Hutchinson Technology's (HTCH) CEO Rick Penn on Q3 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Hutchinson Technology (HTCH)

Hutchinson Technology Incorporated (NASDAQ:HTCH)

Q3 2014 Earnings Conference Call

August 1, 2014 8:00 AM ET

Executives

Chuck Ives – Treasurer and Director, IR

Rick Penn – President and CEO

Dave Radloff – VP and CFO

Analysts

Christian Schwab – Craig Hallum Capital Group

Mark Miller – Noble Financial Capital Markets

Rich Kugele – Needham & Company

Tom Lewis – High Road Value Research

Operator

Please stand by. Good day and welcome to the Hutchinson Third Quarter Earnings Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Chuck Ives. Please go ahead, sir.

Chuck Ives

Good morning, everyone. Welcome to our third quarter results conference call. On the call with me today are Rick Penn, our Chief Executive Officer; and Dave Radloff, our Chief Financial Officer.

As a reminder, we will be providing forward-looking information on demand for and shipments of the company’s products, market adoption and production of our optical image stabilization actuators, our market position, program ramps, product mix, pricing, production capabilities and volumes, our operations in Thailand and the United States, site consolidation efforts, collaborations with our customers on development efforts, capital spending, refinancing of our convertible debts, operating expenses, cost reductions and the company’s business model, operating performance and financial results.

These forward-looking statements involve risks and uncertainties as they are based on our current expectations. Our actual results could differ materially as a result of several factors that are described in our periodic reports on file with the SEC.

In connection with the adoption of SEC rules governing fair disclosure, the company provides financial information and projections only through means that are designed to provide broad distribution of the information to the public. The company will not make projections nor provide material non-public information through any other means.

We issued our third quarter results announcement before the market opened this morning and it is now posted on our website at www.htch.com. I’ll turn the call over to Rick now.

Rick Penn

Thanks, Chuck. Good morning, everyone, and thank you for joining us today. Our results for the third quarter were generally in line with the guidance we provided in our second quarter conference call. The June quarter is typically a seasonally slower period for suspension assembly demand and that proved to be the case this year as well.

Industry analysts and participants estimate that shipments of this disk drives were flat compared with the March quarter. However, we estimate that worldwide suspension assembly shipments declined 2% to 4% sequentially as customers tightly managed their inventories at their yearend. As a result, our third quarter suspension assembly shipments also declined about 4% from the preceding quarter.

As we head into the seasonally stronger part of the year, our participation on our customers’ programs is also getting stronger and we expect our fourth quarter shipments to be 110 million to 115 million which represents a 13% to 18% sequential increase.

In the June quarter as planned, we reduced our production volume. And as expected, our fixed cost absorption was also lowered and our gross profit declined to $3.6 million or 6% of net sales.

Our Thailand operation accounted for 64% of assembly production in the third quarter, up from 55% in the prior quarter and we expect the Thailand plan to account for 70% to 80% of assembly production in the fourth quarter.

With the production volumes we are now achieving at our Thailand operation, we were able to exit our Au Claire assembly operation in June and will see the cost benefits of these actions beginning in our fourth quarter.

Our other site consolidation efforts are also progressing well. By the end of the fiscal year, we will have our stamping operation fully relocated into our main building in Hutchinson which will enable us to vacate the leased facility in Plymouth by the end of the calendar year.

As we near the end of our consolidation activities, the associated costs are diminishing and should be eliminated by the end of the current fiscal year. The benefits we will realize from our consolidation and recent restructuring efforts will become more evident in the September and December quarters.

As a result of the progress we’ve made, we are confident that we have the industry’s lowest cost model for producing suspension assemblies. Moreover, we have achieved this without compromising our core technical, manufacturing and quality competencies that distinguish us from our competitors and enable us to meet our customers’ advancing requirements.

There is also a growing recognition among our customers of what we have accomplished and that is becoming evident in our share positions on new customer programs. Our customers are showing their strong support and commitment to us through higher volume and increased collaboration on development efforts.

I’m also pleased to report noteworthy progress in our ongoing efforts to leverage our precision manufacturing capabilities and equipment capacity to produce components in new markets.

