IXYS's (IXYS) CEO Nathan Zommer on Q4 2016 Results - Earnings Call Transcript

| About: IXYS Corporation (IXYS)

IXYS Corporation (NASDAQ:IXYS)

Q4 2016 Earnings Conference Call

May 26, 2016 05:00 PM ET

Executives

Nathan Zommer - CEO

Uzi Sasson - CFO

Analysts

Christopher Longiaru - Sidoti & Company

John Harrison - Inflections Consulting

Mike Hughes - SGF Capital

Operator

Good day and welcome to the IXYS Earnings Conference call Fourth Quarter Fiscal Year Ended March 31, 2016. Today’s conference is being recorded and at this time, I would like to turn the conference over to Dr. Nathan Zommer, Chairman and CEO. Please go ahead, sir.

Nathan Zommer

Good afternoon and welcome to the IXYS Corporation’s fourth quarter and fiscal year ended March 31, 2016 earning conference call. I’m joined by Uzi Sasson, our President and CFO. Uzi will lead us to through the financial discussion later in the call.

First we'll review the formalities. Our discussion today contains forward-looking statements, including statements related to potential future revenues and earnings. Any statement in this conference call that are not statements of historical fact may be deemed to be forward-looking statements. There are a number of important factors that could cause the results of IXYS to differ materially from those indicated by these forward-looking statements, including among others risks detailed from time-to-time in our SEC reports, including our quarterly report on Form 10-Q for the period ended December 31, 2015. IXYS does not undertake any obligation to update the forward-looking statements. Also, please be advised that the financial data related to today’s conference call is available on our Web site www.ixys.com. Click on ‘Corporate’ and then click on ‘News & Events’.

Overall we are pleased with our quarter-end results, as we saw sequential growth in revenues and a strong upward trajectory in sales trends and customer queries. Net revenues for the quarter were $79.8 million versus $82.9 million net revenue for the same period in the prior fiscal year. Sequentially March 31, 2016 quarter, net revenues were up $4.6 million, 6.2% from $75.1 million in the December 2015 quarter. For the 12 month ended March 31, 2016, IXYS reported net revenues of $317.2 million as compared to net revenues of $338.8 million for the prior fiscal year. We achieved relatively stable albeit slightly low revenues in a year earmarked by substantial micro economic volatility. We also continue to spend on R&D and produce more than 30 new products for commercial adoption and increase our prominence in the market place as competitors underwent consolidation.

I would like to highlight few items not explicitly outlined in the revenue metrics just discussed. For the quarter net revenue was $79.8 million, a sequential increase of $4.6 million or 6.2% from $75.1 million in the December 2015 quarter. Net income was $6.2 million or $0.19 per share, which fairly compared to the December 2015 quarter net income of $2.3 million or $0.07 per diluted share. IXYS generated $5.9 million in cash from operations during the quarter. The company conducted the stock buyback of 118,000 shares for approximately $1.9 million. IXYS declared a $0.04 per share dividend marking the 14th consecutive quarter of dividends.

And now for the year highlights. Gross profit for the 12 months ended March 31, 2016 was $99.8 million or 31.4% of net revenues as compared to gross profit of $102 million or 13.1% of net revenues for the prior fiscal year. IXYS gross profit percentage increased by 130 basis point year-over-year. Cash and cash equivalents totaled $155. 8 million in the fiscal year March 31, 2016, as compared to $121.2 million as of March 31, 2015. Adjusted EBITDA which excludes stock based compensation expenses was $42.5 million for the fiscal year ended March 31, 2016.

Now let's turn to revenue data by region, market, segment and product group. As a percentage of total revenue for the fourth quarter fiscal year 2016 North America revenues represented 23%, Europe and Middle East 31% and Asia and Rest of the World 46%. As the percentage of total revenues for the fiscal year ended March 31, 2016, North America represented 25%, Europe and Middle East 29%, and Asia and Rest of the World 46%.

Our revenues by market segment for the fourth quarter of fiscal year 2016 were as follows. Industrial and commercial 45%, Communication Infrastructure 14%, Medical Electronics 10%, Consumer 12%, transportation 6% and others 13%.

