Executives
Phillip Kagel - Vice President of Finance and Chief Financial Officer
Henry Pao - President and Chief Executive Officer
Ahmed Masood - Vice President of Marketing
Analysts
Jay Srivatsa - Roth Capital
Ramesh Misra - [Collins] Stewart
Jon Gruber - Gruber and McBain
Jiwon Lee - Sidoti and Company
Supertex, Inc.(SUPX) Q4 2008 Earnings Call May 7, 2008 5:30 PM ET
Operator
Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask question during our Q&A session. Please note that this call maybe recorded.
I would now like to turn the call over to CFO, Phil Kagel. Please go ahead, sir.
Phillip Kagel - Vice President of Finance and Chief Financial Officer
Thank you and good afternoon everyone. On the call with me today I have Dr. Henry C. Pao, President and CEO; and Ahmed Masood, VP of Marketing.
First, let me remind you that all statements made during this conference call, including in response to your questions, which are not historical facts are forward-looking statements. They are not guarantees of future performance or events. They are based upon current expectations, estimates, beliefs and assumptions about the future, which may prove incorrect. Furthermore, our goals and objectives, which may change, are also factored into the forward-looking statements. Often such statements can be identified by the use of the words such as, "will," "intends," "expects," "plans," "believes," "anticipates" and "estimates." Examples of forward-looking statements include our guidance and projections as to our sales, both overall and for particular customers and markets for the first quarter and the balance of fiscal 2009; our anticipated effective tax rate for fiscal 2009; our expectations for the trends in our end user markets; our belief that the decline in value of auction rate securities is temporary and that we will be able to hold them until they are refinanced or liquidity resumes; and our planned future from new product R&D introductions and volume ramp. These forward-looking statements involve a number risks and uncertainties including, but not limited to, whether there will be delays in the technology and product changes we anticipate in our end user markets, and those described in our earnings news release of today, as well as other risk factors detailed in our Form 8-K, 10-K, 10-Q and other filings with the Securities and Exchange Commission. Due to these and other risks, our future actual results could differ materially from those discussed in this conference call. Forward-looking statements speak only as of today and we undertake no obligation to publicly release updates or revisions to these statements.
And now I will turn the call over to Henry Pao.
Henry Pao - President and Chief Executive Officer
Thank you, Phil. Good afternoon. The sequential 3% reduction in our fourth fiscal quarter sales resulted from a general softness in the medical ultrasound equipment market and from orders valued at approximately $400,000 which we were not able to ship due to our suppliers delivering to us defective parts. We believe that our suppliers have rectified their problems and we expect to recover the lost revenue during the next two quarters.
Sales of our LED driver ICs for general lighting, our new multi-segment electro-luminescent or EL driver ICs, and our industrial product ICs ramped up nicely. In addition, our foundry business increased, but was more than offset by reduced demand of legacy EL driver ICs from our major cell phone customer.
The defective parts not only reduced our sales volume but also resulted in higher costs due to manufacturing inefficiencies, resulting in a margin loss of approximately $600,000 from lower yield and other costs. This, combined with an unfavorable product mix were the primary causes of our gross margin declining to 51% for this fiscal quarter and from 56% in the prior quarter.
For the whole fiscal year gross margin was 57%, or three percentage points lower sequentially, due to reduced sales, lower ASPs in medical ultrasound, and slightly unfavorable product mix.
Our operating expenses were held flat, interest income increased, and our tax rate declined. We also accelerated our stock buy-back program, repurchasing about 1.2 million shares in the open market for simply $27.4 million.
Cash, cash equivalents and auction rate security investments decreased during fiscal 2008 by $17.7 million, however, adjusting for the stock repurchase, this amount would have increased by $9.7 million. We reclassified our auction rate security investments in AAA rated student loan backed auction rate securities from short-term to long-term assets due to the recent auction failures.
We have recorded a decline in the fair value of our auction rate securities of $4.1 million due to the current illiquid market. However, they continue to pay relatively high tax-free interest rates. We consider the decline in fair value to be temporary and therefore we have recorded it through accumulated other comprehensive loss in shareholder equity and not as a charge to the income statement.
