Full Transcript of Linear Technology’s F1Q06 Conference Call - Q&A (LLTC)

| About: Linear Technology (LLTC)

Here’s the entire text of the Q&A from Linear Technology's (ticker: LLTC) Q3 2005 conference call. The prepared remarks are in a separate article. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

You may want to read the prepared remarks before reading the Q&A.

Question-and-Answer Session

Operator

Thank you. Our first question comes from Adam Parker with Sanford Bernstein.

[Q]: Thanks for all the details there on the options, Paul. Given the high volume handset environment that seems to be out there for the last couple of quarters and the expectations that maybe that will that continue or that the 3G units, the high-end of that will grow dramatically next year, how do you think that's going to impact Linear's business, albeit it's not a huge percent of your revenue right now, but do you think you can commensurately participate there or what's the roadmap in terms of your cell phone business?

[A]: Hi, Adam, this is Dave Bell. I will attempt to answer your question for you. I think in general, the 3G cell phones are going to create a growing opportunity for us. What you have seen during the last decade you went back to cell phones ten years ago they were largely made from commodity components, and as more and more performance, more and more features, battery life expectations and so forth grew in those phones, there were opportunities for more and more high performance products and part of our revenue growth was due to that. As there is more and more business in 3G and more of those phones to get designed, I think the same trend will continue and it will create even more opportunity for high performance products.

[Q]: It's not really represented in your revenue this year. Should I think about cell phone being a bigger percentage of your overall mix at the end of next year than it is now?

[A]: Part of the problem is categorization. As Paul mentioned earlier during his monologue we have some challenges on where to bucket some of these products. Is a cell phone with an MP3 player, should that be called a cell phone, should that be called an MP3 player? If you are looking at the total combination of our consumer products, as Paul mentioned when you look at cell phones, computer and high-end consumer, we actually grew 2 percentage points from last quarter. So you may see a little bit of fluctuation in the cell phone number itself but when you look at the whole consumer business it's actually growing. And I think there is some possibility of continued growing in the future.

[Q]: All right. The other end market I wanted to ask about was just the whole telecom infrastructure and networking market, which I think you guys said bookings were up in absolute dollars. How is that spending cycle unfolding and how do you feel like that business is going to work out over the next couple of quarters or what to the extent you have visibility, how far off can you talk about that business and is it healthy and is it improving and do you see that picking up as well?

[A]: This is Dave again. Yes, it's been with the last year or so our visibility isn't very great, but one of the things we are starting to see is some of the optical business starting to come back in as pretty much on its death bed during the last three, four years. We are starting to see some optical business returning. With the emergence of 3G that you were talking about earlier on the infrastructure side we think there is some growth opportunities for 3G base stations and some of our major customers there are already seeing some growth due to that. So I think overall the health of that overall communications and networking business is improving. And I think our chances for selling more and more products into that is growing as well. Historically it's been primarily a power management and partly signal conditioning business for us, but today as you know we've got growing family of high-frequency see products, high-speed A to D converter products and that creates even greater numbers of sockets that we can fill within that infrastructure equipment, too.

[Q]: Right, Okay Thanks, guys.

[A]: You're welcome.

[Operator]

We'll now hear from Ross Seymore with Deutsche Bank.

[Q]: Just a couple of questions. I think, Paul, last quarter you talked about the bookings being strong in the month of July. Can you go into a little bit of how the bookings linearity was for the remainder of the quarter and what you've seen thus far in October?

[A]: Yes. Actually the bookings increased in each of the months last quarter. So we had a strong start in July and that momentum also carried into August. Relative to October, the reason I was able to talk about July last quarter was our year end and we were, and we report one week later in our year end. So actually July was pretty well done. October for us we are in the middle of the month. That isn't done, but so far October is tracking along what we are expecting and doing well.

[Q]: A little bit as far as the customer cautiousness that you talked about, can you give us a little bit of color on what you think is driving that? Is it, obviously there's worse in the macro economy so that's part of the question, but do they just feel they have shown enough lead time that they don't need to order anything? Do you think it's more a reflection on that side or the concern on the end demand in general, any kind of read through to that end demand that you can provide would be helpful?

[A]: I think I will take a first crack at it and maybe Dave can supplement my comments. I think the customer believes he's in a pretty good position now. Lead times for most companies are low, they are always low for us. I don't think the customer is worried that demand is going to take a dramatic upturn. So the customer certainly pulls us up about our capacity capabilities, our abilities to meet orders. When the customer increases orders we can still do it within the four to six-week range. So I think the customer is a little comfortable now in having low lead times and not taking these chances. And then I also think, you know, they read the paper. They read about how, are hurricanes going to impact business, are they not. Certainly rising interest rates, one would be concerned they might impact business. But I don't think they’ve necessarily seen it yet but are just in a position that they can be cautious. The war keeps dragging on. I think most of the paper you ride the economic news is a bit mixed. The U.S. economy seems to be doing better, but the global macro economic news isn't so good. So I think the customer is just sort of cautious and events able to conduct his business accordingly.

[Q]: One last more quantifiable question. On the share repurchase plan I noticed that the total amount spent dropped a little bit this quarter. Given the fact that your share price is at a relatively low level versus the last couple of years and the fact that the stock option expensing is going to actually increase the diluted share count is there any viability to the argument that you might want to actually buy back more shares to offset that dilution and just take advantage of a relatively low share price?

[A]: Well, as I said in my introductory comments, the dilution due to FAS 123 R is a little bit fictitious. I mean a lot of the numbers around FAS 123 R are all estimates, as you know. You start off with an estimated expense that none of us think will be the real expense, and then just ripples through everything. So I thinking to go off buying shares based on a kind of mathematical rather than real increase in shares outstanding I don't know if we feel that we must do that or are driven to that. Relative to buying back shares our position of late has been to buy so many per quarter, usually it was 1.5 million, but we are not fixed to do that. The prior quarter we bought a little more. The average price of the stock during the quarter that we purchased stock at was close to 39. We are a little disappointed the stock is less than that now. But I think we look at each quarter in and of itself and don't have any set formula, Ross.

[Q]: Last quick question. Capex, I missed that when you were going through the numbers and then I will go away.