Our revenues by market segment for fiscal ended March 31, 2016 were as follows. Industrial and commercial 43%, communication infrastructure 14%, medical electronics 10%, consumer 14%, transportation 5%, others 14%. Our revenue based on product group for the fourth quarter fiscal year 2016 were 67% for power semiconductors, 26% for integrated circuits which includes microcontrollers, and 7% for systems and RF. Our revenue based on products group for the fiscal year ended March 31, 2016 were 67% for power semiconductors, 27% for integrated circuits, and 6% for system and RF.

We continue to execute on our organic and acquisitive growth initiatives all of which are intended to position IXYS as a key player in the ever consolidated power semiconductor industry. We have been the comprehensive product portfolio across the entire product spectrum from roll to refine, to further meet the needs of our customers. Our worldwide IXYS sales and marketing efforts are gaining attraction as our sales reach has broaden in application and geography. I know, we still face micro-economics headwinds with a modest year’s recovery not yet translating to Europe and Asia. We’re optimistic based on current sales trend but remain cautious in our growth projections due to market volatility.

I'll now turn the call over to Uzi Sasson, President and CFO, who will discuss the financials in more details.

Uzi Sasson

Thanks Nathan. As referenced by Nathan, IXYS was pleased with a sequential quarter growth, net revenue and net income increases to achieve such results we intend to focus on higher margin product sales and lower operating expenses in the ensuing quarters.

Now, to turn to the financials. GAAP net income for the quarter ended March 31, 2016 was $6.2 million or $0.19 per diluted share as compared to net income of $7.8 million or $0.24 per diluted share in the March 31, 2015 quarter. The March 2016 quarter non-GAAP net income which excludes the impact of charges for the amortization of acquired intangible assets and stock compensation was $8.2 million or $0.26 per diluted share as compared to the non-GAAP net income of $9.9 million or $0.30 per diluted share for the same period in the prior fiscal year. GAAP net income for the 12 month ended March 31, 2016 was $14.7 million or $0.46 per diluted share as compared to net income of $23.7 million or $0.74 per diluted share for the prior fiscal year. For the 12 months ended March 31, 2016 non-GAAP net income was $22.4 million or $0.69 per diluted share as compared to the non-GAAP net income of 32 million or $1.00 per diluted share for the prior fiscal year.

Gross profit for the quarter ended March 31, 2016 was $24.1 million or 30.2% of net revenues as compared to gross profit of $25.3 million or 30.5% of net revenues for the same quarter in the prior fiscal year. I should note that the gross profit margin has been in access of 30% of net revenues for the past seven quarters. We are pleased by the sustainability of our gross margins, which further validates our earlier decision to focus on higher margin products sales.

Gross profit for the 12 month ended March 31, 2016 was $99.8 million or 31.4% of net revenues as compared to gross profit of $102 million or 30.1% of net revenues for the prior fiscal year, importantly IXYS gross profit percentages increased by 130 basis points year-over-year.

R&D spending for the quarter was $7.2 million or 9% of net sales as compared to $6.2 million or 7.5% of net sales in the prior year quarter. For the year, R&D spending was $30 million as compared to $26.7 million in the prior fiscal year. As we have referenced in prior reporting we planned to spend in the range of $25 million to $30 million a year on R&D. This fiscal year we remained steadfast to this benchmark while introducing more than 30 new products for the power market.

SG&A expenses were $8.8 million or 11% of net sales as compared to $10.1 million or 12.2% of net sales in the prior year quarter. For the fiscal year 2016 SG&A expenses were $38.4 million, a welcome decrease from the 2015 fiscal year SG&A expenses of $41.8 million. We are pleased by the efforts to decrease SG&A expenses as IXYS is committed to tight cost controls which can potentially lead to higher profitability. CapEx was approximately $1.8 million for the March quarter.

