Senomyx Inc. Q2 2010 Earnings Call Transcript

| About: Senomyx, Inc. (SNMX)

Senomyx Inc. (NASDAQ:SNMX)

Q2 2010 Earnings Call

August 05, 2010 11:00 pm ET


Sharon Wicker - VP and CCD Officer

Kent Snyder - CEO and Chairman

John Poyhonen - President and COO

Tony Rogers - VP and CFO


Andrew Vaino - Roth Capital Partners

Dalton Chandler - Needham & Company

Pamela Bassett - Cantor Fitzgerald

Steve Brozak- WBB Securities


Good morning. We will now begin the Senomyx second quarter 2010 conference call. At this time, I would like to inform you that this conference call is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions-and-answers after the presentation. (Operator Instructions).

I would now like to turn the call over to Ms. Gwen Rosenberg, Senomyx Vice President of Investor Relations and Corporate Communications.

Gwen Rosenberg

Good morning and welcome to the Senomyx second quarter 2010 earnings and corporate update conference call.

Participating in this call from Senomyx will be Kent Snyder, Chief Executive Officer; John Poyhonen, President and Chief Operating Officer; Tony Rogers, Vice President and Chief Financial Officer; Don Karanewsky, Senior Vice President, Discovery; and Sharon Wicker, Senior Vice President and Chief Commercial Development Officer.

Before we begin, please note that during the course of this call, we may make projections or other forward-looking statements regarding future events or financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections described in the press release and this conference call.

Factors that might cause such a difference include, but are not limited to, those discussed in our quarterly and Annual Reports filed with the SEC. Copies of these documents are available upon request from Investor Relations at Senomyx or may be accessed via our website, at

I'd now like to turn the discussion over to Kent Snyder, CEO of Senomyx.

Kent Snyder

Thank you, Gwen. Good morning to everyone, and thank you for joining the Senomyx management team for our conference call and webcast. During this call, we will provide you with a general business and financial update for the second quarter 2010, including comments regarding Senomyx's business strategy and corporate collaboration. This will be followed by a question-and-answer session.

The second quarter has been quite active for Senomyx on many fronts including progress for the programs, business development activities and commercialization efforts. I will start the call by discussing Senomyx's progress with sweet enhancer program and it's relevance to our overall commercialization strategy, specifically the large average category opportunity.

We continue to be very enthusiastic about Senomyx's ongoing success and development sweet enhancers and the potential long-term value of these ingredients. Within the past two years we have received GRAS or Generally Recognized as Safe regulatory status for two sweet enhancers.

First our S2383 sucrose enhancer which enables up a 75% reduction of the high intensity sweetener sucrose in numerous products received a GRAS designation in the fourth quarter of 2008. The following year Senomyx received GRAS determination for the use of S6973 a novel sucrose enhancer in a large number of food products.

S6973 allows the sugar content of certain products to be reduced by up to 50% without altering desired sweet taste. In the first quarter of this year the GRAS designation for S6973 was extended to the instant and ready to drink coffee and the tea categories as well as imitation diary products such as non diary creamers and whiteners.

We have also identified a new family of sucrose enhancers with the same physical properties that may be advantageous for a broader range of beverages and other product application. I am pleased to report that a recently discovered sucrose enhancer from this family enables up to 50% reduction of sugar in preliminary tastes.

In addition, Senomyx has identified promising flavor ingredients that demonstrated a statistically significant (inaudible) of the sweet taste of fructose, a key component of high fructose corn syrup. This is meaningful because high fructose corn syrup is the primary sweetener used in carbonated and certain other beverages, especially in North America.

A number of new enhancer has been active in the fructose screening assay. They are currently being optimized to increase their potency and improve their physical properties, followed by evaluation in taste tests.

There is an increasing focus by consumers, health experts and government agencies on reducing the consumption of carbohydrate sweeteners such as sucrose and fructose. In the highly competitive consumer food and beverage markets, manufacturers cannot sacrifice taste without losing market share. Senomyx enhancers could allow food and beverage manufacturers to respond to this need by offering lower calorie products that maintain the taste characteristics that appeal to consumers. Our sweet enhancers may therefore provide the company with a very timely and substantial commercial opportunity.

