Pericom Semiconductor Corporation Q3 2008 Earnings Call Transcript

Pericom Semiconductor Corporation (PSEM)

Q3 2008 Earnings Call Transcript

April 30, 2008 4:30 pm ET

Executives

Jason Golz – IR Counsel, FD Ashton Partners

Angela Chen – VP of Finance and CFO

Alex Hui – President and CEO

Analysts

Krishna Shankar – JMP Securities

Jay Srivatsa – Roth Capital Partners

Christopher Longiaru – Sidoti & Co.

Sal Kamalodine – B. Riley & Co.

Richard Shannon – Northland Securities

John Meza – Kennedy Capital

Presentation

Operator

Good day everyone and welcome to the Pericom Semiconductor third quarter 2008 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to Mr. Jason Golz, Investor Relations Counsel with FD Ashton Partners. Please go ahead, sir.

Jason Golz

Thank you, Dustin. Good afternoon, everyone, and welcome to Pericom's third quarter fiscal 2008 conference call. Our speakers' today are Alex Hui, President and CEO and Angela Chen, CFO.

Before we get started, please be aware that we'll be presenting several visual slides during management's discussion of the business. To view these slides, please go to www.pericom.com and click on the investor link. Today, the company will be discussing its financial results, commenting on industry and on Pericom's business and provide guidance for the fourth quarter of fiscal 2008.

Certain matters discussed in this press release and on this conference call may contain forward-looking statements that involve risks and uncertainties. Therefore, we encourage you to review all filings made by the company with the Securities and Exchange Commission, particularly the Risk Factors section of such filings. In accordance with Regulation of Fair Disclosure, Pericom will continue to only provide guidance via its earnings release and its conference call. The company will not provide further guidance or updates during the quarter, unless it does so via press release.

Now, Angela will first discuss financial performance for the quarter, and Alex will give his comments on the industry and on Pericom's business. Then he will provide guidance for Q4 of fiscal 2008. Angela?

Angela Chen

Thank you, Jason. Consolidated net revenue for our third fiscal quarter were $41.2 million, an increase of 1.1% from last quarter and 36.4% increase over the same period last year. Some revenue statistics including the following, current booking in the third quarter were in the low 40% range. Our consolidated end-market shipments were computer 40%; communications 33%; consumer, 23%, and 4% for other miscellaneous markets.

Consolidated geographic distribution in the third quarter was domestic 10%; Asia 87%; Europe, 3%. Sales into the domestic distribution channel were 4% of the revenue. Foreign distribution were 47% directly into contract manufacturing were 30%. OEMs were 19%. Under generally accepted accounting principles, which include expenses of the stock-based compensation, consolidated gross margin in the third quarter of fiscal 2008 was 37.6%, which is 70 basis point higher than last quarter, and up 370 basis points from the same period last year.

GAAP-basis operating expenses were $10.2 million in the third quarter, compared with $10.1 million in the second quarter. Our GAAP-basis third quarter operating expenses, including FAS 123R expenses, total stock-based compensation expense in the third quarter was $585,000. And for information purpose, the foreign stock-based compensation amount are included in our GAAP results.

Cost of goods sold, $41,000; R&D $232,000; sales and marketing $190,000; G&A $122,000, all combined to a total of $585,000. We were pleased to deliver GAAP operating income of $5.3 million, which is an operating margin of 12.8% in the third quarter of the fiscal 2008. This compares to $5 million last quarter, up 6% sequentially. This is the tenth quarter in a row the company has delivered operating income.

Consolidated interest and other income of $903,000 were made up mostly of interest income. The sequential decrease in interest and other income was due to lower interest rates on invested income, which caused a reduction of $0.2 million from Q2. Our foreign exchange gain and loss in Q3, that was lower than Q2, $0.6 million due to depreciation of U.S. dollar against new candy Japanese yen.

Other income in the three months ended March 31, 2007 was $2.5 million and included $1 million profit on the sale of the Pericom investment in the privately held semiconductor company. Our third-quarter GAAP-basis income before tax was $6.1 million, compared with $6.6 million in the previous quarter.

In the third quarter, our effective tax rate was approximately 33.6%. GAAP basis net income in the third quarter was $4.1 million or $0.16 per share, compared with $4.4 million or $0.16 per share in the previous quarter, and net income of $2.6 million or $0.10 per share in the third quarter of last year.

