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Executives

Richard Schuster – Senior EVP and COO

Kurt Freudenberg – EVP & CFO

Kent Smith – President, Distribution Division

Arthur Nadata – Executive Chairman

Martin Kent – President and CEO

Analysts

Matt Sheerin – Thomas Weisel Partners

Chuck Bennett [ph] – IBC [ph]

Andrew Galligan [ph]

Juan Lopez [ph]

Josh Goldberg – G2

Ted Allocca – Trident Partners

Russ Silvestri – Skiritai Capital

Mike Nery – Nery Asset Management

Nu Horizons Electronics Corp. (NUHC) F1Q11 (Qtr End 05/31/10) Earnings Call Transcript July 8, 2010 4:30 PM ET

Operator

Good day, and welcome to the Nu Horizons first quarter fiscal year 2011 financial results conference call. Today’s call is being recorded. Please note that for the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, our statements today may include certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially.

Such statements are based upon, among other things, assumptions made with information currently available to the management, including management’s own assessment of the Nu Horizons’ industry and competitive landscape. During the presentation, your line will be in listen-only mode. At its conclusion, there will be a question-and-answer session. Instructions on how to signal for a question will be given at that time.

I would now like to turn the call over to Mr. Richard Schuster, Senior Executive Vice President and Chief Operating Officer of Nu Horizons Electronics Corporation. Please go ahead, Mr. Schuster.

Richard Schuster

Thank you, operator. Good afternoon, and welcome to our first quarter of fiscal 2011 financial results conference call. Joining me on the conference call today from Nu Horizons' management are Arthur Nadata, Chairman of the Board; Martin Kent, President and Chief Executive Officer; Kurt Freudenberg, Executive Vice President and Chief Financial Officer; Kent Smith, President of Distribution Division and Executive Vice President; and Chris Winslow, Senior Vice President of Systems Distribution.

Kurt will give an overview of the numbers for the first quarter of fiscal 2011. I will then give a brief market overview and synopsis of the industry and our company’s performance, and then we will open the call to questions you may have.

At this point, I would like to turn the call over to Kurt for a review of the financial results.

Kurt Freudenberg

Thank you, Rich. Good afternoon, everyone. Consolidated net sales for the Q1 of fiscal 2011 were $210,762,000 compared to $147,759,000 in the comparable period last year, a 42.6% increase. Sequential quarterly consolidated sales increased $23,839,000 or 12.8% over the fourth quarter of fiscal 2010.

Compared to Q1 of last year, quarterly sales in the active electronics components segment were up 34.2% in North America, 64.6% in Asia, and 7.4% in Europe. Sequential quarterly sales in the active electronics components segment were up 9.4% in North America, 16% in Asia, and 15.9% in Europe. Sales in our passive components segment for Q1 of fiscal 2011 increased 88.9% compared to Q1 of the prior year and 18.9% sequentially.

We successfully concluded our Xilinx distribution agreement termination on June 5, 2010. All Xilinx inventories have been sold to our customers or returned to Xilinx for cash. Sales of Xilinx products were $60,749,000, $55,228,000, and $49,508,000 for the quarters ended May 31, 2010, February 28, 2010, and May 31, 2009 respectively.

Excluding Xilinx, net sales for Q1 of fiscal 2011 were $150,013,000 compared to $98,251,000 in the comparable period last year, a 52.7% increase. This compares with 42.6% increase, including Xilinx, for the same period. Sequential quarterly sales, excluding Xilinx, increased $18,518,000 or 14.1% over the fourth quarter of fiscal 2010 as compared to 12.8% increase including Xilinx sales. Excluding Xilinx, our book-to-bill ratio was 1.22 to 1 in the first quarter of fiscal 2011. Consolidated gross margin was 14.3% for the quarter ended May 31, 2010 and 15.3% excluding Xilinx for the same period.

First quarter 2011 selling, general and administrative expenses increased $3,224,000 or 14.9% over the prior year first quarter primarily due to higher sales compensation and selling-related costs associated with higher sales, as well as $562,000 severance cost associated with 66% reduction in work force. This severance cost includes $340,000 or 49 employees originally estimated on our year-end earnings call. The incremental SG&A expense was partially offset by foreign exchange income.

Interest expense increased $660,000 for the three months ended May 31, 2010 from $422,000 in the prior period primarily due to higher average borrowings compared to the prior year period related to higher sales. The effective tax rate was a provision of 22% and a benefit of 15% for the three months ended May 31, 2010 and 2009 respectively. Our effective tax rate is lower than the statutory rate of 35% for both periods, primarily due to foreign income earned at tax rates lower than the US tax rate, partially offset by state and local income taxes and an increase in the valuation allowance for net operating losses.

Net income for the three months ended May 31, 2010 was $3,374,000 or $0.18 per diluted share as compared to a net loss of $944,000 or $0.05 per diluted share for the three months ended May 31, 2009. The company has a strong balance sheet. At May 31, 2010, the company had $190,327,000 of working capital, our current ratio was 4.1 to 1, and our bank debt-to-equity ratio was 0.36 to 1.