Cambridge Mechatronics or CML, a design and engineering company based in Cambridge, England sought us out as a world-class development and manufacturing partner for an optical image stabilization or OIS actuator for smartphone cameras. We entered into a development and collaboration agreement with CML last year and for several quarters now, we’ve been devoting a portion of our R&D investment to further development of the product and the process to manufacture the OIS actuator in high volume.

This product is ideally suited to leverage our quality and continues to improve in expertise and precision component manufacturing capabilities, including our automated photo etching, stamping, additive circuit and assembly processes.

Smartphone cameras have a limited ability to take low light photos due to a combination of a small lens diameter which restricts the amount of light that can enter the camera and unwanted motion from the human hand. Our OIS actuator improves picture and video quality, especially in low light conditions by using a shape memory alloy technology that offers performance and size advantages compared with current OIS solutions.

We have recently been selected to provide an OIS actuator that will be used in a smartphone to be introduced in China in the fall of 2014. As a result, we are now installing our first automated production line in anticipation of ramping to volume later this summer.

We’re also working with other interested smartphone and camera module makers who are evaluating our OIS actuator for potential inclusion in their future products. We’re in the early stages with this product and volumes initially will be low. But we are encouraged by the interest our OIS actuator is attracting and we’re excited about the significant opportunity that the smartphone camera market provides.

So to sum up, our suspension volumes are moving up again. Our alignment with and support from the top two drive companies is stronger than ever. Our cost structure is best in class. And we are now leveraging our technology and manufacturing expertise in the new and ramping OIS market.

I’ll turn the call over to Dave now for a review of our financial results.

Dave Radloff

Thanks, Rick. Our third quarter suspension assembly shipments totaled 97.5 million, down 4% compared with 101.7 million in the previous quarter. Our mix of products shipped in the quarter was as follows – suspension shipments were 3.5-inch ATA including near-line applications were down 1% sequentially and accounted for 38% of our shipments compared with 37% of our shipments in the preceding quarter.

Shipments for 2.5-inch and 1.8-inch mobile applications decreased 7% sequentially and accounted for 45% of our shipments compared with 46% in the second quarter. And shipments for performance optimized or traditional enterprise applications decreased 2% sequentially and accounted for 17% of our shipments which was flat with the preceding quarter.

Our average selling price was $0.58, up from $0.57 in the second quarter. The increase resulted from higher mix of certain DSA suspensions that carried development stage pricing that is considerably higher than typical volume pricing.

Shipments of DSA suspensions accounted for 25% of our third quarter shipments compared to 24% in the preceding quarter.

Third quarter net sales were $59.8 million, down 1% from the prior quarter. The revenue percentages for our top customers in the quarter were as follows – Western Digital, 60%; Seagate, 21%; SAE TDK, 12%; and Hitachi GST, 3%. Gross profit in the third quarter totaled $3.6 million or 6% of net sales.

As we guided in early May, the sequential decline in gross profit was a result of a planned decrease in our production volume that reduced our fixed cost absorption. Our finished goods inventory levels are still elevated compared to our historical norms and we plan to reduce those inventories over the next few quarters.

Just as our margins benefited from an inventory build in our March quarter, the use of inventory will dampen our gross margin in the September quarter and offset some of the positive impact for prior shipments.

Depreciation and amortization totaled $9 million compared with $9.9 million in the prior quarter and is expected to be $8 million to $9 million per quarter in the near term. R&D expenses in the third quarter were $4.2 million continuing to reflect some additional spending for a new business development effort including all the expenses related to the OIS actuator that Rick discussed previously. SG&A expenses totaled $5.3 million coming in below our guidance of $6 million per quarter due primarily to reduction in incentive compensation.

In connection with the workforce reduction that we announced in May and the consolidation of our operations we recorded $1.5 million of severance and site consolidation expenses in the third quarter compared to $700,000 in the preceding quarter. Q3 charge includes $1.3 million severance costs for approximately 100 positions that have been eliminated in the U.S. We expect the remaining unpaid severance of $900,000 will be paid in the fourth quarter.