The vast majority of capital expenditures was over manufacturing equipment purchases. Turning to the balance sheet. The ratio of current asset to current liabilities was 8.4. The company exited the March 31, 2016 quarter with cash and cash equivalents totaling approximately $155.8 million. We generated $5.9 million in cash from operations during the quarter. We were able to increase our cash position even after allocating capital to both stock buybacks and shareholder dividend. In fact, IXYS completed a stock buyback of 180,000 shares for approximately $1.9 million during the quarter.

Additionally, the company declared a $0.04 per share dividend highlighting the 14th consecutive quarter of dividends. We returned about $4.9 million to stockholders in fiscal 2016 through dividends. Adjusted EBITDA which excludes stock based compensation expense was 11.8 million and 42.5 million respectively for the quarter and the fiscal year ended March 31 2016. Net accounts receivables at March 31, 2016 were about $38 million and DSO was approximately 43 days.

As of March 2016, net inventory was $89.6 million and inventory returns were 2.5 times during the quarter. In conjunction with increasing sales, IXYS is equally committed to lowering operating expenses. We’ve continued to focus on these two pronged efforts to further increase profitability. As Nathan referenced, IXYS is well positioned to capitalize on upward trend in market conditions. We had streamlined our operations while committing resources to sales and R&D. Customer has begun to place orders in all three inventory, however this is in the very early stages. To that end, we expect revenues in June 2016 quarter to increase slightly from the March 2016 results.

We will now open the floor for questions.

Question-and-Answer Session

Operator

We have one question in the queue and this will be from Christopher Longiaru with Sidoti & Company. Please go ahead.

Christopher Longiaru

So my question has more to just do with kind of how the mix trends and the gross margins look right because they held up year-over-year last quarter you had a pretty big gross margin with less revenues. So you talked about what the product mix look like and where the sales are coming from at this point?

Nathan Zommer

Let me comment on that Chris, this is Nathan. What we’ve seen here that three trends that we’re seeing. One is of course the strength of our power semiconductors and we are very happy to see that and we’ve seen ASP increases in the power semiconductors which is one good thing.

Christopher Longiaru

Okay.

Nathan Zommer

Other trends we’ve seen is the strengthening of the consumer business and also we’ve seen strengthening in ASP also for our microcontroller business. So that relates to the improvement in margins and as Uzi mentioned benefit on the efficiencies that we streamlined the operations and hopefully when we’ll pick up, when revenues will pick up there will be further acceleration on the improved margin. And Uzi might have other comments on that too.

Uzi Sasson

Yeah, so Chris a lot of the margins being almost is at status quo increasing 130 basis points year-over-year has to do with the fact that we just went through an audit, some of it was cleaning up sales inventory that we have which will help us in future quarters because that inventory will come in at a 100% margin, but because of the audit rules we had to make sure that our housekeeping is in order. It wasn’t a significant number, but nonetheless that was part of the major impact on margins.

Christopher Longiaru

And was that the case in December as well, I think you were at 75 and change for a revenue but your gross margins were 32%, I mean was that also a contributing factor in December.

Uzi Sasson

No, a negative, it was not. It was more in the March 31 quarter rather than in December.

Christopher Longiaru

So why was December so much higher than March in terms of gross margin with the lower revenue?

Uzi Sasson

As Nathan eluded, I mean we streamlined our operations. Our operations are running efficiently, our operations are running very well as are all internal fab [ph] and our sub-contractors, et cetera. I think it has to do with the inventory mix that we had to clean house after the yearend audit.

Christopher Longiaru

Okay.

Nathan Zommer

Chris, there was a financial impact not related to the product, but as Uzi says in accounting rule that we had to clean up in the March quarter.

Christopher Longiaru

Okay. Got it. Without that what would the gross margins have been?

Uzi Sasson

We would have seen an uptrend in the margin, I really don't want to give an exact number on that but nonetheless we would have seen an uptick in the margin.

Christopher Longiaru

Okay. So going you said --.

Uzi Sasson

So let me just finish, but that being said as I mentioned earlier I think that all of those moving parts are going to help us in future quarters because when we sell that inventory it all comes in as a drop into the bottom line in terms of dollar revenue or dollar margins.