[A]: Capex for the year, we expect to be roughly $80 million we had $15.867 million for the first quarter.

[Q]: Great. Thank you.

[Operator]

We will now hear from Joe Osha with Merrill Lynch.

[Q]: Two questions. First we've seen a lot of talk at least out of some companies about the progress they are making in things like wide LED drivers, buck boost converters, you know power MOSFETs, some of the areas that in cellphones that at least in the past you've been competitors in. Have you seen the competitive environment in particular in wireless telephony change at all as a result of all this attention or does it just kind of feel like it always has?

[A]: This is Dave, let me take a stab at that and Paul can add his personal view on things here. As long as there's change in the cell phone industry it is going to be good for Linear Technology, because we've shown year over year that we've been the first to identify new opportunities when they emerge. You talked about wide LED drivers. If you go back five, six years ago when those first opportunities emerged, Linear Technology was the first company out with wide LED drivers and we are on our fourth generation or so right now. If you look at battery chargers that can run off USB or wall adaptors, same sort of thing, we are always first to market to get those opportunities and that's where the highest profit potential is.

But there's this constant evolution. You can say well, wide LEDs is a fairly mature area and there's a lot of competition in there and our sales in particular in wide LED drivers at least the single function parts has gone down because the other guys have caught up to a stagnant requirement there. But in wide LED drivers the need for multi-display wide LED drivers, ones that drive, say the main display, the sub display, the flash LED and so forth, I think we are in a leadership position there as well. So again there's this constant evolution that goes on. We think we are still at the leading edge with the new functions that are coming out and it's even more and more functionality goes into cell phones when you start seeing photo flash capability, searching video recording capability, television capability and so forth, I think you will finds that we are going to be right there at the front end there where the higher profit potential exists as well as and leaving the other guys kind of pick up the scraps with the more mature functions.

[Q]: This is the up. You mentioned something that's of great interest to us. Are you beginning to see some design activity for the digital video broadcast in our handsets? Is that something that's beginning to materialize?

[A - Dave Bell]: Yeah, we are seeing some activity there. I don't believe that we've really seen any sales of any substance for DMB applications yet but there's certainly some design activity that's going on and we have a number of our products going into such phones.

[Q]: Okay and then for Paul, look, I agree with you in terms of the estimates piled on top of estimates for FAS 123. Is there a possibility maybe that it makes more sense to just move to straight stock compensation instead of the greater reliance on options?

[A]: Well, first of all, Joe, the difference between pro forma results for us and GAAP results is not very dramatic.

[Q]: No, it's not.

[A]: So that give so that I think should give you a clue that we have been pretty good historically at doing the very thing you are saying. What we have is within stock compensation, we have restricted stock and we also have stock options and stock options play a very critical role. Also though this company over the years has had very high cash compensation based on annual performance. So we have a very, very lucrative profit sharing program that everyone participates in. The last six months it was 46% here in the United States. And we also have a bonus program for senior people. So I think if you look at the way Linear has compensated people it would be something the investor would be appreciative of. We have goals that if we reach them there's good compensation on a cash basis and then we also have people participate in the long-term strength of the company. So I think.

[Q]: I was in no way attempting to be critical. Just now that this is happening and now that you do have this kind of odd set of numbers flowing through the P&L I'm just wondering based on the comments you made about the plausibility of those numbers whether it makes sense to change behavior at all.

[A]: Well, Joe, the critical thing for us is with our company has been successful enough that we can do what's right to get the most skilled people. And in some cases when you go with the implementation of stock option accounting for us when it changes from 42% return on sales to 39, that means I have a lot more capability of using stock if stock is needed to get the most talented people. So we are not embarking on a program to change that unless we don't need to do it to get talented people. But if we can use to it get more than our fair share of talented people we are going to do it.

[Q]: Understood. Thank you very much.

[Operator]

We'll now hear from Mike Masdea with Credit Suisse First Boston.

[A]: We can’t here you.

[Q]: Can you hear me now? Is that better?

[A]: Get to it we didn’t hear anything Mike.

[Q]: All right.

[A]: If you could repeat your question from the beginning.

[Q]: Yeah, No problem Good morning, first of all. The question really was, talking about the supply chain in this kind of environment where your customers are a little cautious, it seems like everybody is depending on these lead times that are structurally shorter than your cycle times. What are the risks and rewards that you see from running a supply chain like this?

[A]: For us it's always been a reward in that we historically, Michael, had four to six-week lead-times. So in strong aspects of the cycle, in weak aspects of the cycle. And we think that's given us a competitive advantage. The reason we drive to low lead times is it helps us run our factories more efficiently. We generally think the orders we get from our customers are close to the real end market demand. So I don't think we are one of those companies that in your question may be alludes to that we now have low lead times but when the cycle heats up we will have dramatically higher. I think we have been consistently low. We have run our business this way for a decade, so for us it's kind of business as usual.

[Q]: I guess part of the question, are your customers, the OEMs, taking a risk in trying to run in this kind of environment? And to that end, is this possibly why we saw what looks to be a little bit of an early start to the seasonal build for a lot of the analog companies specifically?

[A]: I think the customer relative to us feels comfortable. I mean revolve the shipment four to six weeks. The customer whenever he raises his bookings levels we can still meet that. So if you are saying if in general is the customer taking a little bit of a risk, maybe but I think the customer thinks that if he ratchets up his demands he will be able to get it fulfilled. If everybody did it at once and it was a huge step forwards there would be some problems, but I don't think that's what people are anticipating in the market now.

[Q]: Great. And you talk about some new products, you recently talked about converter market, can you tie that in? Are these new designers you hired for any specific area and just remind us of all the area you would consider new product efforts over the last year that Linear is really going into?

[A]: Mike this is Dave, when you say converters are you talking about A to D converters or power converters.

[Q]: A to D.

[A]: Okay As you know that's something that we have really made our first product introductions into about two years ago. And it's actually been a tremendously successful area. We have better performing products. They are smaller, lower power, better distortion and so forth, than the market leaders in that area. So, yes, that's one of the many areas that we are investing in. As Paul mentioned during the last quarter we had unusually good success in hiring design engineers. It hasn't been focused on any one particular area. And a lot of that has been at our satellite design centers around the U.S. So it's really been broad-based. High speed A to D converter is one area, but power management, signal conditioning, a variety of areas are seeing the benefit that increased engineering head count.