We expect to complete the consolidation of our U.S. operations by the end of September. We have vacated the assembly portion of the Au Claire facility and we will complete the relocation of our stamping operation and the majority of our developments and our operations to our headquarter building. Once completed, these consolidation measures and the benefit of operating in Thailand and the cost reductions announced in May are expected to generate P&L improvements of $4 million per quarter compared to our fiscal second quarter.

Approximately 80% of the cost savings will be in cost of goods sold and approximately 10% will be in R&D and the remaining 10% will be in SG&A.

Interest expense in the third quarter was $4 million and included $800,000 of non-cash interest expense. Both of these amounts were flat compared to the preceding quarter. Our net loss totaled $11.2 million or $0.40 per share. On a non-GAAP basis, our net loss is $8.9 million or $0.32 per share compared to a non-GAAP net loss of $7.8 million or $0.28 per share in the preceding quarter. Our share count at the end of the quarter was 28.1 million shares.

Cash generated by operations in the third quarter totaled $500,000. And capital spending totaled $2.9 million resulting in negative free cash flow of $2.4 million.

Cash and investments at quarter end totaled $40.2 million which was unchanged from the end of the preceding quarter. We had outstanding borrowings of $4.8 million under our revolving line of credit at quarter end, up from $2 million at the end of the prior quarter. We ended the quarter with a long-term debt principle balance of $131 million of which $39.8 million has a first put date in January of 2015, and $91.1 million is due in 2017.

We’ve been evaluating our options for refinancing the debt that can be put back to us in 2015 and are working to complete a partial or full refinancing.

Turning now to our outlook. As Rick said earlier, we expect our shipments in the seasonally stronger fourth quarter to be 110 million to 115 million. Our average selling price is expected to be relatively flat sequentially. And DSA suspensions are expected to be 25% to 30% of our product mix.

We currently expect our fourth quarter gross margin to increase compared to the third quarter as higher shipments and the benefits of cost reductions are partially offset by a reduction of finished goods inventories.

Our SG&A expenses should be a little more than $5.5 million per quarter, down from our prior guidance of $6 million per quarter due to the recent cost reductions. Our R&D expenses should be $4 million to $4.5 million in our fourth quarter due to accounting for all of the OIS-related expenses as R&D. In the first quarter of fiscal 2015, we expect a significant portion of the OIS cost will then be classified as cost of goods sold and our R&D expenses should drop to approximately $3.5 million per quarter. Interest expense is expected to be approximately $4 million per quarter with the non-cash portion at $900,000 per quarter.

Excluding the tax benefit that we recorded in the first quarter of 2014, our tax rate is expected to be near zero in fiscal 2014. Our fiscal 2014 capital expenditures, which are primarily for customer-specific program tooling and DSA manufacturing equipment should total about $20 million.

In regards to our OIS actuator, we’re still in the early ages with this product and volumes will be low initially. At this point, we’re unable to predict when it could become material to our revenue and financial results. When we have more certainly around the material revenue stream, we will share that information with you.

That concludes our prepared remarks. Joe, please open the call for questions.

Question-and-Answer Session

Operator

Absolutely. (Operator instructions) And we’ll take our first question from Christian Schwab with Craig Hallum Capital Group.

Christian Schwab – Craig Hallum Capital Group

Great. Good quarter, guys. So as we look to the $4 million that we talked about in the savings as far as 80% of that is showing up with the cost, what quarter does that happen in?

Dave Radloff

You’re going to probably get half or little less of that in the September quarter. And it’s fair to think that you’ll have three quarters of it in the December quarter and all of it by the March quarter.

Christian Schwab – Craig Hallum Capital Group

Okay, perfect. Now of the OIS opportunity, can you – could you – how is that – is there no optical image actuator used in phones today? Could you just explain who we – is this a new component added to the phone or is somebody else making that and you’re just making it better potentially?

Rick Penn

Yes, Chris, and good question. OIS is really just starting to ramp into smartphones. And I think recent estimates are that this year about 60 million or so units will probably ship that are optical image stabilization components in smartphone cameras. And the smartphone market is about a billion units a year. So from that standpoint, it’s just getting started.