Fiscal 2008 was a challenging year. We experienced a dramatic change in product mix due to a precipitous drop of $15.2 million in our legacy EL driver IC sales and a decline in foundry sales of $2.4 million. We managed to replace some of these shortfalls with increases in LED driver ICs, medical ultrasound high voltage pulsers, and multi-segment EL drivers totaling $4.1 million.
We believe we have positioned the Company for future revenue growth. Our research and development activities continue to be on a pace of launching around thirty new products in the calendar 2008. We have expanded our sales organization in Japan and Hong Kong. We are especially encouraged by the market acceptance of our new medical ultrasound pulsers, our lower cost analog switches, and we recently received design wins for our newest product in this focused market, the MD2130 Beam-former IC, which is a very complex. Our LED driver ICs for general lighting and our multi-segment EL driver ICs for cell phone applications are gaining good momentum.
For the first fiscal quarter of 2009, with many of our new products going into volume production, we are very bullish on our growth potential and expect sales to grow between 5 to 10% due to strong bookings and a resulting healthy backlog of medical ultrasound analog switches and pulsers, LED driver for general lighting market, and multi-segment EL driver ICs for the new handsets. Based on our current business plan, we expect good sequential sales growth for the fiscal 2009, driven by our new medical ultrasound products and LED driver products for lighting, setting the stage for increased LED driver product sales for the use in LCD TVs and computer screens as LED price is expected to drop.
Now I will turn this call over to Ahmed Masood who will evaluate on the focused markets. Thank you.
Ahmed Masood - Vice President of Marketing
Thank you, Henry, and good afternoon. In fiscal 2009, we expect growth in our revenue to come from our strong portfolio of product such as analog switches and pulsers, use in medical ultrasound machines, LED drivers used in general lighting applications and multi-segment EL drivers used in mobile phones.
In the medical ultrasound market, our latest generation of 8 and 16 channel switches and multiplexers continue to gain traction and we are seeing both an increase in revenue and design wins for these products. In addition, we are also seeing customers beginning to ramp up production using our multi-channel integrated pulsers and transmit side Beam-former ICs.
For the LED drivers used in general and decorative lighting, we are also seeing an increase in design activity and revenue growth. Due to the energy savings and the long lifetime, LEDs are increasingly being deployed in street lighting particularly in China and (inaudible) to the Beijing 2008 Olympic Games.
While the use of LED has stalled as a back lighting source for LCD TVs due to the high cost differential between LEDs and CCFL. LED back lighting continues to gain strength in PC notebook market. All the leading suppliers in this space have already introduced LED backlight notebook models. All are in advanced development stage and will introduce LED backlight models later this calendar year. The cost differential between CCFL and LED backlighting is not that pronounced in the notebook PCs and the benefits of extended battery life and enhanced viewability outweigh to minor increase in the cost of the building materials.
In the EL driver market, customers are ramping up production of models using higher multi-segment drivers, which are used not only for back lighting keypads, but other function keys in mobile phones. Some of these phones have already been introduced in the market and additional phones using the multi-segment displays are expected to be introduced later this calendar year.
We continue to invest in and develop new products in the medical ultrasound, LED driver, and multi-segment EL display markets. In addition, we are also investing in other emerging markets such as the auto focus lenses used in mobile phones. In fiscal 2009, we plan to extend our product portfolio by focusing and introducing new products to address these key high growth markets.
Now, I will turn the call over to Phil who will elaborate on the financial detail.
Phillip Kagel - Chief Financial Officer
Thank you, Ahmed. Our fourth quarter sales of $19.6 million were down sequentially by 3% and by 14% compared to year ago. We had two significant customers, a major medical ultrasound OEM and a major handset OEM, each accounting for 10% of quarterly sales.
For fiscal year 2008, sales were $82.6 million compared to $98 million for the last fiscal year or a decrease of 16%, resulting primarily from reductions of legacy EL driver sales and reduced foundry sales. On the upside, we had increased sales of LED lighting drivers, medical ultrasound pulsers and multi-segment EL driver ICs.