Christopher Longiaru

So in terms of your guide did you give gross margin expectations for June?

Uzi Sasson

We normally do not give that kind of guide.

Christopher Longiaru

Would you expect it to be higher than March?

Uzi Sasson

I really do not want to comment on that Chris. We only give guidance for revenue and I would like to stop there.

Christopher Longiaru

Okay. And then just lastly what's a normalized tax rate at this point because it's kind of been a little bit, I think it was 10%, but I think it's been trending around high 20s to 30s -- to low 30s is that?

Uzi Sasson

I would say high 20s to 30% that would be you’re celling.

Operator

[Operator Instructions] We will move along to [indiscernible]

Unidentified Analyst

You had mentioned the percentage versus the June quarter and I didn't catch that, could you repeat it?

Nathan Zommer

I am sorry. The percentages for what?

Unidentified Analyst

You referred to the June quarter as the certain percent above last year, so I am asking you what is that percent again you did mention it?

Nathan Zommer

No, we didn't talk about the June quarter. You mean the guidance.

Unidentified Analyst

Yes.

Nathan Zommer

You are looking for the guidance. What I said in my remarks that we expect revenues in the June 2016 quarter to increase slightly from the March 2016 results that's precisely what I said.

Unidentified Analyst

I am sorry. I understood it to be a certain percentage above that number. In the beginning of your comments you had mentioned something to the extent that you're sort of unsure as to -- you don't have a good insight -- I am not -- paraphrasing what you said into the coming quarters because of industry conditions. Is there any way to corroborate a little bit on that the way you're insecure in terms of your confidence going forward?

Nathan Zommer

So, actually this is a, rather an important question. So typically we have at best between eight to 10 weeks visibility into the quarter because of the nature of our business. Because of those factors it's very difficult for us to project into the future what it looks like.

Unidentified Analyst

Is there any activity in terms of preparation of the potential of the ships into the drone market should it develop?

Nathan Zommer

Well, the drone market is there and we have products that we sell into the drone market and we're relying in that case on our distributors and that's part of the answer, why the visibility is so murky because a lot of our customers buy the product from distribution and the distributor, they will on their own clock replenish the inventory. So as Uzi mentioned we sit quite on a significant inventory hopefully to be able to ship on time with a shorter cycle which includes also -- which applies also to the drone market.

Unidentified Analyst

I see, do you have any idea when that drone market will break, they're on laws right now, other countries are making and working on the regulations I don't know where the U.S. stands on it. But I think that would be specific to your company in terms of what you're going to be able to move?

Nathan Zommer

Well, the drone market is as we speak is a small percentage it's part of others in our, I would say revenue breakdown, it's not a major part of our revenues. So, we're more looking into the dynamics of the industrial market and what is indeed a breakout for us is the transportation. The transportation increased significantly as a market which includes traction trays and electric vehicle and hybrid. So these are the trends that are more significant to our revenue growth. And as you know the drone, if you are talking about the small drones for the consumer market these are really tiny semiconductor, we talk about military drone and the more industrial drones that are heavier those are the natural sweet spots for our product.

Unidentified Analyst

So that’s where the profit is going to be if the market develops and that ended the market, the higher end?

Nathan Zommer

Well, the higher end is usually for us the industrial and the medical. So, the industrial drones, if you call them industrial drones, yes they will be higher margin.

Unidentified Analyst

Something else I was thinking about, but I can’t quite put my finger on it right. So thank you very much. I appreciate your answers.

Operator

At this time, we’ll take a question from John Harrison, Inflections Consulting.

John Harrison

Quick two questions, can you provide any feedback on the linearity in the quarter, or was it a nice build up in quarter or did things just improved at the end of the quarter, any comments there?

Nathan Zommer

So, there was some linearity with minor exceptions. So first of all let us think about couple of variables that actually adversely impact the linearity if we were to graph it. The first and the most important I should say is a Chinese New Year. We just stated earlier on the call that Asia represent about 46% of our revenue and because of the holidays in China, whether they fall during the beginning of February, late January early February, that create some kind of dip in our business.