On June 28, 2010, the company executed a new asset-backed global loan facility, which is expected to fund all of our borrowing requirements in North America, the United Kingdom and Asia over a four-year term. The facility provides for maximum borrowings of up to $80 million with an option to increase the facility to maximum borrowings of $110 million.

The ABL facility provides borrowers with variable rates, utilizing the asset-based formula, predicated on a percent of qualifying accounts receivable and inventory in any given month end, and taking into account the excess credit availability under the ABL facility. Proceeds from the ABL facility were used to pay off and terminate the pre-existing United States and United Kingdom bank lines and transaction fees.

Based on the asset-based formula, the company may not be able to borrow the maximum availability under the ABL facility at all times. Total borrowings on July 7, 2010 were $27 million and there were approximately $49 million of borrowings available under this facility. Subsequent to the end of the quarter, Nu Horizons and Oracle Corporation, formerly Sun Microsystems, entered into discussions relating [ph] to the non-renewal of their supplier-distributor relationship following the acquisition of Sun Microsystems by Oracle Corporation.

Sun Microsystems’ product sales contributed 4.5% Nu Horizons’ consolidated revenue in the first quarter of fiscal 2011 in connection with the elimination of this business from company’s consolidated results at a time to be determined, but currently expect it to be later this year. Nu Horizons plans to continue its strategy of concentrating on product lines with existing [ph] high growth and higher profit margin contributions.

Now I will turn the call back over to Rich.

Richard Schuster

Thank you, Kurt. For the first quarter of fiscal year 2011, we continued to see strength in our markets. Sequential quarterly sales in the active electronic components segment were up 12.3%, including Xilinx, and 13.5% not including Xilinx. More importantly, the book-to-bill ratio for the first quarter of fiscal year 2011 was 1.01 with Xilinx and 1.22 without Xilinx. And our book-to-bill ratio for the month of June, excluding Xilinx, was 1.16 to 1.

Suppliers continue to quote extended lead times without a clear date as to when the lead times will be reduced. Although most of our backlog is not delinquent to supplier commit dates, there is significant backlog that could be shipped once received. We continue to believe that due to our high percentage of proprietary content and our ability to view global pipelines on our global IT platform, we are seeing real demand in the active electronic components segment.

We have, of course, seen an increase in customer pipelines with the resulting backlog outside of 60 days, reaching a level that has not been seen for some time. As was mentioned previously, sequential quarterly sales, including Xilinx, in the active electronic component segment grew 9.4% in North America, 16.0% in Asia, and 15.9% in Europe. Growth not including Xilinx for the active electronic components segment was 10.6% in North America, 18.6% in Asia, and 11.9% in Europe. All regions continued to contribute to a positive book-to-bill as well as revenue growth.

Design activity within our customer base remained strong, with registrations up 21.7% sequentially and 34.2% from the same period last fiscal year. Design win revenue was up 31.1% sequentially and up 50.1% from the same period last fiscal year. We believe suppliers continue to value demand creation, new opportunities and design support, as well as our team’s ability to expand their customer reach. We also believe that our proprietary product focus positions Nu Horizons for growth, as suppliers continue to look for more than just logistic support from their distribution channel partners.

It has been a busy quarter for the active electronic components segment, with announcements including the expansion of our Lattice franchise from Asia to a global franchise, of our Pericom franchise from North America to APAC, of our Marvell franchise from North America and Germany to include the UK, and the addition of the newly combined Renesas and NEC in North America.

Finally, our Asian operations not only provided our greatest sequential sales growth, the Nu Horizons Electronic Corp. was identified as one of China’s most preferred 2011 overseas franchise distributors by Electronics Supply & Manufacturing China magazine in the categories of best supply capability, best technical support, and best logistics support for 2010.

The Alcatel-Lucent line continued to grow with record bookings during the quarter. We believe Alcatel-Lucent has taken significant policy actions within their channels to increase the percentage of their business that flows through distribution. In addition, Nu Horizons has been successful in signing new partners that have begun to book new business. With the policy change and the expanded partner community, we expect the revenue to continue to grow each quarter and provide positive profit contributions to the business.

Our NIC passive components business showed continued strength in the first quarter. Shortages and extended lead times due to capacity constraints and high demand were evident throughout the industry. We have been diligent in checking for double ordering and believe it as minimal from our customers. All regions have shown marked improvement in bookings and billings, but Asia still stands out as the fastest growing market for NIC.

As we mentioned last quarter, NIC was successful in pipelining enough product for the anticipated increases in demand. This is paying off significantly in sales, and we believe that it has helped us to bring in new customers as well. Quarter-over-quarter sales were up over 18.9% and book-to-bill was 1.27 to 1. Sales in all of our product categories such as capacitors, resistors, inductors and circuit protection devices are robust. However, certain products stand out.

