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SRS Labs, Inc. (NASDAQ:SRSL)

Q3 2006 Earnings Call

November 7, 2006 5:00 pm ET

Executives

Ulrich Gottschling - CFO

Tom Yuen - CEO

Analysts

Anthony Stoss - Craig-Hallum

Steve Peak - Private Investor

Andrew Weiner - Burnham Asset Management

Presentation

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2006 Conference Call for SRS Labs. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Ulrich Gottschling. Sir you may begin the conference.

Ulrich Gottschling

Thank you. Good afternoon and welcome to the SRS Labs 2006 third quarter conference call. Before we start this afternoon’s call, I would like to go over a couple of items. First, the press release of the results discussed here today have been filed with the SEC on Form 8-K. If you have not received the press release, it is available on our website at srslabs.com in the press section. Also, I would like to remind you that this call is being recorded and a replay will be available through November 14 at phone number 866-837-8032. You can hear the replay by dialing this number and then entering ID number, 982704, when you hear the prompt. In addition, we are simultaneously webcasting this call and it can be accessed on our website for the next 60 days.

I would like now to read our Safe Harbor statement. Except for historical information contained in this release, statements in this release, including those of Mr. Yuen and Mr. Gottschling, are forward-looking statements and projections, which include statements concerning plans and objectives of management for future operations that are based on management’s belief as well as assumptions made by, and information currently available to management. While the company believes that its expectations are based on reasonable assumptions, there can be no assurances that the company’s goals and strategy will be realized. Numerous factors, including risks and uncertainties, may affect the company’s actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the company. Some of these factors include, the concentration of our products and customers, our dependence on the customer electronics market which is characterized by short product life cycles, fluctuations in seasonality and demand, the acceptance of new SRS Labs' products and technologies, the impact of competitive products and pricing, the timely development and release of technologies by the company, general business and economic conditions, especially in Asia and other factors detailed in the company’s Form 10-K and other periodic reports filed with the US SEC. SRS Labs specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

I will start by giving an overview of the results from our continuing operations for the three months ended September 30, 2006. Our licensing revenues for the third quarter increased to $4.9 million, representing a 34.9% increase for the quarter on a year-over-year basis. We realized strong revenues in all five product categories notably in advanced displays, which grew by over 151% on a year-over-year basis and in automotive, which grew by 111% on a year-over-year basis.

Overall, the Home Entertainment segment grew by 85% on a year-over-year basis, personal computers increased by 33% on a year-over-year basis, portable media devices decreased by 30% on a year-over-year basis and personal telecommunications decreased by 45% on a year-over-year basis. These fluctuations are representative of the consumer electronics marketplace and validate our strategy of leveraging on five distinct segments.

A breakdown of our licensing revenues for the quarter by category and as a percentage of total revenue is as follows. Home entertainment 66%, portable media devices 15%, personal computers 9%, personal telecommunications 5%, and automotive 5%. Included in the growth in Home Entertainment segment revenues for the quarter was royalty recoveries of approximately $250,000 from intellectual property compliance activities. These activities which include audit of shipments by certain of our licensees resulted in additional royalty payments due to the company. The company intends to continue such field audit program, however, there can be no assurance that additional underreported royalties will be realized in the future.

Net income from continuing operations for the quarter was $1.3 million or $0.08 per diluted share on 16.5 million weighted average diluted shares as compared to net income from continuing operations of $707,000 or $0.05 per diluted share on 15.3 million weighted average diluted shares for the same quarter during the previous year.

On a non-GAAP basis excluding charges related to stock-based compensation under FAS 123R during the third quarter of 2006, net income increased by 135% for the quarter as compared to the third quarter of 2005. Total operating expenses from continuing operations for the third quarter of 2006 were $3.6 million or 74.3% of net sales compared to $2.9 million or 78.8% of net sales in the same quarter of 2005. Included in the second quarter 2006, operating expenses is $383,000 related to stock-based compensation under FAS 123R, which we adopted at the beginning of this fiscal year.

During the third quarter the major categories of operating expenses were as follows. Sales and marketing expenses were $1.7 million or 35.5% of revenues during 2006 compared to $1.1 million or 29.9% of revenues in 2005. This increase of $657, 000 or 60.4% is primarily attributable to increased headcount in overseas market, increased training activities, and increased sales and marketing management. Additionally included in sales and marketing expenses for 2006 is $140,000 related to the stock-based compensation under FAS 123R.