[Q]: Great. Thanks a lot, guys.

[Operator]

And now we'll hear from Douglas Friedman with American Technology Research.

[Q]: Hi, guys, thanks for taking the question. My question is really regarding looking forward and trying to get catalyst for growth. The new product that you introduced, the micro-module, can you touch on the size of market that that's going to be targeted after? And if there are other areas of growth that you think are going to be driving growth in '06 help us understand those a little better?

[A]: Sure, Doug, this is Dave. If you look at the total power module business worldwide today and this includes the brick modules and so forth, it's in a range of $3 to 4 billion U.S. Now the portion of that that we are aiming at is maybe one tenth of that, a little bit hard to size it up exactly but probably in the somewhere in the 3 - $400 million range but also growing. So we think that is a substantial business opportunity for us, but one of the things that I think means that there might be a bigger opportunity for us is because there's really nothing like what we introduced on the market today. What we just introduced is a complete DC-to-DC converter module with almost all the external components integrated, which is unique in the industry today in the form factor of an IC. So it really I think addresses an emerging market need that really isn't fulfilled by products on the market today. So we are very encouraged by the response that we've seen so far. Under non-disclosure we have sampled this product to nearly 100 customers worldwide and frankly the kind of response that we have from those customers has been even better than we anticipated. So kind of my personal goal for this business is that we would exceed $100 million in annual sales in several years out. And depending on what we see in the coming year it could even be more than that.

[Q]: Great. Thank you. Could you also focus a little, quick question for you on the burst mode licensing and have you licensed that technology to any other manufacturers?

[A]: This is Lothar. We have not licensed that technology to any new ones, the only ones that we have are once that we talked about in the past with two quarters ago with Maxim. And also quite a way back with Texas Instruments.

[Q]: All right. And then lastly, has the company taken any new approach to targeting large OEM customers where higher volume products are being manufactured? Is there any attempts to gain market share at some of the larger OEM accounts?

[A]: Well, this is Dave again. We obviously have active programs that are aimed at building our relationships with major multinational corporations. So, yeah, I think that represents an opportunity. Many of the large companies that you and I could both name in the networking and infrastructure business and so forth we are gaining ground there and that's being done both at the management level as well as the engineering level.

[Q]: Great. Thank you.

[Operator]

We'll now move to Sumit Dhanda with Bank of America.

[Q]: Hi Good morning Guys A couple of questions, first, Paul, you mentioned that the dollar terms, cell phone bookings were roughly flat. Given the momentum we have seen in this segment, is this largely attributable to your reclassification or do we read into this that you are lagging in growth market?
[A]: Well, I think Dave addressed that in response to an earlier question. What you have is within cell phone, you have different phases that the cell phone industry runs through and we typically sell really well products where there’s a new technological advance in cell phones. So you got situations coming up where you might be combining cell phones with audio entertainment, etc. So I think cell phones you need to look at that over a period broader than a few quarters. This past quarter as I said to you on a dollar basis our cell phone activity was flat. I don't know whether that means we sell backwards or not. I haven't seen all the industry numbers for the last quarter, but we are certainly not alarmed by what's going on in that area.

[Q]: Okay The other question I had, gross margin, even after you exclude the impact of stock based compensation down a little bit, is this something we need to worry about or you think it's just a minor fluctuation around your normalized levels?

[A]: I don't think you need to worry about it. I think it's minor fluctuations. I told you about half of it was stock option accounting.

[Q]: Okay. Thank you.

[Operator]

Our next question comes from Ramit Shah from Lehman Brothers.

[Q]: Hi Guys, If you look back historically over the last five, six years down, it seems like the March quarter has typically been the strongest quarter of the year. Given your mix is moving more towards handsets and consumer related markets, does that profile change? Could you comment on that, please?

[A]: You know, the more we are in consumer, I think that strengthens the December quarter maybe in the next few years, maybe a little bit. I don't know if it's going to have a particularly negative impact on the March quarter. A lot of the December quarter is generally not strong in industrial, generally not strong in U.S. distribution. You got that Europe has a stronger March quarter, Japan has a stronger March quarter. So I mean I think it's early to tell. You know as Dave said earlier a lot of customers are ordering pretty close in so it's several months out but we would certainly hope that the March quarter is a reasonable quarter for us.

[Q]: Okay. And a follow up, since I commit a competitors are moving more to fab light model, in a ADI, Inner Cell to mention a couple, do you think that having a proprietary process is becoming in less of a differentiating factor or could you just comment on that as well?

[A]: This is Lothar. There really are no plans for us to become fab light. We think that our proprietary processes is one of the things that allows us to make products that distinguish ourselves. And in the case where we do need to access some technologies that we don't have in house, we always have access to the foundries, but our foundry activity represents probably less than 5% of our wafer consumption. So we have no plans for a foundry light model.

[A]: This is Dave Bell again, too. I think there are some real liabilities, too, with having an analog company that's entirely based on a foundry. The foundries primarily are built around a high volume digital process. So an analog guy who's dependent on a foundry, for one he's probably building products on processes that were designed for digital and may be modified slightly for analog, but as well, as you get into a boom cycle again the guys the foundries are going to take care of are probably not the small analog guys, they are going to take care of their big digital customers. So I think there are some real business concerns when you have an analog company’s that's based on foundries.

[Q]: Thank you.

[Operator]

We will now go to Craig Ellis with Citigroup.

[Q]: Thanks guys. Good morning our first on the consumer reclassification. Does that really reflect a change in the way you are looking at the high-end consumer opportunity or is that really just scrubbing the taxonomy?

[A]: I think it's just scrubbing where the products lined up. As Dave said it's hard to be consistent where you put a product. For example, a good example he gave is a cell phone that has the capability of having audio entertainment. Before it had that it was a cell phone and communications for us. Now that it has that where do you put it, high-end consumer, or you leaded in communications or what do you do with it? That's why for the first time I went over the different in markets I cant summarized at the end by lumping a lot of consumer oriented products together that, being cell phone, computer and high-end consumer because I think products tend to migrate within those three categories.