About 14 of the 15 top handset companies are looking at one or more models that will have OIS in them next year. And so we’d expect the numbers to move up into a couple of hundred million, maybe more.

And then it’s really hard to say how that penetration occurs in the smartphones over time. The current OIS technology is voice coil motor or VCM technology and that’s what the initial offerings are today, and what the primary offerings will be in the future.

Our offering with CML is a different technology. It leverages a shape memory alloy as sort of the core technology of the component. And that’s a metal that when heated, it contracts. So when you apply current, you can get the metal to contract and then relax intermittently.

And so, that allows an actuation, opportunity, and that’s sort of the foundation for our technology. And what our approach does is that it has, we think better ultimate performance or actuation. It’s got more opportunity to shrink in size or be miniaturized. And we think there are some fundamental long-term cost advantages, because it’s just more automatable. And from that stand point, we think the economics could be better over time.

So to sum up, we think OIS as a opportunity that had some real legs in the technology that we’re leveraging now to get in. In play, also has some real legs. And I’ve gave you kind of a rough sense of how to size it. But the penetration or adoption rate is really hard to gauge at this point.

Christian Schwab – Craig Hallum Capital Group

Right. And what are that going to sell for [ph]?

Rick Penn

Well, the current VCM component south [ph] in the $2 to $3 range. So I think we’re not going to tell you our pricing or our pricing strategy at this point. But I think you should think of that as a way – the right way to think about the pricing.

Christian Schwab – Craig Hallum Capital Group

Right. Yours will be below that, I would assume, right? Or [indiscernible] –

Rick Penn

We’ll see.

Christian Schwab – Craig Hallum Capital Group

Okay. Now, as you manufacture that in your facility is this going to be obviously revenue accreted, but how does that impact gross margins? And is it easier to manufacture and have potentially significant less cost in yield, loss associated with it versus your manufacturing of suspensions?

Rick Penn

There’s a lot in that, question because what I’ll tell you is we think the margins will be higher.

Christian Schwab – Craig Hallum Capital Group

Okay.

Rick Penn

The gross margin percentage will be higher than the target that we’ve discussed of high 10s to 20 for suspensions. The gross margin percentage for the OIS actuator, we believe will be higher.

Christian Schwab – Craig Hallum Capital Group

Okay. Okay. And then is this something that you feel very confident that if somebody wants 50 million of them [ph], you’re capable of doing that efficiently with what you have as far as the equipment there? Or is there another CapEx cycle coming if this is successful?

Rick Penn

There is some CapEx involved. It’s a mix of – it does leverage some equipment, and capacity and capability that we have that was initially suspension related, right? But there are additional expenditures that will be required if we’re successful, but we think we can manage those.

Christian Schwab – Craig Hallum Capital Group

Great. And then my last question is back in the suspension slide. As we look to your targeted goal of 25%, is that something that other mass [ph] we’re still a little bit shy of that? Is that something that we feel pretty confident that we get to in 2015?

Rick Penn

I think that’s a fair statement. It’s hard to say. And I wouldn’t say by the way the 25% that they are goal. But I think in the kind of window of time you’re talking about, it’s as we said before Christian, it’s grab a SharePoint [ph] at a time. And we think as we’re looking at the quarter oriented [ph] that we’re probably have a combination of some shared growth and some TAM [ph] growth that’s going on there.

And so, I think if you’re thinking 25% ish share [ph] in the 2015 year, that’s a reasonable way to think about it.

Christian Schwab – Craig Hallum Capital Group

All right, great. Thanks guys.

Rick Penn

Yes. Thank you.

Operator

And we’ll move along to our next question from Mark Miller with Noble Financial Capital Markets.

Mark Miller – Noble Financial Capital Markets

I just want to follow up on this OS – OIS, is there any competition right now? You said there were 60 million in shipping roughly, do they require assembly [ph] operations? And who’s doing it?

Rick Penn

Yes, Mark, the 60 million is the other technology. It’s a Voice Coil Motor technology. And that’s the initial technology that’s in the game of that. There are other companies, mostly Asian companies that are involved in that.