And more importantly this year the Easter holiday fell in the March quarter as opposed to other years where Easter falls within say the first week of April or even the second week of April, it depends. So that would really cause two dips, but for those two items I would suspect that the answer to your question would be affirmative, it would be very similar or linear throughout the quarter.

John Harrison

And in terms of the bookings for the quarter, do you guys provide the book to bill ratio for investors or you don’t provide that?

Nathan Zommer

We didn’t provide but I can give it to you. The book to bill ratio for the quarter was 0.93.

Operator

At this time, we’ll move to Mike Hughes with SGF Capital. Mr. Hughes, we cannot hear you, check your mute button please.

Mike Hughes

Can you just elaborate maybe on the potential to lower operating expenses, whether you can maybe quantify that in dollar terms or is there an explicit operating margin goal?

Uzi Sasson

So, the operating expenses actually were reduced nicely. So if you look at sequentially it went down from 9.1 to 8.7 quarter-on-quarter, so it's about close to $400,000 or little thereabout. And then -- but a lot of it has to do with timing issues but the point that I am trying to depict here is that IXYS, as I said in my remarks, we’re constantly working on shaving our operating expenses and when I say operating expenses I mean SG&A expenses.

With regard to R&D which is also part of operating expenses they were relatively flat in terms of absolute dollars, at 7.2 in the December quarter to 7.2 in the March quarter. But on a percentage basis they were 9.7% and 9% respectively. And the idea as I also mentioned regarding R&D expenses is to spend about $25 million to $30 million on an annual basis, developing products. In the current fiscal year we developed and produced more than 30 new products out there and we will continue to do that given the fact that that is our fuel for the future.

Mike Hughes

And then do you visibility into channel inventory with the distributors. Can you just speak that that please?

Nathan Zommer

Yes, typically, our channels are pretty depleted. There are not -- there isn’t much inventory at the channel at the present time. Not anything that is worth mentioning. What we finding out is that more and more distribution companies are getting orders from their respective customers and they’re turning around and placing orders with us. That being said, it requires us to build inventory. And if you think about our inventory on a gross basis or on a net basis it stayed pretty flat and that’s because we have to prepare to be able to reduce the cycle time and be able to cater and supply our products, our distribution so that they can service our customers or their customer if you will.

Uzi Sasson

The distributers are not anymore acting like they used to be several years ago, where they would stock up, they are doing what we call broking deals, they get an order and they place an order and its quite upsetting, but that’s the fact of life and it brings the inventory on our plate, but we have to keep the inventory for the customers and at the end of day it’s serving the customers. So in some cases we’ve decided to take business direct bypassing the distributor and hopefully that trend continues and we’ll see better margins and probably better visibility from the OEMs communicating directly with us.

Mike Hughes

Your overall commentary this call seems somewhat more constructed than the last call with the start-up of restocking versus last quarter you called up the weakness in developed countries and then parts of Asia especially China, yet the book-to-bill is down sequentially. Can you just speak to that how I should think about that?

Nathan Zommer

So again the book-to-bill ratio is essential of also what we were able to ship during the quarter, so we were able to ship a lot more products during the quarter than the last quarter we exceeded our numbers by $4.6 million of approximately 6% and that manifests itself with the fact that Europe is still struggling somewhat. As I said earlier on the call we had the Chinese holiday which the majority is Asia is pretty much shutdown to almost a week and a half to 2 week. So they’ll not taking any part. More importantly, Europe, not only Europe, but also some parts of the U.S. didn’t take inventory because of the Easter holiday or what they called the Holy Week. So hence, we saw that impact on that.

Mike Hughes

Okay.

Uzi Sasson

As we said, the distributors do not place order on time so we will see more turns business within the quarter.

Mike Hughes

Okay. How is your visibility, just how do you feel about the demand environment now versus a few months ago. Am I right in reading that do you feel a little bit more constructive?