[Q]: Okay. Paul For a device like a next-generation gaming console like X-Box 360, does that fit in computers or is that high-end consumer?

[A]: High-end consumer.

[Q]: And any color you can provide around design and activity there?

[A]: No, we don't talk about that.

[Q]: Okay Switching gears a little bit then to inventory, there was a bit of an uptake in inventory related to the consumer business. As consumer grows is that something we should look at a structurally higher level of inventory or is that going to down tick when we get into the first half of next year?

[A]: I think first of all it's a pretty small number.

[Q]: Sure.

[A]: Let's make sure we note that. And you do have as September moves into, as you close September and move into October and early November you do have pretty heavy consumer shipments towards any product that's being sold in the holiday season. So I think there's a little bit of seasonality in that number. And but whether lit drop back down to what it was certainly stock option accounting is stay in the number even though that's kind of a bogus addition to the number, to be frank with you. But I don't think it's going to continue to grow relative to just consumer products.

[Q]: Okay. So we should expect that to be kind of flattish as we exit the fourth quarter?

[A]: Yeah That's my guess, now, but again it's a pretty small number. We are talking 37 million on a balance sheet of 2.4 billion.

[Q]: Okay and then lastly, we got a nice up tick in ASPs last quarter. This quarter we were up a penny. Is that an ongoing shift that you are seeing or are we at a level that will be pretty stable from here?

[A]: I think it will be pretty stable from here.

[Q]: Right Thanks.

[Operator]
We'll now hear from Craig Hettenbach with Wachovia Securities.

[Q]: Hi, guys. Paul, question for you on the expense side. You said would it grow with rev, is there any granularity on R&D versus SG&A on a pro forma basis? I notice that it was down in the September quarter?

[A]: No, R&D was up dramatically in the September quarter. It was up 5.4 million.

[Q]: But Pro forma?

[A]: 1.4 of it was expenses relative to hiring of new folks. We talked about that. We had a particularly productive quarter in hiring particularly circuit designers this past quarter. So my guess is you know R&D will, I don't know if we can have as equally a productive quarter next quarter, but certainly we have hired people in the October time frame. So I think R&D will go up, but it did go up last quarter. So I'm a little unsure of your question.

[Q]: Okay. Yeah. I was looking on a pro forma versus what's reported on GAAP. Sorry for the confusion. Then Dave, over to you, on the new product front, you are seeing some MP3 players out there with video capability. Can you talk about any other applications out there that you guys are seeing some interesting design activity that based on new functionality really fits your high performance model?

[A]: Well, it's really broad-based, Craig. There is so many hand-held consumer products when you look at GPS navigators and wireless communicators. You've got MP3 players, digital still cameras, on and on and on and combinations of them so it's very broad-based. So that whole category clearly is growing. One I should mention is satellite radios as well as. That market was virtually nonexistent not too many years ago and that's fairly sizable at this point as well. So that whole hand held consumer electronics business is growing. An equally important thing’s like battery life and size become more and more important as you put more of these features together and then drives the designers of these products, the high performance products that we sell. One other example that's not hand-held that's interest something flat panel TVs. If somebody told me five years ago that we will be selling our high performance analog ICs in the televisions I would have said they were nuts, but today that is a decent and growing market as they need to fit a lot of power electronics into a very small face in these flat panel plasma and LCD TVs.

[Q]: On that note with the flat panels given that we are starting to see these some price declines for those products, are you starting to see those designs take off more or any color at this point?

[A]: Well I know to taking off. To be honest with you I don't track the numbers really carefully in that particular category, but I know that we've seen decent growth there and we got major design wins in some of the industry leaders in that market.

[Q]: Okay And then lastly on the power module front is there any particular application where you think you will have the most success write off the bat to lead off there?

[A]: I think it's going to be really broad-based, Craig. I think the one area that we probably won't see a lot of sales are in consumer products, in the hand-held stuff that I was just talking about. But almost everything else is an opportunity for us. We are talking about industrial equipment. We are talking about networking and cellular infrastructure, medical equipment, perhaps even some automotive applications. And really one of the things that driving the need for this product is that there's this gap that's emerging in the industry. There's fewer and fewer people out there, talented analog engineers that are customers that are capable of designing these power circuits and at the same time the complexity and the performance requirements of these power systems keeps going up. So you've going to get this capability gap that's going out there in the marketplace so there's a real need it’s emerged for a product that's easy to use and minimizes the risk of new product development and that's precisely what will this module does. So as you mentioned a few minutes ago, we've actually been surprised at the reception we've had for just those reasons, that it's an easy way for customers to design high performance power systems without needing analog experts on staff.

[Q]: Excellent. Thank you.

[A]: You're welcome.

[Operator]

Ramesh Misra with C. E. Unterberg has our next question.

[Q]: Okay Good morning guys could you talk a little more about your expansion plans in the fab, is it largely on towards being applied towards capacity or is it for new capabilities?

[A]: It's actually probably a combination of both. Most recently we've completed significant, I would call them infrastructure expansion projects. We completed the new test facility in Singapore and we've added clean room capability to both our wafer fabs here in the U.S. So that's I would say is more of a capacity related expansion and to support our future growth we continue to invest on capabilities both in our wafer fabs as well as into our assembly facilities as well. So it's a bit of a combination of the two.

[Q]: Okay. And then on a slightly different topic, there's been some talk recently about Japan beginning to emerge out of its decade long recession. Are you seeing some science of strength yourself over there, obviously that that is potentially a large industrial market as well? What can you say about your business in that regard?

[A]: Yes, I think we are seeing some strength in Japan. I think the Japanese market for us has had some shifts. The Japanese market if you go back a few years was particularly strong in computers and notebook computers and had some resident strength in cell phones. Some of that has migrated away from Japan to Korea or China, as you are well aware, so that impacted Japan. We are seeing strength, of late, a lot of strength coming from Japan in areas like automotive, industrial, infrastructure type equipment. So frankly for us Japan is becoming compared to what it was six or seven years ago a broader market, a market that has consumer products, also has industrial products, also has communication products so that particularly automotive products. So we do see Japan kind of coming out of what's been a malaise a bit and we think that will be a benefit to us. To take advantage of that we hired a few extra people there as well so I think that's going to be a good market for us.