Tantalum and aluminum capacitors for telecom, datacom, industrial, security and power applications are in strong demand. Inductors, which is our newest product line, is benefiting from the continued convergence of additional functions within electronic equipment. We believe that our diverse product line with over 125 series of components gives us the opportunity to service a wide variety of applications and customers. We expect the market will continue to be robust going forward.

Industry demand continues to be strong and our position in the supply chain has never been more necessary than it is today. The global technology landscape continues to evolve as new applications and processes for telecommunications, converge media, wireless and mobile, IT and Homeland Security proliferate at a torrid pace. We believe that there are many small and mid-sized OEMs that need a partner such as Nu Horizons’ that can devote time and add value. This is the foundation of our demand creation model and we are very encouraged by its outlook.

At the same time, we are emphasizing profitable growth. We are actively managing our line cards and product platforms to deliver enhanced profitability, even if it means working from a small base of revenues. The removal of Xilinx in June and Sun Micro in the near future may result in an annual reduction of our revenues. Yet these lines were among our lowest margin and slowest growth products. Our intent is to systematically invest in businesses that we view as playing in the fastest growing technology sectors and where our value-added demand creation model is expected to provide us with a greater level of profitability.

This concludes the presentation of our prepared remarks. We will now pass the call back to the operator so that we may open the conference call to any questions you may have. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is Matt Sheerin with Thomas Weisel Partners.

Matt Sheerin – Thomas Weisel Partners

Yes, thanks. And hello, everyone. Just have a handful of questions here. So the first question, just regarding demand and the book-to-bill, which was 1.22, it sounds like it was a little softer going into July but still obviously very strong. Is that down because of any seasonality you are seeing, or are you still seeing a pretty strong demand in booking trends from customers?

Kent Smith

I don’t – it's Kent Smith, Matt.

Matt Sheerin – Thomas Weisel Partners

Hi, Kent.

Kent Smith

Hi. From a seasonally standpoint, no, I wouldn’t associate with seasonality at this point. It was a June figure that we quoted. We did see a slight slowdown in APAC bookings although they are still very, very strong.

Matt Sheerin – Thomas Weisel Partners

Okay. So APAC – so, would the book-to-bill be then stronger in North America and Europe versus APAC?

Kent Smith

That was in June, but in the previous quarter, the highest was APAC with Europe not far behind and then the Americas.

Matt Sheerin – Thomas Weisel Partners

Okay. So June – but in June, in APAC – it would be what? North America, Europe and then APAC?

Kent Smith

Yes, actually I think Europe was higher.

Matt Sheerin – Thomas Weisel Partners

Europe was higher?

Kent Smith

Highest, yes.

Matt Sheerin – Thomas Weisel Partners

Okay. Above that 1.16, okay, that’s helpful. And in terms of the lead times, what do you generally for your broad line of semiconductor products are you quoting? What kind of lead times are you seeing right now?

Kent Smith

There seem to be two buckets. I think last time when we had the call, we were – what I was seeing was somewhere around 12 weeks on average. Now we have two buckets where we have somewhere between 8 to 12 and 8 to 14, and then we have some individual components and suppliers that are 14 to 20 weeks. So it stabilized the number of components and it was relatively stable back at that point as well, but we did see things creep up maybe one to two weeks. And there are few more devices in the category up to 20 weeks.

Matt Sheerin – Thomas Weisel Partners

And could you just give us some sort of generic descriptions of those products where the lead times have stretched out in the 14 to 20-week range?

Kent Smith

Yes. In some of the networking products is where I think we’ve seen probably some of the longest lead times.

Matt Sheerin – Thomas Weisel Partners

Okay. What about the power, semi land? Are you seeing –?

Kent Smith

So we did – we did see power go out on the semiconductor side, meaning lead times went out from our perspective from what a relatively short in 4 to 8 weeks to as much as 12 weeks. But still they are in the lower end of the – those products are in the lower end of the lead-time scale.

Matt Sheerin – Thomas Weisel Partners

Okay, thank you. And then just company-specific questions here. Could someone give the breakdown of your sales by category? You talked about the sequential moves in the system business and in the NIC business and the active business. Could you tell us what percentage of revenue that all represents?

Kurt Freudenberg

Matt, this is Kurt. Why don’t you move on to the next question and I’ll see if we could find it.

Matt Sheerin – Thomas Weisel Partners

Okay, fine. And on the Sun contract termination, that was – sounded like it was around $9 million in revenue in the quarter. When do you expect the revenue to go away? When will that end?

Kurt Freudenberg

Right now we are still in the process of discussing it. So it’s not clear at this point.

Matt Sheerin – Thomas Weisel Partners

Okay. And are you making any SG&A adjustments around that Sun business in terms of cutting resources there? Are you going to reallocate those resources to your other systems business?

Kurt Freudenberg

We are looking into that right now as well. So as soon as everything settled, it will be some combination thereof.

Matt Sheerin – Thomas Weisel Partners

And is it something that just happened in the last few days or so?

Richard Schuster

Yes, last week.