Senomyx's potential profitability is depended on the commercialization of our flavor ingredients. As we stated previously, we believe the sweet enhancer program is the most valuable of all of our programs and especially large market for sweet enhancers is non-alcoholic ready drink beverages a $600 billion industry projected by industry analyst to exceed $1 trillion by the year 2020.

In order to exploit this opportunity as fully as possible, we have been evaluating opportunities that would allow us to accelerate a sweet enhancer speed to market, maximize penetration rate, a large number of product category and access the market broadly across many geographies.

On April 23rd, we announced that Senomyx had a term sheet with Coca-Cola regarding a potential continuation and expansion of our collaboration. During the 60-day negotiations period, Senomyx continued to receive funding from Coca-Cola at the same rates as was provided under our 2002 collaboration agreement.

Despite those company's efforts we were unable to reach mutually satisfactory terms for a new collaborative research agreement within the period and accordingly, the term sheet expired on June 22. Coca-Cola was a valued Senomyx partner for eight years and we appreciate having worked with them.

On June 24, we announced that Senomyx and PepsiCo. the world's second largest food and beverage company signed a letter agreement and entered into an exclusive 60 day negotiation period for the completion of a definitive collaboration agreement related to Senomyx's sweet taste technology.

The letter agreement includes key, commercial and financial term for a potential multi-year collaborative research program focused on the discovery, development and commercialization of new artificial sweet enhancers, natural sweet enhancers, and natural high potency sweeteners for the non-alcoholic beverage category.

Under the letter agreement, Senomyx has received a payment of $7.5 million from PepsiCo. The payment, which is non-refundable, except under limited circumstances, will be applied as partial payment towards an upfront license fee, if Senomyx and PepsiCo enter into a final definitive agreement.

PepsiCo is an innovative company that shares our commitment to providing healthier, great tasting products to consumers. We believe that our potential new collaboration would include a commercialization timeframe and other terms that are beneficial for both companies. We are working diligently with PepsiCo to complete the final agreement, and we look forward to a long and productive relationship with them.

Please note that Senomyx S6973 sucrose enhancer will not be part of any new agreement between Senomyx and PepsiCo. This gives us the opportunity to enter into one or more collaborative agreements with other parties regarding commercialization of S6973 for use in the GRAS approved beverage categories that include dairy beverages such as chocolate flavored milk along with instant tea and coffee. Potential collaborators are currently evaluating S6973 in these products.

As you'll recall from previous quarterly updates, Firmenich holds the rights to S6973 in almost all food categories. Don will provide a brief update on their activities later in the call.

Turning to another important recent event. During the second quarter, we were informed that the European Food and Safety Authority, known as EFSA, has provided a favorable opinion for Senomyx's savory flavor ingredients, S336 and S807. This means that no further evaluation is required by European regulators regarding use of these flavors or use of these ingredients as flavors.

The successful conclusion of the evaluation process is a key step towards receiving an approval to use the savory ingredients in the European Union. Final regulatory approval and commercialization in the EU is contingent upon their being included in the EFSA Union List, which EFSA has targeted for publication by the end of 2010. At the conclusion of my remarks, John will provide additional comments about commercialization activities with the savory flavor ingredients.

Moving to our other discovery and development programs, Senomyx made notable progress in our bitter blocker program during the past quarter. Development activities including primary safety studies have now been completed for our S6821 bitter blocker allowing Senomyx to submit regulatory filing in the second half of the year. S6821 is effective in reducing the bitterness of a variety of product prototypes.

Another Senomyx bitter blocker S0812 is also very promising. Development activities with S0812 are expected to conclude by year-end and regulatory filing are planned for 2011. We are encouraged by the accelerated pace of this program and potential long term value of our bitter blocker program.

Our Salt Enhancer program continues to be an important focus for Senomyx. The goal of this program is to identify flavor ingredients that allow a significant reduction of sodium in foods and beverages yet maintain the salt taste desirable to consumers.

As we've discussed previously, Senomyx discovered SNMX-29 or what we call Senomyx-29 a protein with characteristics that indicate it could be involved in human salt taste perception. We identified compounds that were active in the screening assays based on this protein. However, these active compounds have not provided significant enhancement of saltiness in taste tests which leads the Senomyx-29 is not the primary receptor responsible for human salt taste.