[Q]: Okay and then finally in the automotive arena, design cycles over there tends to be very slow, but you've been fairly progressive and introducing a lot of products, do you see greater strength coming out of automotive for you over the next few quarters?

[A]: Yeah This is Dave. Absolutely. We are seeing greater strength in Japan. We are seeing growth in Europe as well in automotive. So as we said many times in the past automotive is a growing market for us. It's a market that meets our skills very well since it's becoming more and more performance intensive and always been very quality intensive. Absolutely we see good growth in the future for automotive in Japan.

[Q]: Can you be more specific? I mean do you see that happening within the next year, within the next three quarters, two quarters?

[A]: It's happening right now. As Paul was mentioning, we've been essentially flat in Japan for about the last year or so and that's why all this transition has been going on. While cell phones and notebook and computers have been moving out of Japan, we've seen rise in automotive business and industrial business and we are now starting to see some decent growth in Japan as that transition is complete and automotive growth is one of the key thing that's fueling our growth in Japan right now.

[Q]: Thanks very much.

[Operator]

Tore Svanberg with Piper Jaffray has our next question.

[Q]: Yes good morning question for Paul, Paul I know you don't give out the bookings number but could you qualify whether it was up in the double digits or single digits.

[A]: Paul We don't give the number so that's a way of kind of getting to it. We did tell you we had a positive book-to-bill ratio for the first time in several quarters. So we had a strong quarter but we don't quantify on the percentage growth.

[Q]: I tried. Any way, if you look at the changes in the mix now, it looks like consumer is becoming a higher percentage of revenue. How is that really impacting your product life cycles and how you plan your business in general.

[A]: Well, let me take a stab at that. It does have an impact on us. A lot of our business, in fact well over half our business today are still what we call annuity products, product that we may sell even for a decade or more and that provides a lot of stability. That clearly in the consumer business, the life cycles of those products are shorter but they are not as short as you might imagine. If you take the example of batter charger going to cell phones, one particular battery charger product might have a life cycle of about four years. And the reason for that is that the battery charger portion cell phone doesn't get redesigned with every model that that manufacturer makes. So Yes, they are shorter but like I say, it's not a six-month life cycle like it is with the models in the cell phones, it tends to be more like a four-year total life cycle in those type of products.

[Q]: Right and finally if I remember correctly about 50 to 60% of your revenue comes from power management. How does that look when you, when we start talking about R&D?

[A]: I really didn't understand the question. Can you clarify that?

[Q]: 50% to 60% of your our revenue comes from power management, how much are you allocating to power management when you look at the R&D line?

[A]: I see. As far as the percentage of our resources?

[Q]: Yes, exactly.

[A]: We haven't really disclosed that. But it's, it's pretty well balanced. We obviously have new product lines. You have to invest in R&D earlier so your investment in new product areas is disproportionate with the kind of sales in a more mature areas, you end up not needing to invest in much but it's not really disproportionate with the kind of sales we see.

[Q]: Should I then expect maybe two, three years from now power management to still be more than 50% of your revenue?

[A]: It's really hard to predict. I don't think we are going to see dramatic shifts in that in the coming years but I think we have some new product areas like our high-frequency and high-speed data converters that I think are going to grow much faster. There's some possibility that those growth rates in those areas would exceed power management and the percentage of power to come down. On the other hand in this new micro-module product that we just introduced is in the power management space so that could produce some additional growth in that area as well. Really hard to predict I guess is the bottom line.

[A]: What's interesting, Tore, is you asked Dave that question. If you ask each of the people that run the different product groups here, each of them would say theirs is going to grow disproportionately in the next couple of years. I mean I think all of them are pretty optimistic that they have good business opportunities but my guess is like Dave, if you put the power module into power it probably won't be much of a dramatic change.

[Q]: Thank you very much.

[Operator]

And with J.P. Morgan, we will hear from Bill Lewis.

[Q]: Thank you. I will keep it quick. Just one question. I would like to ask about the computing business. You know, the bookings there, I guess if you negate out the reclassification were down as a percent I think you said flat in dollars in a time when seasonality would tell you it's a lot stronger. So could you talk about the trends you are seeing in the computing business, kind of near term and longer term, how you view your participation in that market? Are there going to be new applications that will require much higher performance as you can continue to be there or gradually over time do you think it will be a less significant segment? Just talk about the near term competitive pricing and longer-term trust base?

[A]: Sure, Bill, this is Dave. If you look at the components that we put into computing today it's such things as PDAs, notebook computers, servers, disk drives and so forth. If you actually go back in time we actually had desktop PCs were in that category as well but we sell virtually nothing into desktop PCs today. So what I think you are seeing is a little bit of a transition going on. You are seeing notebook computers declining a little bit, like we said in Japan, a lot of that stuff is moving off into China. So that's one of the reasons why I think we are seeing our computing number go down. On the other hand, it's being compensator to do some degree by growth in some server equipment and things like that. So I think it's becoming a little bit less in the notebook and desktop area and more in the server area, more infrastructure type equipment. Paul, do you have anything to add to that?

[A]: No, we do continue to sell in the desktop area. But it would be more cutting edge new generation desktops that are, that might be more higher priced than -- we don't sell into the very inexpensive desktops but the more expensive once we actual dollar have pretty good positioning in. And Dave's comment on the notebook I think is accurate. Again, Bill, the most important thing I think in any of these areas is to see, are there any major evolutionary changes or revolutionary changes in the products themselves. When there's a big change in the fundamental product itself normally we do very well. When we are in a period where there’s a kind of subtle changes, cost reductions only being the feature people are selling, I would think you would expect to see us less in that environment. But then see us capitalizing in other areas. So Again, we are kind of more concerned about the what in the function, the what it is than the where it shows up.

[Q]: Okay.

[A]: Does that help answer your question?

[Q]: Okay I think reading between the lines of what you are saying is there are not really those same trends for you in the computing market longer term. In the handset market you have a lot of questions and new applications, new functions capabilities required they are going to require your technologies. Maybe in what we traditionally think of computing that will be a little bit less over time and lit show newspaper other areas.