Net profit margin during the period was 10.1%. Net income in the nine months ended March 29, 2008 was $12.4 million. Net income in the nine months ended March 31, 2007 included $1 million profit on the sale of Pericom investment in a privately held semiconductor company. Thinking of that $1 million profit, then the net income growth in the nine months ended March 29, 2008 was $6.9 million, or 126%.

Now, I would like to provide some details the complement, the information provided on the slide you are viewing. Our cash balance, including both short and long-term liquid assets as of March 29, 2008 was $118.1 million versus $132.4 million in the previous quarter. Accounts receivable increased $3.1 million versus the previous quarter, primarily due to shipments toward the end of the Q3 being higher than shipment toward the end of Q2. Working capital was $141 million. Our total assets at quarter end were $220.4 million, compared with $230.7 million the previous quarter. Net book value is $7.61 per share.

Cash and marketable security is $4.57 per share. Stock buyback progress status, we repurchased approximately 1.09 million shares of our stock during the quarter at an average price of $13.68. Total shares repurchased under this program are approximately 1.86 million. On April 29, 2008, the Pericom Board authorized the additional purchase of up to $13 million of Pericom stock over an unspecified period. Continued strong shipments contribute the inventory decrease this quarter. Weighted average shares outstanding decreased primarily due to an increase in the number of shares we purchased.

Now, I'll turn the call over to Alex to comment our business and our industry.

Alex Hui

Thank you, Angela. We're very pleased to report good results in Q3. Pericom delivered revenue and gross margin that exceeded the high end of our guidance. While we saw seasonally soft demand from existing programs, the benefits that we got from strong demand on new programs from the computer segment more than offset the seasonal softness and allow us to deliver an up quarter.

Comparing the result this quarter to the same period last year, net revenue increased 36%, while gross profit increased 51% due to margin expansion. We continue to control our expenses well, with only 9% increase in expenses year over year. The nice top line growth, together with expanding gross margin and expenses control, allow us to increase our operating income 532% year over year. Our net income comparison year over year, we like to point out that income in Q3 last year include a passive investment gain of $1 million.

Taking that out to give an apple-to-apple comparison, net income will increase around 115% year over year. On a consolidated basis, the revenue mix for our product families was IC 59%, which included analog switches, 26%; digital switches 11%; silicon clocks 8%; Connect 8%, and interface 6%. Frequency control products accounted for 41% of our total revenue.

Gross margin of 37.6% was up 70 basis points, compared to last quarter and up 370 basis points, compared to the same period last year. This is well in line with our goal of increasing gross margin 2% to 3% a year. The improvement in gross margin was driven by a combination of higher mix of IC revenue and increased shipments of focus IC and frequency control products that carried better gross margins.

Our top five end customers in fiscal Q3 were Dell, Cisco, HP, Samsung, and Gigabyte. These customers accounted for 22% of total revenue, and there was no 10% customer this quarter. Pericom continues to deliver products to several high-growth markets, including auto-mobility, digital video equipment, and high-performance PCs and servers.

As expected in the last conference call, the auto-mobility market was soft due to seasonality and channel inventory. Given our modest exposure to this market, we are able to offset the softness in this area with our strength in the computer market and deliver a better than seasonal quarter. This strong revenue contribution from computer segment came from an increasing adoption of our serial protocol solutions in PCs and servers, as well as frequency control products in (inaudible) applications.

Revenues from serial protocol solutions to computer customers enjoyed another quarter of strong growth with sequential revenue increase of 80% and contribute to 9% of our total revenue in Q3. We expect to see continued growth in our computer business as the new PC and server models ramp up in production later part of this year. Our telecom business contributed roughly one-third of our total revenue, and pretty much in line with our expectation. Business from consumer segment was down in Q3 as expected, and we expect the business will pick up in the second half of calendar 2008.

Pericom continued to expand our product solution for the focus market segment that we serve. During the quarter, we introduced two new industry-first high-performance PCI Express Gen2 to the DisplayPort switches, targeting volume, notebook, and desktop PC platforms. These products have already been designed in several top PC OEM models to be introduced in second half of this year.

We expand our solution to the digital video applications with three new HDMI ReDriver products that improve signal integrity in digital TV and PCs. Expanding our high-speed, low-noise timing product portfolio, we introduced a very low-jitter clock oscillator for OEM gigabit Ethernet applications. Further details on this product are available from our recent press releases at Pericom Web site.

For the last few years, we've focused our efforts on enabling the transition from parallel to serial connectivity in computer, communication, and consumer electronics systems. This has helped us achieve a unique position compared to many other semiconductor companies. We've achieved success so far on providing high-speed serial protocol solutions for digital video, auto-mobility devices, and high-performance PCs and servers, end markets that we believe will continue to grow at a healthy rate.