Senomyx's scientists are currently exploring the role of other proteins that may be integral to the sensation of salt taste. This high priority effort involves chemistry and biology approaches, including assessing components of Senomyx's proprietor database in protein found in taste tests.

We believe that discovery of the protein or proteins that function as a salt taste receptor could lead to identifying a salt taste enhancer. Salt experts have identified high salt consumption as a contributing factor to coronary heart disease, hypertension, stroke and other (inaudible) conditions.

More than three quarters of American Sodium intake is from processed food and a restaurant meal. A Senomyx salt enhancer that enables sodium reduction in these products could provide a significant benefit towards consumers.

Our cooling flavor program continues to make considerable progress. The goal of this program is to identify novel cooling flavors that do not have the limitations of currently available agents.

Senomyx has discovered new cooling flavors that demonstrated a taste proof-of-concept and cooperation with our partner for this program Firmenich; we have prioritized sample classes that are the focus of further optimization. Importantly, some of these new cooling flavors have displayed cooling properties that exceed those that of commonly used agents. In addition to other accomplishments, Senomyx has increased our intellectual property portfolio during the past quarter.

As of June 30th, 2010, Senomyx is the owner or exclusive licensee of 207 issued patents and 362 pending patent applications related to proprietary taste receptor technologies in the US, the Europe, and elsewhere. Technologies covered in our patents include taste receptor sequences and functions, screening assays, new flavor ingredients and product applications.

Lastly regarding our discovery and development activities, I'd like to mention that Senomyx achieved our recent scientific advances under the leadership of Dr. Donald Karanewsky, who has served as Senior Vice President, Discovery since joining Senomyx in June of 2007. Don was appointed to the position of Senior Vice President and Chief Scientific Officer during the past quarter in recognition of his valuable contribution to the company.

I'll now turn the discussion over to John Poyhonen who will provide an updated on commercialization and business activities. John.

John Poyhonen

Thank you, Kent. I'll begin my remarks with the review of our partner's commercialization activity and then I'll provide updates regarding our collaborations and our business development efforts,

As Kent discussed, we are looking forward to the publication of the EFSA Union List by the end of this year, which would allow commercialization of Senomyx's savory flavor ingredients in the European Union.

The primary application of these ingredients are to reduce or replace monosodium glutamate known as MSG and to enhance the savory taste of food by combining Senomyx's savory flavors with other ingredients to create unique new flavors.

Nestlé, the world's largest food and beverage company, is currently conducting marketing activities in the Pacific Rim, Latin America, and Africa with both new and reformulated established products that incorporates Senomyx's savory flavor ingredients.

Senomyx anticipates that Nestlé will continue to initiate commercial launches of products containing our savory flavor ingredients in the current and new geographic areas on an ongoing basis. Approval in Europe could create a new market opportunity for Nestlé at approximately two-thirds of their annual established product sales are in Europe.

Last month Senomyx and Nestlé amended our collaboration agreement impacting two key elements. First, we established a new methodology for calculating payments due to us. Nestlé will now make an annual predetermined lump sum base payments to Senomyx at the beginning of each calendar year. The base payment amount will increase annually beginning in 2013.

The base payment amount allows Nestlé to use up to a specified volume of our savory flavor ingredients each year. This volume threshold exists throughout the life of the agreement and importantly Senomyx will receive additional incremental payments for amounts above the threshold amount. This provides us with the best of both worlds. We'll receive a guaranteed annual payment, plus the opportunity to participate in the upside in increased Nestlé sales.

Secondly, it's noteworthy that the amendment expands Nestlé's rights through a new non-exclusive grant to commercialize certain retail products containing our savory ingredients in Asia. We are pleased with this new arrangement, which encourages greater utilization of our savory flavor ingredients by Nestlé and allows Senomyx to benefit from their activities.

Regarding other commercialization activities, Ajinomoto, a leading global manufacturer of food and culinary products, has increased the number of products that contain a Senomyx flavor ingredient being introduced in Asia and in other key regions. Senomyx anticipates that Ajinomoto's commercial activities will expand through additional offerings in countries over time. Ajinomoto has selected several new Senomyx flavor ingredients under our agreement for potential marketing; selection of the new ingredients which are all currently being evaluated by Ajinomoto triggered $0.5 million dollar milestone payment through Senomyx.