The percentage breakdown of our sales by end market in the fourth fiscal quarter compared to the prior quarter was as follows. Medical 34% down 3 points, imaging 31% down 3 points, telecom 13% up 1 point, industrial and other 17% up 3 points, and LED lighting 5% up 2 points. Included in these percentages are foundry sales which were 15% compared to 11% in the third fiscal quarter.
GAAP diluted earnings per share were $0.31 or up $0.05 compared to the prior quarter and down $0.05 compared to the same quarter last year. For fiscal 2008, GAAP diluted earnings per share were $1.21 compared to $1.53 for the same period last year. Non-GAAP diluted earnings per share, excluding pretax employee based stock compensation of $850,000 were $0.36, $0.06 increase from the prior quarter and $0.02 decrease from the same quarter last year. For fiscal 2008, non-GAAP diluted earnings per share were $1.38 compared to $1.68 last year.
For the balance of this discussion, I will be referring to GAAP numbers only. Gross margin in the fourth fiscal quarter was 51% compared to 56% in the prior quarter. This decrease of 5 percentage points resulted primarily from manufacturing inefficiencies related defective products received from our suppliers and unfavorable mix. These effects on gross margin were partially offset by reduced inventory reserves compared to the third quarter.
Research and development spending of $4 million in the fourth fiscal quarter was higher sequentially by $600,000 due to increased design and process development activity. For the fiscal year, R&D expenses were slightly higher than last year.
Selling, general and administrate expenses in the fourth fiscal quarter of 2008 were $3.8 million, lower sequentially by $200,000. Fiscal year SG&A expenses was $15.5 million or $300,000 lower than last year.
Interest and other income net in the fourth fiscal quarter was $1.6 million, approximately $200,000 higher than the prior quarter due to a lower reduction in market value of the company's deferred compensation plan and increase in interest income due to higher yields. For fiscal 2008, interest and other income net was $6 million compared to $5.6 million last year or an increase of $400,000. This increase was due to higher short term and auction rate security investment balances and higher yields, partially offset by a reduction in fair value of investments held by our deferred compensation plan.
We recorded a tax benefit of $520,000 in the fourth fiscal quarter with a total year 2008 -- fiscal year 2008 tax rate of 24%. The favorable adjustments to the tax provision in the fourth quarter were associated with R&D tax credit, domestic production deduction, tax exempt interest income, and reduced taxes related to deferral income. The effective tax rate for 2009 is expected to be approximately 32 to 34%.
As of our year-end balance sheet dated March 29, 2008, we held and we continue to hold $100.6 million of auction rate securities. In February 2008, auctions for our securities mainly others in this market began to fail causing a lack of liquidity. As a result, we have reclassified these investments in our balance sheet as long term and we have recorded a decline in the fair value of $4.07 million recording it through accumulated other comprehensive loss and shareholders equity and not as a charge to the income statement.
These student loans backed auction rate securities are AAA rated, 97 to 98% guaranteed by US government and collateralized to more than 100% of the bond par value. While the timeframe is uncertain, we believe that we will be able to hold these bonds until they are refinanced or liquidity resumes.
Cash, cash equivalents and auction rate securities balance of $121 million at fiscal year end decreased by $28.4 million compared to the end of the third fiscal quarter. This was primarily due to a repurchase of 856,000 shares of company stock for $16.7 million and the $4.07 million decline in fair value of our auction rate securities previously mentioned. During fiscal year 2008, we repurchased a total of 1,173,000 of the company's shares in the open market for $27.4 million.
Now, we are open for Q&A.
Question-and-Answer Session.
Operator
Certainly. (Operator Instructions). We will take our first question from the side of Daniel Amir of Lazard Capital. Go ahead please.
Daniel Amir
Thanks a lot. Thank you for taking my call. A couple of questions here related a bit of financial side. First of all, do you expect margins to increase back to the level that it was in the previous quarter or should it continue to be depressed a bit due to largely this issue with one of your customers?
Phillip Kagel
The issue relate to -- actually there is a couple of suppliers if that’s what you are referring to?
Daniel Amir
Yeah, excuse me, a couple of suppliers, yeah.
Phillip Kagel
Yeah. We had a about a $600,000 cost due to defective parts that we were using during the quarter. That issue is behind us. We are still going to work on catching up the sales and that will take a quarter or two to catch that up. But as far as that condition, it doesn't exist any longer.