Given the tangible productivity benefits from faster high-quality connectivity, we believe our products provide cost-effective differentiating solutions to key OEMs. We believe this has been a key factor for our continued growth in the current market. On top of our PCI-Express Gen 1and Gen 2 products, we expect to see significant revenue contributions from our solution for serial ATA hard disk drive interface and DisplayPort graphics interface starting this quarter.

There's an increasing trend to expect external disk drives to computer systems to handle the storage of large volume of digital video content. Our external SATA ReDriver products have been designed into multiple new PC models from top OEMs to be released in second half of this year. DisplayPort is emerging to be a key digital video interface on computer and monitors. Our DisplayPort products have been designed in multiple and notebook platforms that are going into production in early summer timeframe.

While the broader consumer spending environment has been challenging, our design win pipeline is strong, and we believe our products position us well to sustain revenue and earnings growth going forward. We believe our target markets are in early stages of high growth with our Block portfolio covering PCI-Express, HDMI, DisplayPort, SATA, and USB. We believe Pericom will continue to benefit from an increasing adoption of serial protocol solutions in computer, consumer, and communication markets, and less affected by consumer spending patterns.

I would now give my comments on outlook for Q4. With healthy bookings in Q3 and book-to-bill ratio greater than 1 in Q3, we enter the June quarter with a higher backlog compared to last quarter. We expect revenues in Q4 to be up compared to last quarter at a similar quarterly turn ratio of low 40%. We currently expect Q4 results to be as follows, revenues of $42 million to $43.2 million; gross margin in the range of 36.8% to 37.8%. Operating expenses are expected to be in the range of $10.8 million to $11 million, which includes stock-based compensation expense of approximately $600,000. Expenses in Q4 will be higher due to expenses related to fiscal year-end SOX and audit work. Other income is expected to be approximately $1 million, consisting primarily of interest income. Exchange rate loss we expect to moderate, barring any unusual change in the foreign exchange situation. Tax rate of about 33.5%. This concludes my prepared remarks, and I will now open up for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) We'll go first to Krishna Shankar with JMP Securities.

Krishna Shankar – JMP Securities

Yes, Alex and Angela, congratulations on a good quarter.

Alex Hui

Thank you.

Angela Chen

Thank you.

Krishna Shankar – JMP Securities

As you look at the outlook for the June quarter, you mentioned five high-growth serial areas, Alex, PCI-Express, HDMI, Serial ATA, USB, and DisplayPort. Can you rank order the strength in these five areas and where you expect to see the most growth from?

Alex Hui

We expect the key driver will come from PCI-Express Gen1 and Gen2, as well as SATA, and then towards the later part of the year we'll see DisplayPort begin to pick up also. And USB has been ongoing for some time now, and we expect the business to continue to move up.

Krishna Shankar – JMP Securities

I see. And is the lot of PCI-Express strength is that in notebooks or is that also in desktops and servers?

Alex Hui

Actually, yes, we see them in all three areas. But I would say notebook is probably the strongest one for us.

Krishna Shankar – JMP Securities

Okay. And my final question, how do you see your networking equipment customers, people like Cisco and others, what kind of demand drivers are you seeing in the networking world?

Alex Hui

We can't really comment on specific customers. But I would say, as I comment, we see that our networking business is pretty much on track similar to what we've been seeing historically.

Krishna Shankar – JMP Securities

Okay, great. Thank you. And then gross margin outlook, Alex, given this mix, what should we expect for gross margins as we get into the second half of calendar '08?

Alex Hui

I think we continue to stand by our long-term goal, expanding margin 2% to 3% a year. It's not going to come in one quarter, as you can see now from a historical trend. But we feel year to year, that is the goal that we continue to drive towards. And again, the key is to driving an increasing mix of our Focus FCP and IC products.

Krishna Shankar – JMP Securities

Great, thank you.

Alex Hui

Thank you.

Operator

We're next to Jay Srivatsa with Roth Capital Partners.

Jay Srivatsa – Roth Capital Partners

Thank for taking my question. Nice quarter, Alex.

Alex Hui

Thank you very much.

Jay Srivatsa – Roth Capital Partners

In terms of the DisplayPort, how do you see it playing out? Is it driven by any specific back-to-school sales, or is it driven more just by product generation shifting from current standard there? Can you give us a little bit more clarity there?