[A]: Again, just to kind of underscore what Paul is saying. I think there are these natural evolutionary cycles. And we moved in and out of various markets and if a market stays very stagnant in its requirements then that tends to be an opportunity for competitors to catch up, but at the same time there are many other opportunities for to us continue growing. And such has been the case with Windows, desktop, PCs and to some degree with notebooks but there are many, many opportunities. I think the whole infrastructure business, the server business, the raid business and so forth is going to continue long-term to fuel continued growth in computers for us.

[Q]: Okay. Thank you very much.

[Operator]

We will now hear from Krishna Shankar with JMP Securities.

[Q]: My questions have been answered.

[A]: Okay, Krishna, and thank you.

[Operator]

We'll now move to Jeff Rosenberg with William Blair.

[Q]: Good morning. Paul, on the SG&A line if you back out the options expense it looks like it went down about 10% on an absolute basis from Q4 to Q1. Is there anything other than legal expense that you mention there had that benefited you there?

[A]: That benefited us in going backwards? Well, frankly if you back out the change, if you back out stock compensation it went down a little bit. The biggest area for us was legal that went down. We have certain costs around our annual report, the printing the annual report, the whole process of wrapping up the prior year end, you have more expenses isn't that area in Q4 than do you in Q1. And then there's just kind of a potpourri of some other little areas that caused it to go down a little bit. There were some headcount additions and some salary additions, but if you back out stock option accounting and back out legal it was probably flourish.

[Q]: I was wondering whether or not there was any non-stock profit sharing type cash benefits that were flowing through '05 that with wouldn't expect to see in '06 unless things pick up to stronger numbers so when we model things going forwards there a lower percent of sales that you are tracking at right now on the SG&A line?

[A]: No, I don't think so, I think the compensation, a lot of our compensation programs are based on the profitability of the company, not just the revenue increases of it. You shouldn't read into that that there’s been a lower profit sharing charge.

[Q]: Okay and then the other question I wanted to ask you talked about getting comfortable with level of inventories out there with your customers, can you make it focus in on the high-end consumer and particularly given the strength in bookings there, your sources for comfort there that your customers are not building inventory?

[A]: Well I mean, what we do is, the customers, some of these products you hear about very late and then they want a lot shipped right away because they announce them, they want to make a surprise in the marketplace. So there is an element of risk. There's an element of risk from the customers standpoint as to whether the product will sell as well as what he expects it to do. But I think in some cases we try to have some security on our side that we have more guarantee lead times, etc. If it's a very volatile area. But you're right, you are coming into the holiday season. People are making estimates as to what they will sell. The people we've been dealing with have generally been quite accurate if not needing more products in the past than they have initially ordered in the September time frame. So we are not worried about it but it certain is a potential in the business.

[Q]: I just wanted to hear some further comment there. Great. Thanks a lot.

[Operator] With UBS we will hear from Tom Thornhill.

[Q]: Asked and answered. Thank you.

[Operator]

We will now move to Chris Caso with Friedman Billings Ramsey.

[Q]: Hi Thank I just wonder, not to beat a dead horse, just to go through a housekeeping issue on the SG&A line excluding the stock compensation, the way that -- can you hear me okay?

[A]: I can't now. If you repeat your question I know it's about SG&A but didn't hear the rest of it.

[Q]: Okay Maybe this is better. Basically the way that we came to the SG&A number, we took the 31.2 million that you had reported and backed out 6.2 million in options expense, that comes to 25 million. Is that the right calculation because it sounded like some of your earlier comments differently?

[A]: I'm not sure that's the right calculation because when you backed out the 6.2 what you didn't back out is that there was some similar charge in the prior year period which would have related to restricted stock. So if you go to the same footnote you got 6.2 from you saw the similar period a year ago was 1.3.

[Q]: So you take that out of the previous quarter.

[A]: Yes, so there's a number that you would take out of the previous quarter that would take the impacts on SG&A down to closer to a number of, closer to the 3 million plus range.

[Q]: Right.

[A]: And then you look and you see the increase quarter over quarter was 3.3, probably one item alone that would equal that or maybe exceed it a little bit would be stock based compensation. So therefore if you wanted to do an apples-to-apples comparison, it would be down a little bit as the previous caller referred to. That little bit I told you legal was down, cases were settled that were favorable to us so we settle them rather than pursue them further. So legal came down a little bit. Cost relative to the annual report came down a little bit. Labor went up and that we hired a few more people and then had you sundry other things in advertising, communications, that kind of offset one another. Is that helpful?

[Q]: That clears it up for me. I appreciate it. If I can just follow up with regarding typical seasonality and you guys had sort of addressed this before but perhaps if you can clarify was guys consider to be typical seasonal so we have a baseline going forward, I was looking at the past 12 years, December quarter, typically up about 6%, the March quarter typically up between 8 or 9% is that still was guys consider to be typical seasonality or is some of the mix issues changed what we should be expecting from quarter to quarter there?

[A]: Well, historically what we've done and said is that as we look out long-term at the business, historically the summer quarter has been flat to little growth. The December quarter has had low single-digit growth. And the March and June quarters have had mid to high single-digit or depending on the year. If you take those percentages and you compound them you get generally 20 to 25% growths per year. And if you look at the last 15 years, you back out the worse year, you back out the best year. We've grown 25% each year pretty much and you do the same for a 10-year period. So I think that's sort of historical. We've been saying to you folks over the last year and a half that as consumers become a bigger piece we would expect to shore up the December quarter a little bit and maybe come out of the March quarter a little bit. It hasn't happened to the extent we thought it would and I think some of that is consumer has been a little should stronger into the March quarter than historically. People sort of expected at the holiday season it would fall off a cliff. That hasn't happened much. So you're right, we still have to figure out the nuances between December and March but typically you would have more growth in December than September and more growth in March than December. Does that help?

[Q]: That's very helpful. Thank you.

[Operator]

Any further questions, Mr. Caso?

[Q]: That's all. Thank you.

[Operator]

We will now move to Louis Gerhardy with Morgan Stanley.

[Q]: Hi Good morning. Just some follow-ups on a few items. You mentioned, that it's been a while since bookings have been at this level, looks like it was a good bookings quarter. Can you give a sense from a backlog perspective when is the last time had you backlog at these levels?