Daniel Amir
So, is it fair to say that margins should be at the level that it was in the December quarter?
Phillip Kagel
Yeah, I think so. We expect improved medical ultrasound mix in our sales in the June quarter that will help. But there's a lot of various factors of course, it's utilization, it's other mix. So there's just a lot of factors going on here.
Henry Pao
I think in general, you are right that we should gain back the gross margin that we lost for the defective parts.
Daniel Amir
And with regards to your commentary on annual sales growth here for fiscal year '09. I mean, what type of sales growth should we be expecting? I mean is it something in the single digits range or is it higher than that?
Henry Pao
Well as I project it for the quarter, it's 5 to 10%. So it's between the single and double digit and that’s what we think the fiscal year will come out to be.
Daniel Amir
Okay. And my final question is what gives you kind of confidence in terms of your guidance here? The past few quarters have obviously been a bit tough for your business, but guidance seems to be pretty solid here at 5 to 10%. So what gives you kind of the confidence that businesses are turning around and overall demand is coming back in your end markets?
Henry Pao
Well, with about eight weeks to go for the quarter, we have booked pretty much most of our projected sales for the quarter to the tune of over 75%.
Daniel Amir
And which areas in specific are stronger this quarter?
Henry Pao
Medical. That’s why it's very bullish on the upside on the gross margins.
Daniel Amir
Okay. Thanks a lot.
Operator
Thank you. We will take our next question from the side of Jay Srivatsa of Roth Capital. Go ahead please.
Jay Srivatsa
Thanks for taking my question. Could you give us a little bit more insight into the $400,000 worth of products that didn't ship? Which segment was it and how do you expect that this problem will not recur?
Henry Pao
Yeah, this was primarily industrial product that we use a dielectrically isolated wafers and the supplier ship us some contaminated starting material and we did not catch it at the incoming because this very onerous to do that. And most of the test would be destructive. And so we process this through because there was no problem previously and when the wafers came out, they did not yield very well. So the big loss and we went back to the suppliers, we sent some of our engineers over to their plant and find out some of the wafers they ship us were contaminated and we located the source for them and now they have recovered. But we have a lot of products now in the line and hopefully they will all be good.
Jay Srivatsa
Okay. In terms of the ultrasound market, can you give us an update on where things are in terms of addressing both the transmit side and receive side and give us an insight into when do you expect contribution from both the segments to really start helping you materially from a revenue standpoint?
Henry Pao
Well, as of now we are seeing the high voltage pulsers have been getting very good tractions and a new multiplexers and switchers have gained a lot of momentum in design wins as well as all in production. Even though their price are lower for efficiency purposes, we are able to keep the margin and then still get good lower price. Maybe Ahmed can elaborate more on that.
Ahmed Masood
Yeah. Jay, on the transmit side explicitly, we do have new products that are being received very well. There are some competitors out there who are putting out these data sheets of parts, but our newer generation product is of course a much much more enhanced, better performance, and we have been able to get efficiencies in design and manufacturing and offer lower pricing and costing for those new devices. So this is just one more hurdle that our competitors have to cross now. So the new products are out there and we think they will continue to do well as they have done in the past.
On the receive side, we do have customers who are currently buying in prototype type quantities. As you know, it does take them a long time to qualify it, get FDA approvals. But also importantly, in this market, a lot of the products are actually custom ICs. Every manufacturer puts in some uniqueness in their product. So they are coming to us with those requirements and that’s what we are busy engaged with and developing right now.
Jay Srivatsa
Okay. Henry, you mentioned there was a drop of almost $15 million in '08 primarily from the handset customer of yours, but yet you feel reasonably comfortable to guide to about 5 to 10% growth in fiscal '09 even as that specific customer continues to lose market share. Can you give us a sense of where you are gaining that confidence, in which segment do you really expect the revenue growth to come from to make up the difference?