Matt Sheerin – Thomas Weisel Partners

Okay. Okay, great. And on the SG&A, which was up, and you talked about why, I guess $0.5 million was severance related; the rest of it sounds like it was variable cost. But looking forward at the lower revenue run rate, are you looking to bring that number down? What kind of SG&A should we be expecting in the next quarter or two? And what number are you comfortable with going forward?

Kurt Freudenberg

We’re always looking at bringing the number down for those costs so we can control, professional fees and the like. But this is just purely (inaudible). Operating costs long-term [ph] are somewhere in the $8 million range.

Matt Sheerin – Thomas Weisel Partners

What operating cost –?

Kurt Freudenberg

Total operating – SG&A.

Matt Sheerin – Thomas Weisel Partners

Okay.

Kurt Freudenberg

So – from that if there are any changes that could be related to (inaudible) could be related to other variable costs so we can renegotiate if there is any professional fees we can bring that down.

Matt Sheerin – Thomas Weisel Partners

But are you expecting to bring that actual $25 million number down in the next quarter when revenue is expected to be down?

Kurt Freudenberg

I can't answer that at this time.

Matt Sheerin – Thomas Weisel Partners

Okay. And it sounds like revenue is going to be up, I mean, with that strong book-to-bill on apples-to-apples basis off of that $150 million. But it also sounds like you need a significant increase in order to be profitable. Is that a fair assessment?

Kurt Freudenberg

We need – quite honestly, we need to be somewhere between the $50 million to $60 million range in sales. Somewhere –

Matt Sheerin – Thomas Weisel Partners

You mean $150 million to –

Kurt Freudenberg

Yes, that was a monthly number.

Matt Sheerin – Thomas Weisel Partners

Monthly number? $50 million to $60 million is a –?

Kurt Freudenberg

We’re seeing the same margins as we were experiencing non-Xilinx. That’s kind of the band.

Matt Sheerin – Thomas Weisel Partners

$50 million to $60 million a month?

Kurt Freudenberg

Yes.

Matt Sheerin – Thomas Weisel Partners

Okay. Okay. And then the tax rate, what would you expect that to be going forward?

Kurt Freudenberg

I would use for modeling purposes, use a statutory rate. We have taxes in the foreign entities and the variation in domestic income. It’s hard to predict the number, but I would use for your purpose the statutory rates.

Matt Sheerin – Thomas Weisel Partners

Okay. And just a couple more if I may. Just looking at the – on the balance sheet side, how much of the inventory at quarter-end was related to Xilinx?

Kurt Freudenberg

Most of it by quarter-end had gone back.

Matt Sheerin – Thomas Weisel Partners

Most of it had gone back? Okay. So we shouldn’t see much of it – a big swing then in the August quarter in terms of swings in accounts receivable or payables or inventory then?

Kurt Freudenberg

No.

Matt Sheerin – Thomas Weisel Partners

That’s pretty much cleaned up. Okay.

Kurt Freudenberg

Well, receivables –

Kent Smith

Receivables will, because we shipped a lot in Q1.

Matt Sheerin – Thomas Weisel Partners

Got you, got you. Okay. It sounds like because of that increased business, you are needing to fund that working capital, hence the credit line. And you said – what was the credit line – what was that most recently? Was it $27 million you said, Kurt?

Kurt Freudenberg

Yes, as of yesterday.

Matt Sheerin – Thomas Weisel Partners

As of yesterday, it was $27 million.

Kurt Freudenberg

Right. As you can see it from the quarter-end, we paid down a substantial amount of debt.

Matt Sheerin – Thomas Weisel Partners

Okay. Okay. I’ll let other people ask questions. Thanks so much.

Kurt Freudenberg

You’re welcome.

Operator

Our next question comes from Chuck Bennett [ph] with IBC [ph].

Chuck Bennett – IBC

Hello, everybody.

Kurt Freudenberg

Hello.

Richard Schuster

Hello, Chuck.

Chuck Bennett – IBC

Is Art Nadata here?

Arthur Nadata

I’m here.

Chuck Bennett – IBC

Okay. I didn’t hear your name in the very beginning.

Arthur Nadata

Yes.

Chuck Bennett – IBC

Listen. I’ve been on the call a few times. Finally I’m a little happy. So now I can hit you with some hard questions I wanted to ask before. One of my biggest fears is that I wake up one day and your company is bought out at three-quarters times book, which we think would be travesty. Looking at the whole company, it looks like you have no way to stop something like that. I’m looking at your top holders. I’m sure they are not pleased with the price performance, but I think now they are probably happy with your business performance after all this time. Looking at you and Richard, you probably are holding about 800,000 shares of stock. Is that right?

Arthur Nadata

Give or take, approximately.

Richard Schuster

Approximately, yes.