So that’s the competing approach. As far as competition using our approach, we really have a unique position there, exclusivity with CML. I think there is IP protection as well as trade secrets and know how projection [ph], that’s in place and building as we look at this.

And so, we’re really the sole suppliers for the newer technology. And over some period of time, we’re probably going to have to help enable other sources for this technology, but that’s down the road away as this gingerly goes [ph].

Mark Miller – Noble Financial Capital Markets

You mentioned that the cost are being allocated now to R&D. And you said it was going withdraw back [ph] to $3.5 million a quarter, one I see – you mentioned one that was going to happen [ph]. I’m just wondering – I missed, your volumes are pretty low in my phone.

Rick Penn

In the first quarter of fiscal 2015?

Mark Miller – Noble Financial Capital Markets

Okay. The TSA rep has been somewhat slower than anticipated. I’m just wondering what’s your projections are for that?

Rick Penn

Yes. It has been, really, Mark, it’s just reflecting what our customers are doing and how they are varying their programs as they attack certain capacity points that their customers want in the market. Are they using a DSA based drive or a single stage suspension base drive. And that’s been kind of mixing and matching for awhile.

And as you know, we thought in earlier quarters, it would ramp a bit faster. But it’s really the way, just reflecting what our customers are doing with their programs. But over time it’s definitely continuing to ramp up. And we see at this point, probably 50% of our businesses is DSA as we move through the second half of 2015 or something like that.

So it’s moving up. It is really – it is what all suspensions will move towards over time. And it’s just a pace that’s different than I think we all thought originally.

Mark Miller – Noble Financial Capital Markets

Are you gaining share in this DSA realm I believe [ph] have a higher shares than –

Rick Penn

Well, our shares has been holding roughly steady overall at this point Mark. And DSA or single stage, I think are both opportunities for us to gain some position. And DSA certainly is one of those – one of those opportunities. And we have had a reliability AIG [ph] in cases with DSA. But our competitors of course are also making that platform.

So I think you’ve got to think of it as new – just new programs in general, present windows of opportunity for us to get in and gain. And that’s really what’s happening and how we see things moving forward.

Mark Miller – Noble Financial Capital Markets

And just two more questions, Western Digital was talking about – in the summery typically you’ve seen on uptown [ph]. But Western Digital was indicating that even though the TAM [ph] is going to be up this quarter, the TAM [ph] should be flatted down in December quarter. Do you have any visibility into that?

Rick Penn

You know, Mark, not really. We listen to – we listen to those guys as you do. And try to see if there’s any other dynamics that we think are going on that might shift our views from theirs. But we don’t really have anything to add to what the WDE [ph] guys are saying at this point.

Mark Miller – Noble Financial Capital Markets

And then again, as percent of your sales, Western Digital 50% or 60%?

Rick Penn

60, six-zero.

Mark Miller – Noble Financial Capital Markets

Six – Zero, okay. Thank you.

Rick Penn

Yes. Thanks, Mark.

Operator

And we’ll move along to our next caller, Rich Kugele from Needham & Company.

Rich Kugele – Needham & Company

Good morning.

Rick Penn

Hi, Rick.

Rich Kugele – Needham & Company

Couple questions. The amount that was potentially being able to put to you in January ‘15, can you just repeat that Dave [ph]?

Rick Penn

Yes. It’s $39.8 million.

Rich Kugele – Needham & Company

Okay. And that interest rate again?

Rick Penn

8.5% –

Rich Kugele – Needham & Company

8.5 –

Rick Penn

– cash.

Rich Kugele – Needham & Company

Okay. And from a ownership stand point on this new solution. How much of those Cambridge [ph] wind up having the rights too, can you sell this to other people? Do you have to sell like a “The Stroke Version” or how – can we just talked where your ownership ends and theirs begins.

Dave Radloff

So we paid them a royalty when we become profitable, when the product comes profitable. And so, we actually will be the selling party. And it is being broadly marketed to a number of different phone companies, enhanced and [ph] camera module integrators.

So it’s a broadly marketed product. Certainly because we’re starting out, you’re working more closer with a smaller set of people. But there’s been nice interest from a number of players.