Henry Pao
In the cell phone business, as Ahmed and I said earlier, the key thing is that we have gained a lot of traction not just in the legacy products i.e. the single output EL drivers, but now with the multi-channel, multi-segment drivers, we are getting a lot of attraction not just from this particular customer but from a big cell phone supplier and we feel that with two people ramping up then that result will be - mitigate the drop in one customer that has been so important to us.
Jay Srivatsa
Okay. Maybe a last question for Phil. What's the share count for next quarter, Phil?
Phillip Kagel
Something around 13 million even.
Jay Srivatsa
Okay, thank you. Good luck.
Phillip Kagel
Sure.
Operator
Thank you. We will take our next question from the side of Ramesh Misra of [Collins] Stewart. Go ahead please.
Ramesh Misra
Good afternoon gentlemen. My first question was in regards to how many new products were introduced out in '07? I know you said 30 are expected in '08. So I just want to see your year-over-year comparison?
Phillip Kagel
It's about an equivalent number, Ramesh. It's about 32 is what we netted out in '07.
Ramesh Misra
Okay. In regards to the notebook side that you talked about, is that are you shipping any drivers into that segment at this point?
Phillip Kagel
We are prototyping with couple of the guys right now, Ramesh.
Ramesh Misra
Okay.
Phillip Kagel
But we haven't picked up revenue yet now.
Ramesh Misra
Okay. So are you anticipating revenues from the notebooks in the current calendar year or do you think it's - you've kind of missed out this year's design cycle for second half notebooks?
Phillip Kagel
No, the notebook designs roll more or less continuously and there is still opportunities for us to participate in them.
Ramesh Misra
Okay. In regards to the TV opportunity, I know there was some expectation that you might have a second customer that could start shipping in the September kind of timeframe. Is that still on track or at this point do you feel that your initial customer probably is backing out and the number two guy might also…?
Ahmed Masood
I wouldn’t say they are backing out, but they are going to experience the same thing as the other first guys saw. The cost of the LED back light type unit and that makes it prohibitive. So they kind of limited to the very very high end models essentially. Again the volume in those is not very high. Even the first guy has not withdrawn those models. Those models are still there and they are continuing to buy some product from us. It's just that it's focused towards this very high end line. So if anybody wants a very high end line LED back lighting is probably the good way to go. It's just that it's not a very volume business.
Ramesh Misra
Okay. Henry, this question is probably for you. I guess you have been asked in the past as to how do you put your cash to more effective use? And I guess our share buyback is one option that you have already used quite significantly. But in this market where valulations have come down fairly sharply, are you looking at potential acquisitions or is that kind of a secondary focus?
Henry Pao
We always have look at the acquisition front. However, it is hard to find somebody who can be accretive at this moment. So once we have looked into recent month, I think the prices are unreasonably high and it will not be accretive to us.
Ramesh Misra
Okay. Finally, you have talked in the past about automotive design wins and an anticipation that model year '09 cars are an opportunity for you. I wanted to get an update on the automotive side.
Henry Pao
At this moment, we have a lot design wins but then we are still not sure about going to while in production and as you probably know the LED price at least for the market refocus such as the headlight, the LED price is still very high.
Ramesh Misra
Okay.
Henry Pao
But we are not sure how big a volume in production they will go into if they will go ahead anyway.
Ramesh Misra
Okay. Now the automotive segment I presume would tend to give you at least somewhat longer order lead times and so presumably that may be an area with better visibility. So in other words, if you haven't seen orders, volume orders at this point, is it quite likely that that may not be a very big important driver in the second half for you?
Henry Pao
That may be a fair statement. However, at least I was told that typically new models come out in September and we don’t see any orders until June.
Ramesh Misra
I see, okay. So well, there is still a little bit of hope.
Henry Pao
Yes.
Ramesh Misra
Okay. All right. Thanks very much gentlemen.
Operator
Thank you. We will take our next question from the side of Jon Gruber of Gruber and McBain. Go ahead please.
Henry Pao
Hi Jon.
Jon Gruber
Hi. Operating income in the fourth quarter was down 50% and you benefited from the tax and why did you lower your tax rate for the year so much, number one? Number two actually going to be is the New Year and my computation is that the tax rate added $0.20 to the fourth quarter. So I just checked that out with and then what will '09 tax would be?