Research and development expenses were $628,000 or 12.8% of revenues during 2006 compared to $584,000 or 16.0% of revenues in 2005. This increase of $44,000 or 7.6% is due to the company recording $67,000 of expense related to stock-based compensation under FAS 123R.

General and administrative expenses were $1.3 million or 26.0% of sales during 2006 compared to $1.2 million or 32.9% of sales during 2005. This increase is primarily attributable to $176,000 related to stock-based compensation under FAS 123R partially offset by decreases in legal and accounting professional fees.

Our effective tax rate was 15.4% as compared to 22.1% in 2005. The provision for income taxes during the third quarter 2006 is principally comprised of foreign withholding taxes related to revenues realized from our customers in Korea and Taiwan partially offset by a recovery of US Federal income tax overpayments.

Now for a short summary of discontinued operations for the quarter which is comprised of our previously owned semiconductor operation based in Hong Kong. We completed the sale of our ownership of Valence Technology Limited on September 29, 2006 to Noblehigh Enterprises. The results of operations of Valence through the date of sale are included in our condensed consolidated financial statement for the quarter ended September 30, 2006. The operations of Valence for the period July 1, 2006 through September 29, 2006 produced net income from operations before income tax expense of $860,000 and the company recorded a gain on sale of Valence of $261,000.

I will now provide an overview of the results from our continuing operations for the nine months ended September 30, 2006. Our licensing revenues for the nine months increased to $13.5 million, representing 29.3% increase for the period on a year-over-year basis. We realized strong revenues in all product categories, notably in advanced displays, which grew by 114% on a year-over-year basis and in automotive which grew by 150% on a year-over-year basis.

Overall, the Home Entertainment segment grew by 44% on a year-over-year basis, portable media devices increased by 3%, personal telecommunications decreased by 7% and personal computers increased by 20%, all on a year-over-year basis. These fluctuations again are representative of the consumer electronics marketplace and validate our strategy of leveraging on the five distinct segments.

The breakdown of licensing revenues for the nine months by category and as a percentage of total revenue is as follows. Home entertainment 58%, portable media devices 18%, personal computers 9%, personal telecommunications 9%, and automotive 6%.

Net income from continuing operations for the first nine months was $1.8 million or $0.11 per diluted share on 16.4 million weighted average diluted shares as compared to net income from continuing operations of $1.3 million or $0.10 per diluted share on 15.1 million weighted average diluted shares for the same period during the previous year.

Total operating expenses from continuing operations for the first nine months of 2006 were $11.7 million or 86.5% of revenues, compared to $8.9 million or 85.2% of net sales for the first nine months of 2005. Included in the 2006 operating expenses is $1.2 million related to stock-based compensation expense under FAS 123R, which again we adopted at the beginning of this fiscal year.

During the nine-month period, the major categories of consolidated operating expenses were as follows. Sales and marketing expenses were $5.5 million or 40.7% of revenues during 2006 compared to $3.3 million or 31.6% of revenues in 2005. This increase of $2.2 million or 66.7% is primarily attributable to increase head count and related expenses, increased commissions on higher revenues, increased training activities, and increased marketing expenses related to efforts to enhance the company's brand. Additionally included in sales and marketing expenses for 2006 is $439,000 related to stock-based compensation under FAS 123R.

Research and development expenses were $1.9 million or 14.2% of revenues during 2006 compared to $1.7 million or 16.4% of revenues in 2005. This increase of $206,000 or 12.1% is due to the company recording $270,000 of expense related to stock-based compensation under FAS 123R, offset by decreased head count and related expenses.

General and administrative expenses were $4.3 million or 31.6% of sales during 2006 compared to $3.9 million or 37.3% of sales during 2005. This increase of $374,000 or 9.6% is primarily attributable to $363,000 related to stock-based compensation under FAS 123R.

Our effective tax rate was 23.3% as compared to 26.6% in 2005. The provision for income taxes, again is principally comprised of foreign withholding taxes related to revenues realized from our customers in Korea and Taiwan.

Turning finally to financial fundamentals. As of September 30, 2006, our balance sheet remains very strong with $33.3 million in cash and investments available for sale, an increase of $5.6 million as compared to December 31, 2005.

Operating activities from continuing operations provided $2.0 million of cash flows for the nine months ended September 30, 2006. An additional $3.6 million of cash flow was recorded from the exercise of employee stock options during the period, of which $2.1 million was used to retire shares of our common stock and additional $4.3 million was received through the sale of Valance. We continue to be free from external debt.

