early to be judging our Q4.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

Last quick question, Steve. Can you quantify the percent of your microcontroller revenue that's -- you would classify as Internet of Things, or wearables, just to understand how far along we are there?

Steven A. Laub

I think ours is a lot harder than a lot of other people's. I'm not going to give you a number today. I am finding that people's definition of what percent of the business is IoT and so forth is very dependent on their definition of IT and what product constitutes that. So we are working on that, but we want to make sure that when we give you guys a number and you're comparing it to the other suppliers, it's something that you can do in a very fair and thoughtfully way. And we think that we'll probably do something later on this year. But it's a little too early for that.

Operator

Your next question comes from the line of Christopher Rolland with FBR Capital Markets.

Christopher Rolland - FBR Capital Markets & Co., Research Division

Sorry if I missed this, I jumped off for a second. But on the 4Q revenue impact from your product that you couldn't ship from the fire, is that all, first of all, in 1Q? Was there any of that in 4Q? And then also, if it's all in 1Q, I think it works out to like an $18 million impact. Did you say 75% of that would then push? And is that all in Q2? Did I do that right?

Stephen A. Skaggs

So it's correct, there was limited impact of Q4, although I would say that, that obviously an incident in the fab is a distraction to an operations team.

Steven A. Laub

In fact, let me clarify, it's probably a portion of you guys that will appreciate this. In Q4, we came in $3 million to $4 million shy of where we expected. That was not a demand issue. As Steve is alluding to, because of the disruption at the fab, it kind of impacted obviously operations management. And so I think that it had a little bit of impact on just the last week of the quarter as it was, on having everything go out the way they had planned. So, just as color for that, I think it's probably relevant for you guys to know that. Go ahead, Steve.

Stephen A. Skaggs

And then I think the second part of your question related to Q1. So the midpoint of our revenue guidance, to clarify, is $325 million. We gave a range of $320 million to $330 million. We also told you that demand, from our perspective, is about $343 million. So at the midpoint, there is a gap of $18 million as you correctly identified. We further commented that approximately 75% of that would shift forward 2/3 into Q2 and 1/3 into Q3.

Christopher Rolland - FBR Capital Markets & Co., Research Division

I see. Okay. Back to the touch PC controller market, can you guys talk about who you're running into in that market besides Synaptics? We hear vague rumors of some Asian commoditizers out there. Is that true? How do you guys sort of see share in that market?

Steven A. Laub

Actually what we see is -- probably the other supplier that we see is a company called ELAN [ph], is in that marketplace. And actually, after that, we don't see nearly, really, anybody else.

Operator

Your next question comes from the line of Liwen Zhang with Blaylock Robert.

Liwen Zhang - Pacific Crest Securities, Inc., Research Division

During the recent investor conferences at [indiscernible] management team mentioned there were over 100 car models with maXTouch. When should we expect these become materialized into revenue?

Steven A. Laub

I mean you should expect those returns revenue during this year. I would say different times during the year, but certainly throughout the year. Some of them have -- some programs have already begun shipping, other programs will be released.

Liwen Zhang - Pacific Crest Securities, Inc., Research Division

Okay. And are you ready to discuss XSense's manufacturing yield?

Steven A. Laub

We don't disclose, for confidential and for competitive reasons, our product yields.

Liwen Zhang - Pacific Crest Securities, Inc., Research Division

Okay, got it. And is the -- was the MCU units profitable during Q4?

Steven A. Laub

I'm sorry, repeat that please.

Liwen Zhang - Pacific Crest Securities, Inc., Research Division

Was MCU unit profitable during Q4?

Steven A. Laub

The business segment you're speaking to?

Liwen Zhang - Pacific Crest Securities, Inc., Research Division

Yes, overall MCU.

Steven A. Laub

We'll double check. As you know, the MCU business segment is comprised of the MCU business, the maXTouch business, and the XSense business. It was essentially flat.

Stephen A. Skaggs

Break even.

Steven A. Laub

Break even.

Liwen Zhang - Pacific Crest Securities, Inc., Research Division

Okay, got it. Break even? Okay, good. And probably my last one, what Atmel has to pay to your U.K. partner cost clear for XSense?

Steven A. Laub

Obviously, that's confidential. Our business relationship with that, the terms of those, are confidential.

Operator

Your next question comes from the line of Sidney Ho with Nomura Securities.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

My question is more on the broader base. The data from the emerging market has been pretty mixed in the last few weeks. I know you have about 60% of your business going to Asia. Have you noticed any change in order pattern from your customers or distributors in the past few months?

Steven A. Laub

Overall, actually, our business levels and our bookings have been, I think, as Steve mentioned earlier, kind of above seasonal for us. So, in fact, and we felt relatively good about that. Q1 is a hard one to fully appreciate at this time, because of the Chinese New Year in Asia. And until you get past that, that's when you get a much more accurate sense of the business. So it's too early to really give a judgment on that.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Okay. Switching to a different subject, on your capital return policy. I realized that your cash balance bottomed around $230 million and has been going up for a couple of quarters. And by my math, you should generate about $200 million of free cash flow this year. I know you have a buyback program in place, but what are your general thoughts on returning cash to shareholders? And how much would you want to keep as, like a minimum cash?

Steven A. Laub

I think our policy speaks for itself from the standpoint of what practice we've taken. We provided lots of capital back to our shareholders, both last year and the previous, I'd say, 3 to 4 years. With respect to our sort of cash balances that we would like to take, I think, consistent with that, roughly, I'd say, half a quarter's revenue between that and roughly $200 million would probably be a cash balance that we would like to maintain.

Operator

And at this time, I would like to turn the conference over to Mr. Schuman for any closing remarks.

Peter Schuman

Thank you, Sarah. During the first quarter, Atmel will be presenting in San Francisco at the Goldman Sachs Conference on February 12 and the Morgan Stanley Conference on March 6. We'll also be in New York on March 4 for the Susquehanna Semiconductor Conference. Webcast and other information for these events will be available on the company's Investor Relations website. In the meantime, you're always welcome to contact our Investor Relations Department at (408) 437-2026 with any questions that arise.

Thank you for joining us. And this concludes today's call.

Operator

Ladies and gentlemen, that concludes today's quarterly earnings call. Thank you for your participation. You may now log off.

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