[A]: Oh, well, it's -- certainly we told you at the end of last year, that our backlog for the fiscal 2005 was down from what it was fiscal 2004. It was down considerably. So and you are probably aware of those numbers. I wouldn't classify we had a very good bookings quarter but it certainly doesn't rank up our backlog with some of the historical highs we've had in backlog. It's been a tighter market. I told you in my introductory comments that our turns business was towards the high-end of our turns business historically and that's directly a function of backlog. So certainly backlog is less than it has been historically, but it's still higher than it was at the end of June, for example, and certainly within a range we've clearly met our numbers in the past.

[Q]: You usually give us a sense for the next quarter, the December quarter, what we could expect on bookings, what you think you would have a positive book-to-bill, at parity or below one, what's your thoughts on that?

[A]: At this stage we think we are going to continue to grow bookings, at least we think we will.

[Q]: Just on the module related questions, if you look at the module bill of material what percentage of that would be coming from Linear Tech?

[A]: This is Dave. I am not going to quote what percentage is going to be from Linear Tech but what I will tell you is all the silicon within the module was designed and fabricated by Linear Technology. So it's built on a technology that we developed internally and we think that gives us a competitive edge.

[Q]: I guess to get directly to what I was thinking about, how does this impact your margin profile? Are you thinking about this market from a gross profit per unit perspective or are you just keeping the traditional Linear module of high 70% gross margins here?

[A]: I think this product is going to be a very good gross margin product. Certainly the ASPs are higher than most of our products so that's a good thing. But from a gross margin standpoint I don't think you can anticipate it will have a negative impact on the company's gross margin.

[Q]: Okay. Sounds like some good business. And just on the led free issue, can you give us a sense what have percent of your products that you shipped in the September quarter, what percent of revenue maybe was lead free?

[A]: On a volume basis we are approaching about 50% of our products are being shipped as lead free.

[Q]: How about your own inventory, do you have that number?

[A]: What percentage of our inventory is lead free?

[Q]: Yes.

[A]: I would say it probably pretty closely matches to what we are shipping.

[A]: Louis, one of the things that you're undoubtedly trying to get your arms around is how we are going to be affected by this transition of lead free, while we haven't talked about it much on this call or previous once, I think we are in great shape. I think we've got a good handle on the inventory at the factory here and a good handle on the inventory principally in Europe where it's impacted by this transition. So we've been for a long time planning our transition to lead free and I think the company has been executing that very well. So we don't have any worries about that coming up next year.

[Q]: Well, thank you for the details.

[A]: You're welcome.

[Operator]

With Global Crown Capital we will hear from David Wu.

[Q]: Good morning, gentlemen. Two quick ones. First one is in the computer side of the house when we look at both AMD and Intel moving to, I guess would you call it multi-cores, on both the client and the service side how does it really affect your power management business in the computer segment? And the second one I guess try to beat a dead horse again, Texas Instruments has been growing pretty fast the past couple of quarters and I was wondering whether you have actually seeing them more in the marketplace than before or is it just a function of them dipping more significantly during the downturn and sort of have the snap back effect going on right now?

[A]: Well, David, this is Dave Bell again. As far as the dual core movement that's happening across the board, Intel and AMD, and so forth I think that's going to be a positive thing for us because it basically just means higher current supplies for these processors. So it's kind of in line with the overall move that's happening throughout the industry of having higher current, higher power, more complex power systems and the more complex those systems to get the better it is for Linear Technology. Although it doesn't really effect you're strategy directly, the simple fact that it increases power levels and complexity is good news to us. As far as answering the T.I. question, Paul.

[A]: Hi, David, it's Paul. I think your second premise relative to the T. I. when we look at their sales growth in several quarters compared to ours, they dipped much lower than we did as a sequential and year over year basis in the downturn, and they've come up a little bit in the last two quarters. But I don't think we necessarily see more of them in the marketplace than we did a year ago.

[Operator]

Mr. Wu, did you have any further questions?

[Q]: No, thank you.

[Operator]

We will now hear from Monesh Goyal with Craft Investments.

[Q]: My questions have been asked and answered.

[Operator]

We will now hear from Sanil Zapsadar with Bramwell Capital Management.

[Q]: You spoke about quarter to quarter going into the first half of '06, but based on historical patterns, but given the headwind out of rising interest rates and high oil price, how do you think this year's or next year's foot path March and June quarters are going to shape up? Is it going to follow the seasonal pattern that we have seen in 2005?

[A]: Well, first of all, we wouldn't venture to be economists on that front. We know there’s been this headwind from rising interest rates that you've mentioned; I don't know that they've made a dramatic impact on the consumer yet. You also have rising oil prices. We don't know the answer to that, to be frank with you. We have four to six-week lead times. We feel that we've got a good grasp on giving you forecasts in the next quarter but going beyond that we don't give forecasts going beyond and don't feel comfortable doing it.

[Q]: Okay. If you look at your business now, it's been a little bit high in consumer and if I two years from now what segment of the marketplace do you think would be driving your business then?

[A]: The most important thing, I will answer and let Dave, what we do more than any other analog company is we focus on high-end analog functionality with commercial success. We don't try to guess where that's going to wind up and what particular end market. If you look at Linear over the last 20 years of the company, different end markets in each five-year segment and each three-year segment drove our growth. When people ask us what's going to be the driver three to five years from now, we know about functionality that we think will make a difference, functionality in portability, functionality in speed, functionality in module type stuff, but where it's going to wind up, if we tried to focus too much on that we think we would sub-optimize some of the opportunities we have rather than benefit them. Dave?

[A]: The only thing I would add is we don't have any master five-year plan that we are heads down in executing. We are very opportunistic. We are always out in the field looking at where there are new opportunities for high performance analog, and there are changes that come along but because of the way that we approach our product strategy, I think we identify those opportunities before most of our competitors do, not all of our competitors. If you're looking back the last couple of years it's been automotive and high-end consumer that's grown quite a bit. If you go out two to three years it's hard to tell. I'm sure those areas will be strong as well as but even at categories like industrial, it's done very well, during the last year, a very diverse market. It's not any master five-year plan that we are executing. We are very opportunistic and identify new opportunities every month.