This concludes my discussion of the financial results and at this point, I would like to turn the call over to Tom Yuen, our CEO.

Tom Yuen

Thank you, Ulrich. Good afternoon, everyone. You have just heard from our CFO, Ulrich the financial report on our Q3 results. We are very pleased with our Q3 achievements. This past quarter we set another revenue record and our profit rose to $1.3 million after accounting for the new stock options charges. During the quarter, we also completed the sale of our semiconductor business. The sale was completed on September 29 and officially marks the end of our cooperate restructuring.

Going forward, the company will focus on delivering performance based upon its core strength as a world class audio technology company. We are going to now dedicate our efforts to provide excellent audio technology to support our customers around the world. With this singular business mission, our customers and investors should have a much easier time in understanding our business and who we are.

From a financial performance point of view, SRS Labs now will be able to fully exploit the benefits of its excellent business model, a model which delivers both high gross margin and highly leverageable operating expense. With this model, our business has the potential of achieving higher rate of revenue increase with relatively low rate of increase in expenses and that’s favoring the -- favorably influencing our profitability than traditional business models, and we intend to maximize this benefit by driving sales.

Let us now briefly recap our Q3 business. The main revenue driver in Q3 came from the Home Entertainment segment with flat panel TV growth leading charge. The growth rate of these flat panel TVs are expected to continue, which bodes well for our growth potential in the future quarters. We've also seen good growth rate in Car Audio segment especially in Japan. In the meantime, we've seen progress in the Korean and European auto market with revenue expected to begin in 2007.

In the cell phone segment, we are in the Motorola Moto Q, a smartphone that is windows mobile platform based. Because of our success in porting our technology to this platform, we have gained new opportunities working with several more cell phone makers. Some of whom should become licensees soon.

As far the MP3 marketplace, with the introduction of our new technology Mobile HD and WOW HD have given us new approach to try to regain our growth here. In the meantime, we have been quite successful with the accessory marketplace. Most prominently, we have launched our relationship with Sharper Image. A variety of products were recently introduced and were featured in all of the 200 stores nationwide as well as visibility feature in the widely distributed catalog.

Our recently announced partnership with CSR also opened up new and sizeable Bluetooth based headset market for us. As for the PC segment, revenue remained steady as we worked with Microsoft, our customers and partners to migrate towards their new operating system Vista. We have also recently launched two new audio enhancement software products, the SAS Audio Sandbox and iWOW through online means. The respond has been favorable. Our goals with these products is to broaden our direct consumer contact, as well as a means to explore new revenue engines that is based on our technologies and maintaining the high margin business model.

For the remainder of the year, our business activities continues to look good. The business pipeline remains strong in all of our market segments. It appears that our largest market segment, the flat panel TVs will continue to grow. It also appears that we are poised to achieve revenue growth in the accessory market, the car audio market, and the cell phone markets.

During the coming holiday season, we expect that our brand visibility will also be highly noticeable. We expect many flat panel TVs, MP3 players, accessory products, cell phones and laptop PCs will be on display at retailers. We are also very pleased with the product Sharper Image stores, will be marketing starting now. This heightened brand exposure should help build value for our brand.

And on the investor relationship front, we have seen increased interest in our company's story and its stock. In September, we presented at the Kaufman Brothers Conference and had meetings with Needham as well as Wedbush Morgan. We have numerous meetings with various institutions requesting meetings with us. We'll also be presenting at the Needham Conference in January and we plan to be in New York during November, December and January for additional one-on-one meetings.

Now that we have a simple and attractive story as well as the profitable results, we intent to broaden our IR activities so that the investment community is aware of our activities in progress.

So I would now like to turn the call over to the operator to open up the call for questions and answers. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instruction). Our first question comes from Anthony Stoss of Craig-Hallum. Your question please.

Anthony Stoss - Craig-Hallum

Hi guys. Great quarter. Congrats. Either -- I guess maybe Tom if you can give us a sense of what products Sharper Image will be showcasing? And then I've got a couple of more questions after you answer that?

Tom Yuen

Yeah. There is actually a close to a dozen of products that will be featuring our technology in the stores and also already in their fall catalog and that these are consumer products ranging from iPod accessories to essentially radios and also docking stations and headphones.

Anthony Stoss - Craig-Hallum

Okay. Tom, also if you could give us a little bit more detail on your relationship with CSR on the Bluetooth side, what do you expect from that? How quickly you think that it becomes meaningful?