Alex Hui

Well, we feel that this is really the first year that we are going to see significant deployment of additional video in notebook computers and desktop. So DisplayPorts now is the key standard that the OEM are looking at. So we expect again in the second half of this year, we'll begin to see our DisplayPort being deployed in the PCs. We don't really expect to see the monitor area to be re-ramping until next year. But obviously, the source equipment, the computer has to be ready first.

Jay Srivatsa – Roth Capital Partners

Okay. In terms of the cell phone market, the dual SIM card market, the handset market in China has been a little weak early part of this year. Can you give us a sense of where you see that market going? Does it bounce back? What are your expectations in that market?

Alex Hui

Yes, as we had indicated in the last conference call, and pretty much what we see this quarter is that the China cell phone market was soft, and we expect it's probably still in a soft situation for this quarter. We do expect probably it will start picking up in the second half of this year.

Jay Srivatsa – Roth Capital Partners

All right. One of your top major customers in the previous quarter reported some weak numbers today. What's your sense on what's going on in the navigation side, and do you see that coming back later on this year or what are your expectations there?

Alex Hui

I believe you're talking about Garmin. And certainly I think this is a seasonably soft quarter for the consumer guys, which MPD (inaudible). But as we look at the industry number, the Q1 unit compared to the same period last year is still up almost 100%. So we believe that, and again this will still be a significant growth year for the MPD market. Obviously, the strength is going to come from second half. But year-to-year number, actually is still looking pretty good.

Jay Srivatsa – Roth Capital Partners

My last question, and then I'll step aside here. In terms of OpEx, you mentioned there's a little bit of legal year-end expenses. Do you expect that to go down in the next quarter? How do you see that OpEx numbers shaping up for the next couple of quarters?

Alex Hui

We're (inaudible) fiscal year-end company. So if you look at historical, we tend to begin pickup with expenses in the June quarter, and then sustain debt level in the September quarter, and you'll see a pretty significant drop in the December quarter.

Jay Srivatsa – Roth Capital Partners

Very good. Congratulations again.

Alex Hui

Thank you.

Operator

We are next to Christopher Longiaru with Sidoti & Company.

Christopher Longiaru – Sidoti & Co.

Hi, gentlemen.

Alex Hui

Hi, Chris.

Christopher Longiaru – Sidoti & Co.

Hi, how are you?

Alex Hui

Good.

Christopher Longiaru – Sidoti & Co.

My question really is, can you explain just again and give us a refresher on where the source of the margin base is? I think it's product mix, but just give us an idea of your progression?

Alex Hui

I think essentially this quarter is driven by two factors. It's that our IC, the revenue is slightly higher than last quarter. So IC carrying a higher margin, that's one positive contributor.

Christopher Longiaru – Sidoti & Co.

Do you think that's going to continue going forward, at least into the next quarter?

Alex Hui

No, actually it fluctuates. So, that's why I think we have a range in our gross margin guidance for next quarter.

Christopher Longiaru – Sidoti & Co.

Okay.

Alex Hui

But the other more important thing, which is a more of a consistent theme is as we continue to pump our R&D money into the focus products, we're seeing a better and better margin over time. So they essentially allow us to average up our gross margin.

Christopher Longiaru – Sidoti & Co.

Got it, okay. And also, it looks like you were pretty aggressive on the share buybacks this quarter. Is that something, I know that you have a program in place. How much is left in the program, first of all? And at that point, would you authorize some more when you run out of shares to buyback?

Alex Hui

Yes. Actually, in the comment from Angela just now, out of the 2 million share program, I think we finished over like 1.86 million, so we have about just 140,000 shares to go in this program. But then in the Board meeting that we had yesterday, our Board has authorized to buy another $30 million, up to $30 million of stock over a period of time.

Christopher Longiaru – Sidoti & Co.

Okay. And what's that period of time, do you know?

Alex Hui

I can't specify it now.

Operator

We are next to Sal Kamalodine with B. Riley.

Sal Kamalodine – B. Riley & Co.

Yes, guys, congratulations on the quarter. A couple of accounting questions to begin with. Can you give us what D&A and Cape were for the quarter, and also if you could just help me understand why the carrying value of PTI was lower during the quarter?

Angela Chen

Okay. Our G&A expense in Q3 is $10.2 million, and including –

Alex Hui

That's total expenses.

Angela Chen

Yes, that is the total operating expense.

Sal Kamalodine – B. Riley & Co.

Chen, I was asking for depreciation and amortization in capital expenditures.