Henry Pao
Yeah. Phil, may be you can touch on what happened we want to reserve, the auditors won't let us reserve any.
Phillip Kagel
We were very pleased with the outcome of recent R&D tax audit and we have several years underlie over the last three years and so as a result of the R&D tax study that we did recently to defend against a 2004 tax audit, we teamed out extremely well and that meant that for 2004 through 2007, we have a big benefit and that all of that benefit actually has been recorded yet. There are certain conditions by which you have to time, when you can relieve those reserves against those contingencies. But the biggest problem of the benefit for the fourth quarter was our 2008 tax credit that we recorded with some reserves based on the R&D tax study and the results of the 2004 audit. That was a very big number, but that wasn't off.
We also took advantage of a domestic production tax deduction called Section 199. Since we have a fab in San Jose, one of the few who do, we have a significant amount of production activity going on in the US and thereby we can capture a lot of deductions related to that. So we see that opportunity as well. And then we also did another study related to income in Hong Kong and found that as a result of that we didn't have subpart that income, something we really didn’t know before we did the study. So we are able to reverse some tax reserves for that too.
And then fourthly because of the auction rate market that failures, we had projected that we will be giving the money out of these tax exempts and then to investments where we have the liquidity, but this was better, one, we are unable to do that, but on the other hand we are getting very high yield that are tax exempt, actually higher yields than we were getting before the auction failures. So that turned out to be a huge aftertax benefit for us, but all of that hit in the fourth quarter.
Now going forward, we have tax initiative that we have been working on that we already haven't formally modeled and formerly announced that will reduce our overall tax rate, but it's going to be - we may not get the -- receive any of the benefit this year because we have some one-time cost related to buy/sell on our inventory between Hong Kong and the US. So that's why we are projecting a 32 to 34% tax rate and that were the projection that we had for fiscal '08 as well. Another part of the reason for the higher tax rate vis-à-vis the '08 year is that the federal R&D tax credit provision expired. We believe that will come back and we will get a big pick up at that time. But for now, we have to take those out of our tax projection.
Operator
Thank you. We will take our next question from the side of Jiwon Lee of Sidoti and Company. Go ahead please.
Jiwon Lee
Good afternoon. I jumped in the call a little bit later, so I missed the commentary. Did you comment the LED lighting driver as well as the notebook, are they pretty customized type of product or the volume driven product?
Henry Pao
No, they are pretty much for the open market, so they are not specific to any customers, they are meant for the broad market.
Jiwon Lee
Okay. And then I missed also the commentary on your F'09 effective tax rate, did you guide 32 to 34%?
Phillip Kagel
That's our projection right now, but we have more work to do to model the effect of all of the changes that we are making.
Henry Pao
Still took out the R&D tax credit because as of January 1st for calendar year '08, the R&D tax credit expired. So we cannot come on those tax query at this moment.
Jiwon Lee
And my final question is, you have sort of a decent booking and backlog that you feel comfortable to be bullish on the next quarter, but sort of going forward beyond that with the bookings and backlog and the customer relationship that you have with them, the significant one, how much visibility do you feel that you have?
Henry Pao
Well, as I said in my comments, my belief is based on the new products such as the high voltage pulsers, the new ultrasound multiplexer and analog switches and the multi-segment EL drivers. Those have gained tremendous momentum in the design wins and starting a very rapid pace of volume production. And if that rate continues, if that momentum continues, we see a very good fiscal year.
Jiwon Lee
So most of your bookings and backlog is geared towards just medical and the EL, multi-segment EL driver, is that the right way to look at it?
Henry Pao
Yes.
Jiwon Lee
Okay. More skewed towards the medical side?
Ahmed Masood
No, it's LED as well, you mentioned two of the three segments, we are also seeing bookings on the LED side as well.
Henry Pao
Yeah, we do particularly for general lighting.
Jiwon Lee
Okay, fair enough. Thank you.
Operator
Thank you. There are currently no questions in the queue.
Henry Pao
Thank you.
Ahmed Masood
Thank you.
Phillip Kagel
Thank you very much and we will talk to you next quarter. Bye.
Operator
This concludes today's conference call. Thank you for attending and you may disconnect at any time.
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