Tom Yuen

Yeah, as you know that the Bluetooth market is roughly about a -- currently 50 million units a year market and that there is also quite a bit of interest in using the Bluetooth mechanism as a means of achieving stereo headphone entertainment, and we have successfully floated our stereo technology into the CSR platform, and we are already working with OEMs that are ready to launch stereo Bluetooth headsets for the marketplace. So, the Bluetooth is a very convenient way for the MP3 playback. In addition, the Bluetooth is widely used for the hands-free operation. So, we also intend to move our voice technology into the larger marketplace of mono headset for cell phone applications.

Anthony Stoss - Craig-Hallum

Okay. And one last one for Tom, and then I have got a couple for Ulrich. On the auto side, can you give us an update on perhaps new brands or new models that you are likely going to begin in the next two months?

Tom Yuen

We have mentioned that we have some very successful business design situation in -- both in European car -- one-car manufacturer and also in Korea. I think until we officially announce the names of these auto manufacturers, we will have to just leave it at that. And, these are significant car manufacturers.

Anthony Stoss - Craig-Hallum

Great, okay. And, then Ulrich, if you could comment about your expectations for the tax rate going forward we should use and also any kind of thoughts on operating expenses going forward would be helpful?

Ulrich Gottschling

Okay, so -- again, we are somewhat hesitant on giving forward-looking financial information. We really haven't given a lot of guidance on that, but I'll give in the general sense, we expect the proportionate share that Korea delivers of our revenues right now to continue for the next several quarters and we expect that Korea will continue to have the 16.5% withholding right there, so I think that the overall tax rate is probably going to go down a little bit, but it shouldn't materially change from quarter-to-quarter, is our expectation right now.

In terms of the operating expenses, I think we have been pretty straight forward in saying that it is our expectation to continue to control our R&D expenses and our G&A expenses. We would like to continue to drive down the G&A expenses. R&D, as we have mentioned in the last conference call, we recently hired several more engineers and in fact we just had two more start this quarter. One individual who left us about four months ago and came back, and is really excited to be back, and we are really glad to have him back, a very, very sharp DSP Engineer and then, we also brought in another individual. So, we are expecting that the R&D side will continue to increase, but just at a moderate rate.

From the sales side of life, we've recently added a second person in Taiwan and we expect that as we continue to move forward, we will add some more folks in the People's Republic of China and some other places, but again I think the tremendous growth rate in sales and marketing expenses on a percentage basis, should start to taper off although we will continue to invest in that area.

Anthony Stoss - Craig-Hallum

Okay. And then if you wouldn't mind just repeating the year-over-year growth in each of your product segments, you went pretty quick and I think I may have missed one or two.

Ulrich Gottschling

Okay. You are talking about for the nine months or for the third quarter?

Anthony Stoss - Craig-Hallum

Third quarter.

Ulrich Gottschling

Okay. For the third, advanced displays grew by 151%. Overall, the Home Entertainment segment grew by 85% and advanced display is part of home entertainment the way we categorized. Automotive was up by 111%, personal computer up 33%, portable media devices was down 30%, and personal telecommunications was down 45%, and now -- on the piece -- on the personnel telecom with principally related to one significant customer who had previously done quite well in the People's Republic of China and that has tapered off for them and hopefully, they will be able to recover some of that.

Anthony Stoss - Craig-Hallum

Great, thanks a lot. Once again great quarter guys, congratulations.

Ulrich Gottschling

Thank you.

Operator

Our next question comes from Steve [Peak], Private Investor. Your question please.

Steve Peak - Private Investor

Firstly, as a long time shareholder, I would like to give my regards to Tom and the rest of the management team for doing a great job in terms of starting to realize a vision, which is profound with vast opportunities ahead.

Tom Yuen

Yes. Thank you, Steve. Thanks for your patience.

Steve Peak - Private Investor

Yes. And, so getting to some of the details, can you highlight us with the progress in the TV market that relates to China or Chinese TV OEMs?

Tom Yuen

I think that we continued to have good traction with several of the main China TV manufacturers. And that the -- our platform strategy has been very instrumental in gaining traction there. We are very well positioned in four or five major platforms; these include Micronas STMicro and Philips UOC and not to leave out NJRC. And these companies have been able to deliver the timely solutions for many of our Chinese TV manufacturers. So in addition to our sales force activity trying to build up brand awareness I think that the chip platform partners have done a phenomenal job in bringing our technology to the manufacturers. So, we feel that by continuing our execution, working closely with the platform partners and our sales force promoting the brand, we should continue to see opportunity growing in the China TV marketplace.