Alex Hui

Okay, I think we don't have the number on hand. We may have to again, give it to you later on.

Sal Kamalodine – B. Riley & Co.

Okay, got it. No problem. And as it relates to the carrying value of PTI, was there a write-down charge there, or was there a change in the equity value at PTI that led to the lower carrying value?

Alex Hui

We actually don't think there's a significant change in that number. Again, we did the lock in – where did you see that?

Sal Kamalodine – B. Riley & Co.

I just show it down something like $2 million sequentially.

Alex Hui

I don't think that is that correct. So, we probably have to talk to you off-line and wait and see that number.

Alex Hui

Right.

Sal Kamalodine – B. Riley & Co.

That's probably where it's from. Okay, got it. Can you just talk about your HDMI business? And I apologize if you quantified how much revenue you guys derived from your HDMI switches during the quarter, but if you could just quantify that, and talk about how you see that trending through the second half of the year?

Alex Hui

Yes, our number in the March quarter actually was up by high single digits, and digital video switches were up about 8% of our total revenue in the quarter, up and above 7% last quarter. We expect second half we'll see a sequential pickup.

Sal Kamalodine – B. Riley & Co.

Okay. And then if I could just follow up to the earlier question about DisplayPort, so it sounds like in the shorter term, that business will be driven more by PCs rather than monitors. But can you give us a sense for what you expect that business to be in absolute dollar terms for you in fiscal '08, and maybe if you want to, as well, fiscal '09 if you could just give us a sense of how big that business could be potentially?

Alex Hui

Yes, I think we're literally at the last quarter of fiscal '08. So, we really don't expect we're going to get a very significant revenue from DisplayPort in fiscal '08. I'd say probably less than $1 million. And I think in fiscal '09, right now we took a stab at it. I think we'll probably see multiple million dollars, but still in the single digit range. We really expect fiscal '09 will be just the third initial year for the ramp up of DisplayPort.

Sal Kamalodine – B. Riley & Co.

Yes. And how are you positioned in that market today, or are you seeing competitors come in with similar parts, or is that something that becomes more of an issue next year?

Alex Hui

Certainly, I think DisplayPort is a pretty hot area. We see a number of competitors. But Pericom is really well positioned in the PC market. We have really multiple products that we're supplying. So I think that's really something that we could do very well with our channel and customer relationship, and also with our good technology.

Sal Kamalodine – B. Riley & Co.

Got it, okay. Thanks

. Alex Hui

Thank you.

Operator

We are next to Richard Shannon with Northland Securities.

Richard Shannon – Northland Securities

Hi, guys. Maybe to follow up on one of the previous questions, not on DisplayPort but on the SATA products and SATA design wins you're talking about. Love to get your sense of what you see the potential for that product line being in fiscal '09.

Alex Hui

The potential will be significant. Today this is probably the first year that you're going to see computer with external SATA connectivity. We see initially, we would see a 10% penetration rate into the PC, but even with that, you will be – (inaudible) into millions of dollars, and over time, we expect we'll get into the double-digit number.

Richard Shannon – Northland Securities

Okay, great. And do you expect that to be at least – looking a year out or so, or even two years out, which one do you expect to be bigger, DisplayPort or SATA?

Alex Hui

It's really hard to say right now. With new standard, it's hard to crystal ball.

Richard Shannon – Northland Securities

Okay. Shares outstanding, what are you expecting for the June quarter?

Alex Hui

For what product?

Richard Shannon – Northland Securities

For shares outstanding.

Alex Hui

For shares outstanding, I think it's probably similar to what we see this quarter. But it depends on our buyback situation. And we don't have to – and then on our ongoing stock option grant and all that. But we don't really expect a rapid change.

Richard Shannon – Northland Securities

Okay. So, I noticed your basic shares outstanding barely declined, while you mentioned you bought back 1 million shares. I was just wondering if that was bought late in the quarter, and we ought to see more benefit in the June quarter. But it doesn't sound like you expect that then?

Alex Hui

I think we'll see some benefit from that because we actually the number we report is average of the quarter. So, I think from the stock buyback program last quarter, we see some benefit from them. But then there will be also new shares being exercised from options and stuff like that.

Richard Shannon – Northland Securities

Okay. Fair enough. Maybe my last question, and Alex, I want to make sure I heard your commentary right. But it sounds like you are pretty positive in the June quarter about some design wins related to PCI-Express and also SATA in the quarter. I'm curious how many designs we're talking about here?