In addition to Nestlé and Ajinomoto's marketing efforts, Firmenich's continuing commercialization efforts with S2383 Senomyx's extremely effective enhancer of the high intensity sweetener sucralose. Firmenich is a global leader in providing ingredients and flavor systems to major consumers, has exclusive worldwide rights to market the sucralose enhancer as either a standalone ingredient or as part of a flavor system in all food and beverage product categories.

They will take Senomyx's royalty on all sales of S2383 whether it's sold on a standalone basis or within a flavor system. We expect to begin receiving royalty revenues following the first commercial sale which is anticipated later this year.

As Kent mentioned earlier, Firmenich has exclusive rights for worldwide commercialization of selected Senomyx sweet enhancers including S6973 or sucrose enhancer in virtually all food product categories. Firmenich has imitated pre-commercialization activities with major clients in anticipation of conducting its first product launches during 2011. These activities include product application work, manufacturing scale up and product demonstrations. We are very encouraged by the response that Firmenich has been receiving from potential customers we've had an opportunity to evaluate S6973.

Regarding our business development activities, we are continuing seek new collaborations with retail and ingredient supply partners for several Senomyx discovery and development programs. We're pleased that our technologies continue to draw interest from perspective partners and we believe our flavor programs will offer valuable solutions for new collaborations and potential new revenue opportunities for Senomyx.

This completes my update. Tony Rogers, Senomyx's CFO, will provide a financial overview of the company.

Tony Rogers

Thank you, John. Revenues were $5.7 million for the second quarter of 2010 compared to $3 million for the second quarter of 2009, an increase of 91%. Revenues were $13.4 million for the six months ended June 30, 2010 compared to $6.5 million for the six months ended June 30, 2009 an increase of 107%.

The increase in revenues for the second quarter and the year to-date were primarily due to recognition license fee and R&D funding revenue related to the company August 2009 sweet enhancer collaboration with Firmenich.

License fee and R&D funding related to the collaboration contributed $3.3 million and $6.2 million for the three and six months period ending June 30, 2010. Also contributing to the increase year to-date was total $3 million in non recurring milestone payments and cost reimbursement from collaborators.

Research and development expenses, including stock based compensation expense, were $7.1 million for the second quarter of 2010 compared to $7.8 million for the same period 2009, a decrease of 10%.

Research and development expenses, including stock based compensation expense, were $13.5 million for the six months ended June 30, 2010 compared to $16.4 million for the same period 2009, a decrease of 13%. These decreases were primarily due to reduced expenditures for compound acquisition and the related high throughput screening activities as well as reduced personnel-related expenses.

General and administrative expenses, including stock based compensation expense were $3.3 million for the second quarter of 2010 compared to $3.2 million for the second quarter of 2009. General and administrative expenses, including stock based comp expense were $6.4 million for the six months ended June 30, 2010 compared to $6.5 million for the same period in 2009.

The net loss for the second quarter of 2010 improved to $0.12 per share compared to a net loss of $0.26 per share in the second quarter of 2009. The net loss for the six month period ended June 30, 2010 improved to $0.18 per share compared to $0.50 per share for the six months ended June 30, 2009.

Due to the receipt of $7.5 million from PepsiCo related to the June letter agreement, we are revising our cash utilization guidance for 2010 from a range of $14 to $16 million to a range of $6 to $8 million.

At this time, we are not revising our other financial guidance metrics; however, we will update our financial guidance as necessary if we enter into a definitive agreement with PepsiCo.

For the full year 2010, Senomyx at this time expects total revenues of $20 million to $24 million, total expenses of $42 million to $44 million, of which $5 million to $6 million is non-cash, stock-based compensation expense. Net loss of $18 million to $21 million and basic and diluted net loss per share of $0.48 to $0.56 per share and net cash used in operating activities to range from $6 million and $8 million.

At this time, I will turn the call back over to the operator to open it up for questions.

Question-and-Answer Session


Thank you. The question-and-answer session will begin at this time. (Operator Instructions). Please stand by for your first question. Mr. Snyder, our first question comes from the line of Andrew Vaino, representing Roth Capital Partners. Please proceed.