Chuck Bennett – IBC

Okay. So my biggest fear could happen because there is really no one in there standing in the way of it. I don’t think you would want to give up your shares at $5.50. Perhaps the top holders would. Now, I’ve held my tongue over the last year since I’ve taken a big position in this thing. The size of your salaries have been pretty big considering you don’t make any money. Now you are making money, I don’t think you are getting a raise, but maybe you guys could do something with that money to give value to shareholders such as myself. And I asked the last time we talked about the things that you could do, and I’m not sure if you did anything. I didn’t see anything done, and I can only stress that you’re worth more than this and it’s kind of tiring. You didn’t go down that much compared to the rest of the market when we got killed, but you shouldn’t be down here to begin with. Do you have any saying in your – on the table that could bring some type of shareholder value to everyone else there off of the top of your head?

Arthur Nadata

Well, I’ll answer part of the question and I’ll let Rich or Martin chime in. But I think I would hope that you would hear from the script and what’s going on that the company has been making some significant investments over the last year or two to try to balance the company more, bring margin up, more focused, invest in Asia, invest in certain links [ph] and try to – and just being a survivor in the market and having the strong balance sheet we have and investing and being a local company is quite a lot to say.

If you look at the rest of our competitors, there is really no one left in our space. And I think by staying focused, it might have been a little bit slower because we haven’t stepped out and made any large acquisitions. Most of it was done pretty much on our own – organically. It’s taking a little bit more time. But the company has stayed very strong from a balance sheet standpoint, and the market has been very difficult until just recently. We’ve probably been eight or 10 years since it’s been a sellers’ market. It’s really been difficult. We are now training our people how to get more money. People haven’t raised prices in a long time. So we’re working on a lot of things. I think that we’ve built a solid foundation. We are as disappointed in the value of the stock as anybody is. We don’t have a whole lot of control. The control we have is to continue to build the company with strong earnings and continue to grow. I know where you are coming from. We do have a lot invested and we feel that we’re doing the right thing and it’s going to benefit all of us down the road.

Chuck Bennett – IBC

Richard, do you have anything you want to add to that?

Richard Schuster

No, I think Art is right on – you know, I believe that we’ve built a solid company. I think what’s – we are always concerned with giving value to our shareholders. That’s a priority. And I think the way we view it is that if we can increase the earnings, if we can expand our business, expand our top line sales, our GP margins, that is we think the best way to add value for our shareholders, showing those earnings.

Chuck Bennett – IBC

I would agree in a lot of levels, but I think there is – you know, you really want to know why your stock probably won’t go up past $4 even with how you’re doing? I mean, you’re performing. You’re doing the right thing. But there is a reason why your stock's not going to get past $4. It’s not because I’m selling it. The reasons are really simple, is that everyone that’s watching you, it’s almost like a show-me. They don’t believe it because you’re getting paid a lot of money and nobody is investing in their own company, which is – in other words, there is nobody buying stock. And I’m sure you hear a lot of people bringing this up, but it is the truth. No one is going to believe until someone gets up, pulls up some of that money that they are making and actually put the step forward in the right direction with regard to that. I can’t – I don’t see it getting past $4.

Arthur Nadata

Okay.

Chuck Bennett – IBC

I would –

Arthur Nadata

We are having the same conversation that you are talking about, Chuck.

Chuck Bennett – IBC

Okay. I mean, we talked about this last quarter. I brought it up. So –

Arthur Nadata

I understand. Last quarter is not that far away and there is liquidity issue. We know we don’t trade a lot of shares. And there are other issues. You’re right. The most important thing for us was to get the company strong stable going forward, absorb the Xilinx set, and try to continue to keep our people motivated and focused and keep the company’s balance sheet strong.

Chuck Bennett – IBC

Any chance you’re talking to Xilinx to come back?

Arthur Nadata

No.

Chuck Bennett – IBC

How did you turn $40 million worth of inventory to $60 million?

Arthur Nadata

Well, we sold a lot of it and we returned some of it.

Chuck Bennett – IBC

I like it. I’ll tell you what. I’m going to recommend you to a friend of mine and maybe if you guys are looking to take a position in your company, he can facilitate that. I appreciate your time fellows.

Arthur Nadata

Thank you.

Operator

Andrew Galligan [ph].

Andrew Galligan

I have a quick question for you. I saw your inventories dropped about 35 – $34 million, $35 million sequentially. How much of that was Xilinx?

Kurt Freudenberg

We had roughly $40 million in Xilinx inventory.

Andrew Galligan

That’s today or that was at the end of February?

Kurt Freudenberg

We have nothing today. That was at the end of the year, which is we need it sold and – or returned.

Richard Schuster

End of the first quarter.

Kurt Freudenberg

End of the first quarter.

Andrew Galligan

End of first quarter. So really then if you ex out the Xilinx inventory, inventories are up sort of $5 million sequentially?

Kurt Freudenberg

Roughly.

Andrew Galligan

Yes, okay. Do you feel like that you need to increase inventories here?

Kurt Freudenberg

We’re always looking at –

Arthur Nadata

You do need to keep pipelines going. The market is strong. Activity is up. And you’d have to have inventory on the shelf. That’s what distributors’ function is. And you can’t continue to take back orders on long lead time parts. So yes, you have to have the right products. As long as your mix is strong and you’re turning the right products, then it’s a true asset.