Steve Peak - Private Investor

Okay, great. In terms of thinking about seasonality, typically Q4, the quarter to come has been the largest quarter in terms of revenues and is there any reason to think that the seasonality will be changed or that there shouldn’t be the same seasonal patterns in terms of growth from Q3 to Q4s in the past?

Tom Yuen

I think we are still expecting the traditional trend, so Q4 remains a very strong quarter and so I think -- I don’t -- so far our expectation has been as our traditional trends indicate, we expect a strong Q4.

Steve Peak - Private Investor

Okay. And in terms of the -- can you give some color on how the operating cash flow has picked up along with this increase in operating profits? And now that there is improved profitability of the company, given that there is excess cash on the balance sheet, what are the plans or the thoughts with regards to strategic uses for that cash and cash flows to come?

Ulrich Gottschling

Okay. So let me address cash flows for a little bit. We obviously feel very good about the cash flows. They are heading in the right direction for us and we feel really good about those. Again as you can see, our balance sheet is becoming extremely heavily weighted toward cash, cash equivalents and investments. We really are at the point where we have a nominal amount of inventory, for example, we would expect that we are going continue to get positive cash flow. We feel very good about the collections of our receivable. We don’t expect our payables to increase in any way, shape or form. I think we are in pretty good shape as it relates to that. In terms of how we would utilize any "excess" cash, that’s always a relative term as to what's excess. I think as we stabilize in our business here, as we can stay focused on what we are doing, and as opposed to being -- also focused on Valence and the semiconductor business, I think as a group including our Board of Directors, we will take a hard look at all different kinds of options that are available to increase shareholder value with the assets that we have available. Clearly for us, the utilization of assets is our number one thing and driving top-line revenue is really top of the list.

Steve Peak - Private Investor

Okay. So going -- eventually going to the Board and discussing the potential for a dividend as well as turning back on the share repurchase, things like that are possibilities?

Ulrich Gottschling

I don’t think that there is anything that’s been specifically excluded, but I can tell you that there is nothing on the table right now in terms of a decision that’s been made that we would anything other than focus on the operations.

Steve Peak - Private Investor

Okay. Can you give a little bit more color on the mobile phone category? There is a lot of talk about the big potential that could start to develop this quarter with the new license, and so is that something that’s been pushed out or it's still on the works or has been delayed in some regard?

Ulrich Gottschling

Steve, as we've mentioned that we have been involved with the Moto Q for Motorola, that product launched in late May or early June and they filled up the channel with an appropriate number of units. And we reported that revenue in our Q3 results. We have received their royalty report for the following quarter. It's inline with what we had expected in terms of sell through, what is really more important is with the cell phone and the Motorola relationship is that it validates on the Windows Mobile platform our technology and that enhances the value, the perceived value of the consumer of the phone. We have been able to leverage that, as Tom had mentioned, into some other markets for other handset makers that utilize that platform and we are hoping that we will able to show value to those individuals to include our technology going forward.

Steve Peak - Private Investor

So the bigger opportunity would be to get into the RAZR platform obviously?

Ulrich Gottschling

Well I think there is number of handset makers throughout the world and we are utilizing the success with Motorola as a means of opening the door and starting a dialog with the variety of different handset manufacturers that provide product throughout the world.

Steve Peak - Private Investor

But do you still see opportunity with Motorola for additional --

Ulrich Gottschling

Absolutely, I mean we are constantly in conversations with all of our licensees on ways that we can add additional value to their products.

Steve Peak - Private Investor

Okay. And last question, the downloads from the Internet, it’s a really great useful product and hence is the music listening experience quite a bit. So, I think you did a good job on getting that out there, but what category does that fall into in terms of licensing revenues, is that PC, and can you give any statistics on how it's done in terms of downloads? Go ahead.

Tom Yuen

Yeah, I think that most likely we will see that as categorized from the PC segment and that we have experienced very strong download rate and that we are working to perfect the conversion. So, we have two products, one addressing the PC market and one is focusing on attracting the Apple iTunes community and both of them have received rave reviews. So, I think that it’s a very good opportunity for us to really look at inventing a new revenue engine based on our technology. And, so that the download rates are extremely high, we are in the thousands of downloads a day. So it’s a pretty nice beginning.