Rick Penn

So, Rich, yes, I mean CML has been engaged with the smartphone guys for quite some time now, really kind of entrenched with design and development teams bringing the – finalizing the design of this particular approach. So there’s some real good relationships with the customer base out there that really – that CML brings to the table.

We’ve been jointly working with them for several quarters now to finalize the designs and ensure the design for manufacturability exists and we jointly sell with them. So we’re really acting very much like one company.

They’re sharing in the investment. And so we’ve become – until it starts to generate cash and become profitable, they’re sharing in the initial investments, capital and so forth. And then as Dave said, once it’s profitable, they receive a royalty.

So that’s the – maybe a little more color just on how this has developed and the arrangement and so for the with CML. But they’re a real topnotch team, great relationships with customers. We’re being pulled. This is really not a push. We’re being pulled into this and it’s getting interesting.

Rich Kugele – Needham & Company

Okay. And so go-forward designs and future R&D on this will be really won out of them?

Rick Penn

I would not say so. I mean I think we’ll be jointly designing and developing. We’ll be developing IP, we’ll be developing joint IP, there’s trade secrets and know-how here that will make this difficult for others to produce even if they’re not minding the patents. So it’s very much a joint effort.

Rich Kugele – Needham & Company

Okay. And then just a question we occasionally get asked nowadays. It’s whether this product or even your core suspension business, is there a 3D manufacturing opportunity here where you could change the process and either make it more cost-effective, more complex, any thoughts there on changing the manufacturing process?

Rick Penn

Can you keep going, Rich? I’m not sure that –

Rich Kugele – Needham & Company

Well, I guess the idea was that just as DSA and TSA versus conventional back in the day increased the complexity through a slightly different process, can you go one step further and build up the suspensions through three-day printing? That’s where I think people were going.

Rick Penn

Yes. I would say unlikely when you look at what – and I’ll stay on suspension, stay away from alliance for a moment. I think when you look at what’s required of a suspension both mechanically and electrically, I don’t see the 3D printing as an example. And where that technology is going is playing into hitting the requirements.

And when we look at fairly far-out technology roadmap planning and do that together with our customers, I think we’re really talking about processes that are similar and technologies that leverage the processes that we currently have and maybe advance them a bit further. I guess the last thing I’d say to that is related to all that, Rick, is we also don’t see any massive increase in investment required in processes or in technologies to hit the requirements that go quite a ways out with suspensions as we –

Rich Kugele – Needham & Company

So you can do the 20% plus aerial [ph] density improvements with this?

Rick Penn

No, I think even when you look at – we’ll see what happens with Hammer and so forth, Rich. But even with pretty substantial improvements, we see no massive disruptive kind of shift in technology that will make sense.

Rich Kugele – Needham & Company

Okay.

Rick Penn

Okay.

Rich Kugele – Needham & Company

Thank you very much. That’s helpful.

Operator

(Operator instructions) And we have a question from Tom Lewis with High Road Value Research.

Tom Lewis – High Road Value Research

Yes, hey, good morning. And nice work on the new addition to your website. I find that very helpful to – a lot of pictures in there this new product that – or certainly help to explain that.

And to that, looking at it, it looks like a product that – I mean’ it’s – I don’t see any reason why – I mean you should be very confident in your ability to be the low cost producer of this, particularly if you’re doing it in a plant that’s already somewhat loaded. Is that a fair assessment?

Rick Penn

Yes, Tom. It’s a very good match with our engineering disciplines and our process technologies. And including the process technologies that we put in place to develop and produce the current and even near future platforms for suspension DSA and next generation DSA suspension. The degree that this leverages those competencies and strengths that the company has built, frankly, it’s amazing.

And with the way we see this, we think we can automate highly the processes needed. It’s very likely that it’ll be a model such that critical components are produced in the U.S. where the more chemically-oriented processes are and could likely be doing assembly in Asia, perhaps in Thailand, perhaps somewhere else.