Andrew Galligan

So would you say that the increase in inventory – would you want to build your inventories even more this quarter? This past quarter that just ended?

Arthur Nadata

I’d say they are on track to where we see it has to be with the growth that we are projecting.

Andrew Galligan

Okay, great. Thank you very much.

Kurt Freudenberg

You’re welcome.

Operator

Juan Lopez [ph], your line is open.

Juan Lopez

I’m sorry. Can you guys hear me?

Richard Schuster

Yes.

Juan Lopez

Sorry. I apologize. I’m sorry. Can I turn to you one second? You said – the prior question regarding inventory, you said that the prior quarter you had $35 million of Xilinx inventory?

Kurt Freudenberg

At year-end we had $40 million of Xilinx inventory.

Juan Lopez

$40 million. I‘m sorry, I heard $35 million, I apologize. Okay. And so, of that – of the 117-ish, $40 million that was Xilinx, and of the $83 million you’re reporting tonight, zero that’s Xilinx.

Kurt Freudenberg

That’s right.

Juan Lopez

Okay. And there – I don’t know if there is – just as you look at your cost of sales for the last two quarters, was there an impact like the Xilinx relationship wound down? Were you continuing to compensate people similarly? I guess what I’m ultimately asking you is, is there a way to call out where your cost of sales would have been, ex Xilinx, both last quarter and this quarter?

Kurt Freudenberg

What the gross profit would be?

Juan Lopez

Yes, asked a different way, sure.

Kurt Freudenberg

Yes, it’s higher. And that’s one of the things we noted in the script.

Juan Lopez

Did you have just a ballpark?

Kurt Freudenberg

Yes. It’s 14.3% for the quarter, which includes Xilinx, and 15.3% excluding Xilinx.

Juan Lopez

And do you have the same latter figure for last quarter?

Kurt Freudenberg

I do not have it in front of me, but it’s a similar comparison.

Juan Lopez

Okay. Okay, great. The second question, if I just look at European business, I hope all my numbers are right because I think you guys may have restated some stuff going back. But it was up about 18% quarter-to-quarter. Does that sound about right to you?

Kent Smith

No, that was APAC. Are you talking about with or without Xilinx because we’ve put it in both ways?

Juan Lopez

I think I’m just using the straight numbers out of the release. So I’m probably talking with-Xilinx because that’s how you guys reported them.

Kent Smith

Yes, 15.9%.

Juan Lopez

15.9% ex Xilinx?

Kent Smith

With Xilinx. 16% with Xilinx; and then without Xilinx, 11.9%.

Juan Lopez

Okay. Sorry. But the question is probably still going to apply. Just looking back historically, this quarter is generally down in the European business if I just look back to your history or down to sort of up slightly. Is there anything sort of unusual in just either where inventory levels were in Europe or anything about customer demand there that caused your growth to be a little bit better than it usually is this time of year?

Kent Smith

It was actually relatively broad-based, meaning, we are seeing it from all three regions, Germany, the UK and the Nordic region. And it’s again a broad-based business. When you look at the business, the bookings and billings are both across pretty good customer base.

Juan Lopez

Okay. So I’m sure you guys get this question all the time, but with everything going on in Europe, apparently your business is largely unaffected or you're not seeing much of an impact of any of the stuff you're reading about in the newspapers?

Kent Smith

That’s right. And understand the market share is an opportunity for growth for us. So it’s a good opportunity for us.

Juan Lopez

Okay. The last question, just a nuance, I wanted to understand a little bit better. It sounded like in some of your – some of the components you are distributing, you’re seeing lead times extend a little bit recently. At the same time, you did note your book-to-bill eased a little bit in June. And I think your commentary was you saw a little bit of bookings – I don’t think the word you used was softness, but deceleration, whatever the word was, in your Asia-Pac region. So I think the thing I’m ultimately wondering about is, if your book-to-bill moderated a little in the month of June and you saw some softening in the Asia-Pac region, why do think lead times extended in the context of both of those two things happening?

Kent Smith

Books still have and are speaking for what we’re seeing with our suppliers, they still have not caught up. So lead times have extended as they continued to try to catch up with the links that have been put in place or I should say bookings that have been at a positive book-to-bill run rate for quite some number of months now. So they are still trying to catch up. And I really – like we said in the script, we are not sure when that’s going to turn. I don’t expect it to get worse, if you will, but I’m not sure when they are not going to catch up either.

Juan Lopez

Okay. Okay. Thanks so much. Very helpful. I appreciate it.

Richard Schuster

You’re welcome.

Operator

Our next question comes from Josh Goldberg with G2.

Josh Goldberg – G2

Hey, guys, good results. I had a couple of quick questions on the numbers ex Xilinx. It sounds like you did roughly around $150 million without Xilinx for the quarter and your book-to-bill was 1.22, which implies something like $180 million or so of bookings. Is that fair?

Richard Schuster

Yes, that’s fair.

