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Anaren, Inc. (NASDAQ:ANEN)

F4Q2012 Earnings Call

August 7, 2012; 08:30 am ET

Executives

Larry Sala - President & Chief Executive Officer

George Blanton - Chief Financial Officer

Joe Porcello - Vice President of Accounting

Analysts

Rich Valera - Needham & Company

Mike Walkley - Canaccord Genuity

Gregory Garner - Singular Research

Bhakti Pavani - CK Cooper

Operator

Good day ladies and gentlemen and welcome to the Anaren fourth quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

I would now like to turn the call over to your host, Larry Sala. Please go ahead.

Larry Sala

Thank you. Good morning and thank you for participating in the Anaren fiscal 2012 fourth quarter conference call. I’m joined again today by George Blanton, our CFO; and by Joe Porcello, our Vice President of Accounting. I’ll provide a brief overview of the results for the quarter, after which George will review the financial highlights, and we will then take your questions.

Certain statements made during this conference call will be forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially from those discussed. You are encouraged to review our SEC filings and exhibits to those reports to learn more about the various risks and uncertainties facing our business and their potential impact on our net sales, our earnings and our stock price.

Net sales for the fourth quarter were $38.2 million, down 19% from the fourth quarter of last year, but up 10% sequentially from the third quarter of fiscal 2012. Non-GAAP operating income for the quarter was $4.9 million or 12.7% of net sales, down 24.5% from the fourth quarter of last year, but up 64% sequentially from the third quarter of fiscal 2012.

Margins improved from the third quarter levels due to the increase in Wireless Group net sales levels and the cost reduction initiatives that were completed in the first nine months of fiscal 2012. Given the reduction in manufacturing and operation expenses, the improving wireless demand in a record Space & Defense order backlog, we believe that we are well positioned for improved sales a profitability in fiscal 2013.

Wireless Group net sales for the quarter were $13.4 million, down 32.5% from the fourth quarter of last year, due to decline in demand from wireless infrastructure customers. Though comparisons to the record demand experienced in fiscal 2011 remained unfavorable, fourth quarter Wireless Group sales increase 30% sequentially from the third quarter levels, as inventory and the distribution channel was liquidated and demand increased in the quarter. Demand for wireless infrastructure products continues to improve and current customer forecasts project increased demand for fiscal 2013.

New product investments for the quarter remain focused on expensing the wireless infrastructure and Anaren Integrated Radio module product lines and we continue to see steady increase in AIR design-ins and customers transitioning to volume production. The customers that exceeded 10% of Wireless Group net sales for the quarter were E.G. Components, Huawei, Nokia and Richardson.

For the Space & Defense Group, net sales for the quarter were $24.8 million, down 9.5% from the fourth quarter of last year, due primarily to the decline in LTCC related business. New orders for the quarter were $34.8 million and were driven largely by previously announced contracts for ground based radar and passive ranging applications. In addition orders for salary related products remained robust and the group continues to experience a high level of radar and space related new business opportunities.

Space & Defense Group order backlog at June 30, 2012, was a record $105 million. Customers that generated greater than 10% of Space & Defense Group net sales for the quarter were Lockheed Martin, Northrop Grumman and Raytheon. George.

George Blanton

The highlights of the fourth quarter income statement and the balance sheet as of June 30, 2012 are presented on a non-GAAP basis. These non-GAAP measures are each adjusted from GAAP results to exclude certain non-cash items including equity-based compensation and intangible amortization.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with accounting principles generally accepted in the United States. Please refer to our Q4 earnings release for a reconciliation of GAAP and non-GAAP measures.

Non-GAAP gross margin was $14.1 million or 37% for the current quarter compared to $18.1 million or 38.4% for the fourth quarter of last year. Gross profit as a percent of sales decreased by 140 basis points compared to the fourth quarter of last year, due to lower sales volume resulting from softer demand from wireless products and the decline on the LTCC sales in the Space & Defense group since the LTCC product line was reemphasized after the fourth quarter of last year.

Gross margin increased 260 basis points sequentially from the third quarter due to the increased sales volume and cost reductions realized in the first nine months of fiscal 2012. Gross margins are expected to improve with increased sales volume in the first half of 2013. We expect non-GAAP gross margin to be between 36% and 40% for the first quarter of fiscal 2013.

Investment research and development was 7.7% net sales in the fourth quarter compared to 9.8% net sales for the fourth quarter of last year. Total R&D expenditures for the fourth quarter were $3 million compared to $4.7 million in the fourth quarter of fiscal 2011. The lower spending levels were due to a reduction of engineering personnel as a result of reduced design requirements and reassignments of the number of employees to funded non-recurring work in the group.

Space & Defense group programs are anticipated to generate $6 million in funded engineering revenue over the next six months, after which slightly higher levels of R&D spending will be realized.