Andrew Vaino - Roth Capital Partners

You mentioned on the Nestlé deal that you guys would now be getting a base payment from Nestlé. Did you mention what that amount was?

Kent Snyder

No, we did not.

Andrew Vaino - Roth Capital Partners

Is it possible to get any guidance to try to figure this out?

Kent Snyder

No. At this point, we are not disclosing the specifics regarding that amendment.

Andrew Vaino - Roth Capital Partners


Kent Snyder

We have provided guidance in the past of our overall commercial revenue and that's roughly in the $2 million range, Andrew. So it will give you a sense of what the overall revenue would look like, and we're not changing that particular component of the revenue guidance at this time.

Andrew Vaino - Roth Capital Partners

Okay. Also, on the earnings you guys mentioned today, what was the amount of revenue that was from commercial sales of your products?

Kent Snyder

Commercial revenues for six months were $1.2 million.

Andrew Vaino - Roth Capital Partners

Okay. Sorry. Did you say for six months?

Kent Snyder

For the six months, correct and for the three months over $352,000.


Your next question comes from the line of Dalton Chandler representing Needham & Company. Please proceed.

Dalton Chandler - Needham & Company

Good morning. I just wanted to make sure I understand what's going on with the EU approval process. So you are saying that there is no further evaluation needed but if you are waiting for the publication of are you effectively saying we have all the information we need to make a decision but we haven't made a decision yet is that what this means?

Kent Snyder

Well, I think what we known Dalton is that we've been informed that the evaluation process completed on our savory flavor ingredients which I mentioned now it's in more of a process of publishing a lift that would include all approved flavor ingredients in the EU and so I think it's more of a matter of time before the process is completed and the complete list of approved flavor ingredients is completed, which we expect will include 336 and 807.

Dalton Chandler - Needham & Company

Okay. So I guess you expect to be on the list of course when it's published but you don't know with certainty that you will be at this point is that correct?

Kent Snyder

It's our expectation that we will be on the list and what we do know is that there is no further evaluation or no further data that's required by the European Authority.

John Poyhonen

And we also know that Dalton that other companies have been asked to provide additional data, but we certainly haven't been one of those based on the safety data package that was submitted.

Dalton Chandler - Needham & Company

Okay. And how long after you approved do you think it will be for Nestlé is ready to launch a product?

Kent Snyder

I might ask Sharon to comment on that.

Sharon Wicker

In anticipation of getting European approval, Nestlé has already been doing some work that they can as we discussed before, but clearly once it is official, there are some steps that they will have to take the finalize their development and so its difficult to put a timeframe on it but they are eager to (inaudible) board as well too so, we're hopeful it wouldn't take a tremendous amount of time but its something we'll really just have to keep you posted on as we have more visibility to that process.

Dalton Chandler - Needham & Company

Okay. And then new deal with Nestlé, when does that begin, the revenue churn out…

Kent Snyder

The new portion of that began April first so the new amendment was effective on that date which as you'll recall we recognized quarter in arrears or I mean revenues from royalty revenue in arrears one quarter.

Dalton Chandler - Needham & Company


Kent Snyder

So that will give you a timing of that being impacted.

Dalton Chandler - Needham & Company

Okay. And just how did you recognize the revenue from the deal? I mean if they are making a…

Kent Snyder


Dalton Chandler - Needham & Company

An upfront payment. I assume you would recognize it ratably over the course of the year but if they exceed the minimum how do you treat that?

Kent Snyder

So, the way that would work is they will make the annual payment as we described in our 8-K and will recognize that really one quarter of that each quarter throughout the year.

Dalton Chandler - Needham & Company


Kent Snyder

And then once we exceed that amount we will start recognizing it on a quarterly basis Dalton.


Your next question comes from the line of Pamela Bassett representing Cantor Fitzgerald. Please proceed.

Pamela Bassett - Cantor Fitzgerald

I'd like to hear more details if you can share about the sweet program and the commercial activities that are underway. What kind of range do you think you're going to see in sales?

Kent Snyder

I am sorry Pamela what kind of what?

Pamela Bassett - Cantor Fitzgerald

How quickly do you expect to have customers on board next year?

Kent Snyder

John, may be you want to comment on that?