Kurt Freudenberg

Yes.

Josh Goldberg – G2

Okay. And then the June quarter – the June month started and your book-to-bill went down, both judging from the bookings that you did in that quarter, some of these – your total bookings in June probably weren’t down much from what they were through those three months. It’s just the denominator was higher. Is that a fair assessment or did you see a drop-off in your bookings?

Richard Schuster

No, that’s fair as well.

Josh Goldberg – G2

Okay. So the idea that there has been any sort of softness is really just because you are growing your sales not because the bookings have slowed down.

Richard Schuster

Yes.

Josh Goldberg – G2

Okay. Just so I’m clear about that. If these trends continue, I mean, it would seem like you would at least grow 10% sequentially in the second quarter. Yet you talked a little bit about staying profitable. And I’m just wondering why would you have a problem with profitability if you are going to be closer to a $170 million or so of revenue in the second quarter.

Richard Schuster

I think what we said was we were asked that what level would we attain profitability and we gave an estimate that it was – to attain profitability, our top line would have to be in the mid $150 million to $160 million range.

Josh Goldberg – G2

Okay.

Richard Schuster

The current margins.

Josh Goldberg – G2

But based on what you’ve seen so far, there is no reason to believe that that number shouldn’t be reached in the second quarter.

Richard Schuster

We can only – you can extrapolate that from the first quarter and from June since we don’t give guidance.

Josh Goldberg – G2

Okay. Can you talk a little bit about the new PLDs vendor that you signed up to replace Xilinx and how well that’s going?

Richard Schuster

Sure. Lattice – we had Lattice in Asia, as we’ve mentioned, and have been building a business there. Lattice will be in APAC, our number one supplier this quarter. So it’s substantial growth that we’ve seen there. And we’ve been building the business here in the Americas and Europe, now that it's global franchise. And I’ll just – without going into specifics, just share what I believe that would represent our fastest growing supplier of this quarter and to the foreseeable future.

Josh Goldberg – G2

Okay. And do you believe that that’s taking share from some of your other distributors or how do you – why is it growing so fast?

Richard Schuster

They have changed. So that’s a part of it and that the added pieces they did adjust make some changes to their channel, which is public in reducing the number of partners that they have.

Josh Goldberg – G2

Okay.

Richard Schuster

But they added us and reduced in other areas.

Josh Goldberg – G2

Are they 10% of your revenue or do you expect them to be 10% this quarter?

Richard Schuster

There is no supplier in looking at – last quarter and for the foreseeable future, no supplier will be over 10% of our revenue.

Josh Goldberg – G2

Okay. All right. Great. Thank you so much.

Richard Schuster

You’re welcome.

Operator

We’ll go next to Ted Allocca [ph] with Trident Partners.

Ted Allocca – Trident Partners

Hi, guys.

Arthur Nadata

Hello, Ted.

Ted Allocca – Trident Partners

Hi, guys. Great quarter, by the way.

Arthur Nadata

Thank you.

Ted Allocca – Trident Partners

I was quite impressed with the $0.18. Nice revenue growth. And you guys have built a heck of a company through the years and you guys know I’ve been there with you for a long time, always believe in. I think one of the things – the reason I kind of hopped on the call, the gentleman, I don't know his name, Bennett, a few calls earlier, was talking about the price of the stock and blah, blah, blah. I think to just kind of speed that up a little, I would think at this point in time, I know you said you’re considering things, the word that he left out was perception. And the perception – although I’m comfortable with the company, the perception really isn’t the greatest at the moment with the stock. I know the market conditions are tough and all that, but let’s go a step further. I think Wall Street needs to see this company put a flag in the sand and say, hey, we really believe in it, whether the company buys a little stock, whether the officers at the company step up and buy a little stock. I think ultimately far more than that giving us a temporary blip, it sends a message so that when people look at the company, they say, hey, they believe the story. How would you guys feel about a stock buyback?

Martin Kent

This is Martin Kent. Can I answer that please?

Arthur Nadata

Sure, Martin.

Martin Kent

It’s something we talk about quite fairly, but we discussed it all on a number of occasions particularly in Board meetings, but if you look at the growth that we have in business today and you look at our new facilities that we have that Kurt talked about, then the truth is we are using our facility to fund the growth, which is our belief that we have to fund the growth. We have to make sure we have the right energy levels with our customers. We have to make sure we are growing the suppliers that we have so they are satisfied with our performance. And so if you look at the present time what we are doing with the cash that we have available is we’re investing it back into the business to make sure we support the growth of the business (inaudible) in turn is increase the earnings. And I think today that’s the right use of our cash. And I understand the concept of buying back stock and as I said, something we discussed on a regularly basis. But I really think if you look at the growth number today, we must make sure we continue to invest, make sure we hit those numbers.