Uzi Sasson

Let me put it in my own words rather than addressing constructive versus none. I would submit to you that we are optimistic about our business. I think that the company is in a very well position right now to address market needs and our customers. More importantly in the last year and a half we’ve experienced a lot of consolidation in the market. If you think about the OEMs that used couple of our competitors now they have to turn to us as a second source. So we are rather optimistic about where we go in and the directions of where we’re going in terms of the power semiconductor market, and I believe that we’re going to be seeing good things in the future.

Mike Hughes

Okay, great. And one last question for you. I realized you’re not giving guidance on the gross margin into the June quarter, but is there anything that we should think about just from a high level historically where the mix will be a little less beneficial in the June quarter, whether it might be less medical, less industrial in that quarter. How does that work?

Nathan Zommer

I think that now we will see the classic return hopefully of our some businesses, there are indications that maybe Europe is coming back in the industrial market. Let’s not forget that there are some areas that we elaborated in the past like the Internet of Things and we remind the world that we know just what is the I/O of the Internet of Things, we are in the things and there are many more things than there is the internet off.

So we control the things so we’ve seen very good momentum and when -- as Uzi mentioned we feel more optimistic. There is that general feeling that we have very successful penetration in the products and the cloud is still settling on the major acquisitions or consolidations that go on in the power semiconductor industry and we believe it will come out stronger out of that as an independent company and having the right products. So I see positive signs coming back to our strategic mixes that deliver good revenues and good margins.

Operator

We’ll take a follow up from [indiscernible].

Unidentified Analyst

Yeah, since I thought of what I wanted to bring to your attention. You bought 180,000 shares of stock during the quarter. Can you give me an idea of determining what the average price was that you paid?

Uzi Sasson

It’s little bit above $10 and below $11.

Unidentified Analyst

Okay, between $10 and $11. And the other part is that you have so much cash is that I was wondering if your involved or you’re considering there is some opportunity to find some acquisitions that would be constructive for your company?

Nathan Zommer

Yes, definitely, I am surprised that it’s not one of the first questions. Obviously, we’ve taken a view and thanks to our President Uzi when we had the opportunity to monetize some of our fixed asset by way of a loan, you know we sit on quite a nice real estate portfolio and it’s really nice to leverage that by getting cash from the banks and indeed it’s a good chest to have and we’ve been reviewing potential acquisitions and the best news I can say is that the best acquisition, so far is the acquisitions we didn’t do.

But we are actually evaluating opportunities and as Uzi mentioned before the best opportunity as mainly for our sockets below 11, it’s the best opportunity for us to invest in us. So having that cash gives us tremendous flexibility to invest where we can get a very good return on equity.

Operator

We have a follow up from Christopher Longiaru with Sidoti & Company.

Christopher Longiaru

I just wanted to ask about factory utilization, just kind of where it was in the last quarter and how much of your expectations for what you have to do in terms of maintaining that or expanding that for your expectations for growth?

Uzi Sasson

Okay. So Chris I’ll take that. The overall utilization of our internal sales were between 60% to 65% close to 70% utilization. I would submit to you that as we’ve seen more bookings and more products that are being manufactured in-house the utilization would grow, and hence we would have positive impact on our gross margin, but given the fact that we were only between 60% to 75% utilization in our all internal sales, we didn’t let that take away from our margins or adversely impact our gross margin.

Christopher Longiaru

And how much of revenue was products that are outsourced from a manufacturing perspective?

Uzi Sasson

So typically 50% of our product is manufactured in-house and the other 50% we outsource, on a give and take basis.

Operator

And at this time we have no questions in the queue. I’ll turn it back over to management for any additional remarks.

Nathan Zommer

Thank you. If there are no more question I think in concluding the conference call we need to remind you that our discussions contain forward-looking statements and there are number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements including, among others, risks related from time-to-time to our SEC reports, including our quarterly reports on Form 10-K for the period ended December 31, 2015. We do not undertake any obligation to update forward-looking statements.

Thank you all for your time. We also would like to take this opportunity to thank our suppliers, customers, employees and stockholders for their support of IXYS. Thank you.

Operator

And again that does conclude today’s conference call. Thank you all for your participation. Thank you for calling.

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