John Poyhonen

Sure. Right now Firmenich is doing a tremendous amount of work in the pre commercialization activity. So those really are a function of doing product development and formulation work. They are scaling up the manufacturing to meet demand in the marketplace and they are conducting customer evaluations.

I can tell you based on the feedback that we've had that the customer evaluations have been extremely positive and there is a high degree of interest.

So right now the only specifics that we have on timing from Firmenich is that the launch of 6973 will occur in 2011, the specific quarter is not something that we've complete agreement time at this point or understanding on because part of that will be a function of the number of clients and their annual usage and making sure they have the volume to support that. But as soon as we have that information, we'll be sharing it as far as the timing.


And your next question comes from the line of Steve Brozak, representing WBB Securities. Please proceed.

Steve Brozak- WBB Securities

One quick question and this is more external, but I'd like to use that word granularity, I hate it, but it's one of those things where I guess you guys are used to it by now. We just got numbers back saying that I guess, most Americans are just getting fatter by the minute and its (inaudible) propensity in the Southern part.

I wanted to know because every large beverage and food distributors got to be aware that the taxation part of this is one solution, and every municipality is suffering. Have you actually gotten any calls from any municipalities or any companies basically pinging you, saying, look, we've got to be proactive on this and looking at combinations in terms of answers and/or what the highlights would be for avoiding taxation for their avoiding taxation for their products and things like that?

Have you started to form some kind of a strategy around it because they are obviously talking about different taxes based on reduction of calories and things like that? Any granularity you can provide on that? And I'll jump back in the queue.

Kent Snyder

Steve, we really haven't had those approaches by local governments. I think it's more appropriate to point out that working with our partners and potential partners, I believe, they get contacted by governments, and then we hear from them that there is pressure to reduce calories and that sort of thing.

And so our partners such as Firmenich who have all the rights of S6973 primarily in the food area, I am sure they are the ones that probably get approached rather than directly to us and I am sure certainly that larger beverage companies get approached as well. But in terms of direct approach it's by any governments to Senomyx, we haven't really had that type of interaction.

Kent Snyder

But I think it's clearly an issue that the large consumer product companies are very aware of. They are monitoring that situation very closely. And they certainly are doing everything they can to make sure that they are feeling the brunt of those types of legislative changes.

Steve Brozak- WBB Securities

Actually if I could ask a follow-up on that point, and this isn't a miss-statement because we've done in our calculations that in some cases, some of these (inaudible) for instance beverages, can actually have greater profitability concerning their COGS with sweeteners using your type of products than products that are currently out there especially any kind of sweetener that comes from green sugar corn syrups. Is that an accurate assessment of what the landscape can devolve to?

Kent Snyder

Well, it certainly depends on the type of products and you are referring to beverages specifically the amount of added sweetener, the amount the reduction that can be generated by a sweet enhancer and then obviously the offsetting cost of adding the sweet enhancer but in the modeling we would hope that in some situations there may be a cost saving for beverage manufacturer but we think that the key drive continues to be improving the nutritional profile of their products and reducing calories to provide consumer choice.

Operator: (Operator Instructions) At this time, there are no further questions. So, I'll turn the call back to Mr. Snyder to conclude.

Kent Snyder

I'd like to thank all of you for participating in Senomyx's call today. A significant amount of progress has been achieved during the second quarter of 2010, highlighted by our late agreement with PepsiCo, the favorable safety review by savory flavor ingredients in Europe and the accelerated pace of our development activity for the bitter blocker.

We are excited about set on the R&D front and it's providing new commercialization (inaudible) now opportunities with Senomyx.

In addition to the potential new collaborative agreement with PepsiCo and new collaborative agreements with other companies, value drivers that may occur within the coming months include we are saving regulatory approval for the savory flavor ingredients in the EU, recognize the first commercial sell by Firmenich of our sucralose enhancer, finally progress that as for our S6A2 bitter blocker, completing key development activities for the S0812 bitter blocker and initiating development phase activities with the new sucrose enhancer.

We are also looking forward to continue progress with our earlier stage program. We like to optimizing and accounting the fructose enhancers, improving flavors and advancing developing enhancer programs.. We appreciate your time and interest to know, looking to have any additional, please feel free to contact directly through our website. Thank you very much.


Thank you very much. Ladies and gentlemen, this concludes our conference call for today. All lines may now disconnect. Have a great day.

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