When you sort of look at the design and development expertise of the company, the processes, where they’re located, where the customers for this is located, it’s a really nice match and we’re positioned well, I think have the best class that can be had. And we’re really excited about it. And now it’s just – there’s lots of questions around what will this penetration really look like and how fast and so forth. But as I said earlier to I think it was Rich, we’re really being pulled into this. And it’s getting pretty exciting.

Tom Lewis – High Road Value Research

Okay. And do you have any flavor, I mean, of how extensively – I mean you’ve always sort of implied there will be design advances in this. But in thinking down the road, I mean is this a product where one skew might be good for 20 different cell phone models or do you need 20 skews for – 20 models or somewhere in between, do you have any feel for how extensively you’re going to have to pull up to – if that kind of demand develops?

Rick Penn

Pretty good leverage of processes across a lot of different variations, Tom. So I think that’s probably the way to sum it up. And having said that, it’s hard for us to know this early just how fragmented that might look. But I think that just the leverage of the core process technologies will be very, very similar across those different variations for some time to come.

And we are working and looking at future roadmaps for this product with customers and with CML. And again, it looks like the core technologies can be leveraged very, very well into the future.

Tom Lewis – High Road Value Research

Okay. And finally, not really knowing the smartphone world, can you give us a sense of what the cycle time is like from somebody expressing interest and you connecting them, design to actually getting a product? I mean, I would think it’s fairly fast, but can you give us – do you have a sense of what that cycle time looks like to the extent that this thing could take off?

Rick Penn

We’re getting a sense for it. I think the way to think about it is you get into serious discussions and you at least get on a path where it looks like the plan of record and then you’ve probably got a couple of quarters from that point where you then move into a ramp. It could be one quarter, maybe two quarters where you really start to then ramp up.

There can be – what we’re a getting a sense for is there can be follow on similar programs that then can happen very quickly from there. And then you might go to a whole new handset. Then you’ve got a couple of quarters of work before you get into a ramp. So that’s probably the way to think about it.

Tom Lewis – High Road Value Research

Okay. Well, that’s it for me. Thanks a lot.

Rick Penn

Thanks, Tom.

Operator

And we have a follow-up question from Mark Miller with Noble Financial Capital Markets.

Mark Miller – Noble Financial Capital Markets

You mentioned that the 14 of 15 companies are considering it, is that the number of companies Cambridge is engaged with or are there other firms trying to market a similar product?

Dave Radloff

We or Cambridge have been engaged with really all of the major handset companies or module companies at this point, Mark. So it’s a wider list than that than the 14 of 15. But I think what’s exciting for us is that 14 of the top ones are looking at this and programs this upcoming year.

Dave Radloff

And just to be clear, Mark, that’s not looking – the 14 of 15 was not specific to our product. That was just the validation of OIS in the value of OIS.

Mark Miller – Noble Financial Capital Markets

Okay.

Dave Radloff

14 of the 15 top manufacturers have OIS going into their phones.

Rick Penn

Yes.

Dave Radloff

I don’t want to confuse that that’s our OIS.

Rick Penn

Right. And we are talking to all of those as well, though.

Dave Radloff

Yes.

Rick Penn

That’s the other point.

Mark Miller – Noble Financial Capital Markets

So there’s another – besides Cambridge, there’s other people producing OIS, is that correct?

Rick Penn

Just the other technology, Mark, the voice coil motor technology.

Mark Miller – Noble Financial Capital Markets

Oh, the voice coil, okay.

Rick Penn

Yes.

Mark Miller – Noble Financial Capital Markets

And I still need – this is a production opportunity in China significant volumes or they’re just evaluating it?

Rick Penn

No, it’s a real program. And yes, it’s a production opportunity.

Mark Miller – Noble Financial Capital Markets

Thank you.

Rick Penn

It’s a ramping program.

Mark Miller – Noble Financial Capital Markets

Thank you.

Rick Penn

Okay, you’re welcome.

Operator

(Operator instructions) At this time, we have no further questions. I’d like to turn the conference back over to our speakers for any additional or closing remarks.

Rick Penn

Well, thanks everyone for joining us on the call this morning. We really appreciate your questions and interest in the company. And I look forward to speaking with you real soon. Thank you.

Operator

That concludes today’s conference. We thank you for your participation.

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