Steve Peak - Private Investor

So it's been enough to start to move needle at least in terms of growth rates in that category?

Tom Yuen

It's too early to tell. We think that with another quarter under our belt, we will be able to more properly size the magnitude of this opportunity.

Steve Peak - Private Investor

Right, One suggestion is I think improving the ease of download. It’s a little bit of a multi-step process and I think.

Tom Yuen

Absolutely, we are focusing on exactly the same issue, we are new in this game and that there's a lot of the direct user interface experience that we learn everyday.

Steve Peak - Private Investor

Okay great. Well, congratulation again and good luck on keeping up all the momentum.

Ulrich Gottschling

Yeah, thank you Steve.

Operator

Thank you. Our next question comes from Andrew Weiner of Burnham Asset Management. Your question please.

Andrew Weiner - Burnham Asset Management

Hi, good afternoon guys.

Tom Yuen

Hi Andrew.

Andrew Weiner - Burnham Asset Management

First couple of things I wanted to clarify, couple of points, you alluded to automotive relationships with the European and Korean manufacturer, am I to understand that; one, we have not begun to recognize revenue from those relationships and two, while we haven't publicly disclosed them yet that we have actually been designed in '07 models?

Tom Yuen

Both are correct.

Andrew Weiner - Burnham Asset Management

Okay. Secondly I believe on the last conference call, you alluded to some new perhaps relationships in particular with the European advanced display or television manufacturer, has that begun to recognize revenue and generally speaking, can we expect to see us on some new brands or models of TVs for this holiday season?

Tom Yuen

First is that, we have not begun recognizing revenue from the European TV manufacturer and that at any one time, I think we expect some new brands of flat panel TV coming on the market without technology and that has -- so, I think that the adoption of our technology in the flat panel TV area is very good, I think that we continue to see new platforms requiring -- requesting our technology to be ported on to new chips. So, I think that over time we continue to expect new models to come out with -- I mean our flat panel TV to come out with our technology.

Andrew Weiner - Burnham Asset Management

With respect to the download of software products, I believe those products were announced in mid September, was there any revenue in this quarter recognized from the downloadable software products?

Tom Yuen

It’s a very - - we are still in the beginning phase, so there is a small amount of revenue attributable to the download.

Andrew Weiner - Burnham Asset Management

Okay. And perhaps you could elaborate a little bit on how you proceed to go to market strategy. Obviously, these have significantly higher ASPs for SRS as well as it gets the -- because it gets away from being as well of piece of the billing materials for consumer electronic provider to perhaps an incremental revenue stream for them, are we planning on soliciting channel partners or perhaps software distribution partners to help market this product and sort of where do we stand into those negotiations if we are?

Tom Yuen

Yes. I think that there are many ways that we are reviewing on how to broaden the market ability of these products. It’s a very nice enhancement feature that we have gotten very affirmative end user reviews and that so this -- and the nice thing is that there are many business models in which we can rely on the online community and also online partners, both online and offline partners, to distribute this piece of products. And so while we are still trying to refine our technology and the online business model, we've already started to talk to some of these potential affiliates and trying to compose essentially business models that would work for both our partners and ourselves. The price currently for these products are about $20. So as you mentioned that it’s a very a different kind of magnitude and there is enough room to create business models with partners.

Andrew Weiner - Burnham Asset Management

So would you expect to see some partners in 2007 or is it too early to talk?

Tom Yuen

I think that there are a lot of interests and it is a method of ourselves trying to make sure that we refine our process; and as I'd mentioned earlier, this is our first time we do a direct to consumer type of business and there is a lot of the experience that we are trying to gain. So we want to learn to walk before we run. But certainly 2007 is still quite a bit of time ahead of us and I believe that we will learn enough to be able to probably exercise some of these experiments.

Andrew Weiner - Burnham Asset Management

Ulrich, just a last question, should we assume that the cash tax rate is similar to the reported rate?

Ulrich Gottschling

Correct.

Andrew Weiner - Burnham Asset Management

Thank you.

Operator

Thank you. At this time I show no further questions.

Ulrich Gottschling

Well, thank you everyone for calling in this afternoon and participating in our Q3 conference call. We look forward to the next conference call which will be the fiscal year end 2006. And thank you again. Bye, bye.

Tom Yuen

Thank you.

Operator

Ladies and gentlemen, thank for participating in today's conference. This does conclude the program. You may now disconnect.

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