Alex Hui

We don't really have an exact number off our hand. But I would say it's a pretty significant number. If you look at the key OEMs out there, I think we have a pretty good coverage.

Richard Shannon – Northland Securities

Okay, great. Thanks a lot and great quarter, guys.

Alex Hui

Thank you.

Operator

(Operator instructions) And we have a follow up from Krishna Shankar with JMP Securities.

Krishna Shankar – JMP Securities

Yes, Alex, on the cell phone market, you said that you thought the inventory situation was winding down. What do you see in terms of new products, new design wins for Pericom in the cell phone area? And with the Olympics in China, will that be a stimulant for you in terms of sales for cell phones into the China market?

Alex Hui

I would say from what we could see, we feel that China's cell phone market is still choppy right now. So it's really hard to get a firm handle on it. But then our exposure to that market is only a few percent of our revenue. So, we don't think it's a very big factor for us either way. But we expect to gain typical seasonality, the second half will pick up. The Olympics might have an effect on it, but it's something we try to gauge.

Krishna Shankar – JMP Securities

What is cell phones in total as a percent of your revenue?

Alex Hui

Cell phones today I think is about maybe 4% to 5%. Yes, we actually classified under the general category of what we call our auto-mobility which includes cell phones, GPS, and some portable media devices. But cell phones by itself I believe is about 4% to 5% of our business.

Krishna Shankar – JMP Securities

And then can you comment on how you are positioned with respect to the new Intel Monteria notebook platform? Will that use a lot of the functionality that you provide in terms of PCI-Express and SATA?

Alex Hui

Yes, we really feel pretty good about the next generation notebook that we expect to see coming out in second half of this year. As we talk about, we see the emergence of digital video with DisplayPort. We're seeing external SATA conductivity. We see PCI-Express Gen2. So actually, we're seeing multiple opportunities that we see good design activities. So we feel Pericom has a benefit from this technology upgrade cycle.

Krishna Shankar – JMP Securities

And my final question is on HDMI. Are you seeing any slowdown there in terms of consumers pulling back, or anything you can comment on HDMI uptick in the flat panel and LCD TV market?

Alex Hui

Well, from what we see, it's pretty much close to seasonality in the TV market. But also we actually have not begun to see some contribution from the computer side. So that's why if you look at our March number, as I just mentioned, digital video revenue actually went up.

Krishna Shankar – JMP Securities

Okay. Thank you.

Alex Hui

Thank you.

Operator

And we'll go next to John Meza with Kennedy Capital.

John Meza – Kennedy Capital

Hi, Alex. Great quarter. Just a quick question, given the wide range of the gross margin guidance, I was curious what product area needs to do well to get to the high end of the range.

Alex Hui

It's pretty much coming down I think to a mix between the IC and frequency control products. I think that's a major swing factor.

John Meza – Kennedy Capital

Okay. Thanks, so much.

Alex Hui

Yes.

Operator

And there appear to be no further questions at this time. I would like to – actually we've got another signal from Richard Shannon in Northland Securities.

Richard Shannon – Northland Securities

Hi, I'm sorry to delay the end of the call.

Alex Hui

No problem.

Richard Shannon – Northland Securities

I just have one quick question for you. In terms of your FCP products, I know that you've added some additional manufacturing lines. Are you capacity constrained in that? And if so, what's the outlook for that over the next couple of quarters based on your capacity there?

Alex Hui

We're not capacity constrained right now because first half of the year tends to be not as easy as the second half. But we're gearing up in additional capacity to prepare for second half.

Richard Shannon – Northland Securities

Okay, great. Thank you.

Alex Hui

Thank you.

Operator

We've another follow up from Sal Kamalodine with B. Riley & Company.

Sal Kamalodine – B. Riley & Co.

Just a quick follow up on the personal navigation devices. If I'm not mistaken, you're doing business with the number-one player in that space and the number-three player. Do you see any opportunity to expand your presence in that market?

Alex Hui

Yes, I think if I mentioned about Garmin and Neil [ph], which I believe is number one and number four. We're certainly working on number three. As of now, we don't have anything to report, but certainly if there is any significant progress, we will update that in future.

Sal Kamalodine – B. Riley & Co.

Okay. Thanks.

Operator

All right, and with no one left in the queue, I'd like to turn the call back over to management for any additional or closing comments.

Alex Hui

I really like to thank all of you for a quick participation in our conference call. And thank you for the support, and wish all of you a good afternoon. Thank you.

Operator

Again, that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

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