Ted Allocca – Trident Partners

Martin, I couldn’t agree with you more. You don’t know me, but let me just explain. I’ve been involved with this company since their inception of them going public in 1983. I own an awful lot of stock and I’ve at times have owned a real awful lot of stock. So I agree. You did need to do that. And I’m just going to give you an example. As you go, you have your road shows, you meet institutions, you talk to other firms. Hopefully one day you will get some additional research. People are going to see the great balance sheet. They are going to see the great lines. They are going to see a great management team that built a great company. But they are also going to see a couple of blemishes over the last couple of years. A CEO that came and went in a quick period of time doesn’t look great. We all know that. Okay.

There was an issue in Asia with some numbers that had to be restated. That number looks good. So these are things that can create a perception on Wall Street that’s not great. There are thousands of public companies. There are plenty of other companies for a fund manager to go look at that don’t have any blemishes, with all due respect. And I’m a big believer and I agree with what you said. But I’ll end by saying this. With a relatively small amount of money that would not affect what you just said, I still think you could put a flag in the sand and you could show the world that you believe in the story and you wouldn’t need enough dollars to really affect the working capital for you guys to continue to grow this wonderful company. And that’s 28 years of experience with the stock speaking. That’s it; one man’s opinion.

Martin Kent

Okay. Point well taken and it’s always out for discussion.

Ted Allocca – Trident Partners

Okay. Great job, guys. I know it’s going to work in the long run. I know it.

Martin Kent

Thank you very much.

Richard Schuster

Thank you, Ted.

Operator

Our next question comes from Russ Silvestri with Skiritai Capital.

Russ Silvestri – Skiritai Capital

Hello. Good afternoon. Couple of questions. First of all, could you try and quantify the revenue opportunity for Lattice in total on an annual run rate basis when those gets mature? That’s question one. And then number two, you talked about controlling expenses to deliver strong operating earnings. And trying to get a sense of what you think the operating earnings should be since you can’t control those expenses that you mentioned in those operating costs. And the last question is, Marvell, you said you are in Europe. Are you servicing Marvell in Asia yet?

Richard Schuster

I’ll answer the last question first. We have Marvell in India today. And as you mentioned, we have Marvell in Europe. We expanded in the UK with the most recent expansion with Marvell.

Russ Silvestri – Skiritai Capital

So – just follow up quickly on that. So, of the total world available market for Marvell, what percent do you think you serve?

Richard Schuster

I don’t know a percent –

Kent Smith

The biggest market is Asia, we have it in India right now. There are five locations.

Russ Silvestri – Skiritai Capital

So you’d say – I mean, it’s somewhere between probably 25% and 40%?

Kent Smith

Yes, it could be. Yes, it sounds reasonable. Yes. We have North America and a good part of Europe and India.

Richard Schuster

That sounds in that range, up to 40%.

Russ Silvestri – Skiritai Capital

Thank you. And the other two questions?

Kurt Freudenberg

And with regard to – this is Kurt. With regard to operating expenses, I can’t give you a forecast, Russ. I can tell you we’re always looking at the right mix of costs to our GP volume and what we’re generating. So there is nothing new in the horizon, but we’re always looking at it and vis-à-vis what we are selling and what our gross profit is.

Richard Schuster

In terms of Lattice dollar-wise, at this point we are looking at about 10% of our business, in that range. In that range, yes. So no – like I said earlier, no supplier will be over 10% of our revenue. We expect Lattice to encroach on that.

Russ Silvestri – Skiritai Capital

So 100 some odd – what's the total revenue per year you can generate from Lattice?

Richard Schuster

We don’t share individual supplier revenue.

Russ Silvestri – Skiritai Capital

Okay. And then just one follow-up on Lattice. Is the Lattice business at this point in time primarily fulfillment so one would assume it’s probably lower than the company’s average gross margin and as that relationship matures, would probably be at least at the company gross margin?

Richard Schuster

Yes.

Russ Silvestri – Skiritai Capital

Okay. So currently it is below the companywide gross margin, but you expect it to be at or above?

Richard Schuster

The answer is, it’s in that ballpark. We are – we have indigenous demand creation design revenue hitting now in Asia. So we’re seeing margin increasing there and we expect to see that in the rest of the world as well, as we develop new opportunities.

Russ Silvestri – Skiritai Capital

Okay. Thank you.

Operator

(Operator instructions) Our next question comes from Mike Nery with Nery Asset Management.

Mike Nery – Nery Asset Management

Hi, guys. I actually don’t have any questions, but just want to say it was a great quarter and I loved the comment about emphasizing profitable growth. Keep it up.

Kent Smith

Thank you, Mike.

Richard Schuster

Very nice of you.

Operator

And we have no one else in queue at this time. (Operator instructions) And we have no one else in queue at this time. I’d like to turn the conference back over to our speakers for any concluding remarks.

Richard Schuster

Okay. I’d like to thank everyone for participating on the conference call. We welcome your questions and look forward to the next conference call. Thank you all, and have a great day.

Operator

That does conclude today’s conference. The replay for today’s call will be available today, beginning at 7:30 PM Eastern Time and will be available until July 15 by dialing 1-888-203-1112 or 719-457-0820 and using the passcode 5181423.

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