[Q]: Okay. On the part of the ASP part of the commercial impact, the guidance that you had for the sequential quarter assumes an ASP in the rate of $1.54 to $1.55 because in the last quarter had you mentioned that this kind of ASP may be a two quarter or three quarter event and probably might be rating back to $1.40 range basically. What color can you give on that?

[A]: Well, when we look at it that could happen. Now, our, when you go out a year the ASP could go up because of the module issue. But remember the most important thing to focus on, is what we focus on as the return less, than the ASP. So what you should not try to connect that if ASPs go down that means they are going down because we are selling the same functions for less money. If the ASP goes down we are selling different functions for the same percentage profitability. So if you go back three years our ASPs were $2. If you go back a year and a half our ASPs were down $1.40, high $1.30 range. The last two quarters they've been in the $1.50 range. If you go to the gross margin it's been the same or rising over the three-year period. So don't focus too much on the ASP if you think changes in it are going to be immediately visible in net margins.

[Q]: Thanks a lot.

[A]: You're welcome.

[Operator]

We will now hear from Tom Smith with Standard & Poor.

[Q]: Yes, I would like to nudge you what little bit further on Capex. You've had a pretty big year last year and this year looking forward to '07, '08, would you expect those levels to come down? Was this an unusual build as you still have equipment to buy to fill the clean rooms you have made or are making this year?

[A]: Well, some of the addition this year is there are a few buildings that we rent that we potentially might buy. So some of our forecast of 80 this year would include some potential building purchases if that gets consummated. So that might be a third of that number or, roughly. So then if you look out the last two years we did roughly 60 million this year without that building we might do 60 million again. You know, I think going out we don't have an immediate plan for new fab in the immediate couple of years certainly going out a little further than that we will. So I think Capex will probably rough will be in this range maybe a little bit less, but Lothar, do you?

[A]: Yeah, I think we've completed a lot of the larger infrastructure projects. Those are coming pretty much to conclusion, so from a brick and mortar standpoint those Capex projects are behind us. Going forward I think it will be more incremental capital associated with just growth of the company. So I think Paul's forecast of a number like 60 million is probably pretty accurate.

[Q]: Okay. Great. Thank you very much.

[Operator]

We will now hear from Paul Leming with Soleil Securities.

[Q]: Good morning. Two questions. First, if I take your ASP this quarter versus your revenues it looks like unit shipments were down a little quarter-to-quarter. There was a lot of talk on the call last quarter about a big cell phone contract that had expired, caused a large increase in your ASP in the quarter. I would just like to clarify was there any of that cell phone business still being shipped in the June quarter so as I look at units, June quarter to September quarter, did that, if you will, I don't want to say inflate, but were there units shipped in the June quarter that then fell off and just weren't there on the September quarter? Was that contract ending in any way part of the reason that unit shipments to me appear to be down quarter to quarter?

[A]: Well, first of all you're right, they were down but very, very modest amount in units. Again we focus not on the number of units, not on the ASP, but on the margin we generate from the products we sell. Relative to that cell phone contract, that Dave mentioned earlier that cell phones tends to be a longer life -- our products in the cell phones whereas the models might change, our product might change every four years. So we would have shipped less of that product this quarter but not shipped none of that product this past quarter. And any shift in those areas relative to the overall financial statements would have probably been very, very minor if not miniscule.

[Q]: Okay. Second question. You talked a little bit about capital spending going up as you start to have to expand capacity to meet the growth of the Company. I was just wondering if you could help us understand at all when there is a, what year we should begin to think about where capital spending in fact jumps up to the kind of 250 million or $300 million level that I think you spent back in 2000 as you were building I think it was came us. When as, I guess the question is when as you look at a future plan today do you think you really have to tackle the next substantial condition to fab capacity.

[A]: This is Lothar, the current wafer fabs that we have are still not fully utilized, meaning that the we've done some clean room additions, which is kind of the infrastructure, but in terms of the amount of output that they can accomplish there's a lot of sales growth that these factories can still support. And so there is nothing in our near term horizon that's forecast that we need to purchase or build a new wafer-fab and that the two existing ones we can support sales levels nearly double of what we are currently, so there's nothing in our plans current to the support that. But again if there's another dot-com boom or something like that that maybe takes place that will change, but right now in the current environment we have no plans for any wafer-fab.

[A]: This is Paul, the numbers you gave for the cost of our past fabs, the costs really were roughly half of the numbers you gave. So we are an analog company, analog fabs typically don't come anywhere near the cost of a digital fab. I think when we built the came us fab and when we built the Hillview fab initially, the initial phases of both of those costs us about 125 million, in around there.

[Q]: What was sticking in my mind and I hadn't gone back and looked it seemed to me there was a year right around the turn of the decade where capital spending for Linear had been over $200 million but I was doing that by memory.

[A]: I don't think that happened, but I will look. You may be right.

[Q]: I just pulled it up and the number you gave nailed it. It was 125 million in 2001. I just want to go to back to something Lothar just said. You can basically double the sales rate of the Company without any major increases in capital spending. I mean is it fair to just think in terms as we look out going forward that you really can keep capital spending no higher than the 80 million we are seeing right now until the company has doubled it's revenue rate. Is that the right way to think about thing?

[A]: What I said was that you don't have any major construction projects that we would need to do to support our even a doubling of our sales because a lot of this infrastructure of buildings in completed, but I still have to reminds that you there are factory tools that go into those facilities that would have to support our growth. So, but, again, if you look at what we are saying is that I think the forecast of around $60 million a year of Capex really is a level that supports our normal steady state growth in sales and the infrastructure that we have in place right now from, particularly a wafer-fab which generally drives the largest spending when you build a new one, there is nothing in our horizon that says that right now we need to build a wafer-fab. So there is no, no large capital project like a wafer-fab certainly in the next several years.

[Q]: Thanks very much.

[Operator] There are no further questions in the queue, but I would like to take this opportunity to remind everyone that it is “*” “1” if you would like to ask a question. We will pause for just a moment. It appears we have no further questions. I will turn the call back over to you gentlemen for any closing remarks or comments.

[A]: This is Paul. Thank you very much for your attention today. As we said, we finished a quarter in which we met our expectations. We expect to grow in the December quarter. And with that we wish you all a good day. Bye- bye.

[Operator]

That does conclude today's conference call. Thank you everyone for your participation and we wish you a great day.

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