Non-GAAP operating income was 12.7% of the net sales for the fourth quarter of fiscal 2012, down 100 basis points from 13.7% in the fourth quarter of fiscal 2011. The decrease in operating profit was a result of lower overall sales volumes in both the wireless and space and defense segments and a less favorable mix of business.

Operating expenses were $2.3 million lower in the current quarter when compared to the fourth quarter in fiscal 2011, as a result of the company’s cost reduction efforts. During the first nine months of fiscal 2012, personnel levels reduced by approximately 20% resulting in an annualized annual reductions in excess of $6 million, but including benefit cost compared to the fourth quarter of fiscal 2011. The total impact of the cost reductions completed in the first nine months of fiscal 2012 is expected to exceed $12 million annually.

Non-GAAP net income was 9.8% of sales or $0.26 per diluted share for the fourth quarter of 2012 compared to 10.6% of net sales or $0.34 per diluted share for the first quarter of last year.

The effective income tax rate for the fourth quarter of 2012 was 22.6% compared to a tax rate of 28% for the fourth quarter of last fiscal year. The tax benefit in the fourth quarter of fiscal 2012 resulted from a higher than anticipated federal research and experimentation credit. The overall projected effective tax rate for fiscal 2013 excluding one-time adjustments is expected to be approximately 32%.

Balance sheet highlights include cash provided by operations was $10.4 million in the quarter. Capital expenditures were $2.1 million in the quarter. Cash, cash equivalents and investments were approximately $34 million as of June 30, 2012. The company repurchased 901,000 shares of its common stock in the fourth quarter. There were approximately 914,000 shares remaining under the current core repurchase authorization as of June 30, 2012.

Accounts receivable were $30 million at June 30, 2012, down $1 million from June 30, 2011. Day sales outstanding were 70 days, down five days from the last quarter. The accounts receivable includes $5 million of unbilled receivables related to non-recurring engineering projects that are using a percent of completion accounting methods. The unbilled receivables will be significantly reduced by the end of our calendar year. DSO excluded two unbilled receivables was 59 days as of June 30, 2012.

Inventories were $36 million at quarter-end, up $2 million compared to June 30, 2011. The increase was due to additional inventory for long lead satellite programs in the Space & Defense Group and a customer delayed shipment, a portion of these inventories will begin to be consumed in the first quarter. Larry

Larry Sala

Thank you, George. For the first quarter of fiscal 2013, we anticipate comparable sales for both the Space & Defense Group and the Wireless Group compared to fourth quarter levels. As a result we expect net sales to be in the range of $36 million to $41 million.

We expect GAAP net earnings per diluted share to be in the range of $0.13 to $0.24 using anticipated tax rate of approximately 32%, an inclusive of approximately $0.05 per share related to expected equity-based compensation expense and amortization of intangibles. Non-GAAP net earnings per diluted share are expected to be in the range of $0.18 to $0.29 for the first quarter of fiscal 2013.

We will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Rich Valera from Needham & Company. Your line is open.

Rich Valera - Needham & Company

Thank you. Good morning gentlemen. Larry, I think it sounds pretty good. Wireless demand sounds like its picked up and if anything, maybe continues to strengthen and obviously very good bookings in Space & Defense, which I think should lead to some growth there. So just trying to understand the quite wide range we have for the guidance for the current quarter and what might take you to the low end of that range and diversely I guess to the high end of the range.

Larry Sala

Well, normally we set our guidance with the expectations of the mid point like this past quarter came in pretty much as we expected. I think the biggest factors this quarter, we tend to have large shipments on individual programs in the Space & Defense Group, any one of which can be disrupted for a multitude of reasons, both within our control and outside of our control.

Last quarter we had a shipment to a defense customer of over $1.5 million where they would not get a person on site to accept that shipment at the end of the quarter and ended up being held up until this quarter. Sometimes we can compensate for that with other programs, sometimes we can’t. So that drives a lot of volatility in the potential space and defense running it.

On the wireless side, we are half way through the quarter. Demand is pretty stable, shipments are quite linear on the wireless side, so it tends to have a little less volatility from our expectations in wireless and we expect it to be dramatically different than demand patterns that we’ve been seeing in the last six weeks.

Rich Valera - Needham & Company

Great and from where you sit now, you think that the current demand levels kind of keep you at roughly this flattish $13 million plus per quarter run rate this quarter and do we think that’s sort of similar next quarter. Do we potentially see some probably variation in that?

Larry Sala

Generally on the Space & Defense side, we don’t look at it so much quarter-to-quarter because its larger shipments on any particular program. We’d say for the year we would expect our space and defense business to grow organically kind of mid single digits throughout the year.

Quarter-to-quarter we can see some volatility, just because of these large shipments, but generally we expect that business to be up with that kind of order of magnitude. Obviously there is some bookings shipped in the business. That would only today be positive for us, if we book some things that we can ship within the year and we can see some upside from that, but that’s our expectations there.

On the wireless side we don’t have tremendous long-term visibility, but the second quarter looks like things pick up a bit in the wireless group. So our expectation is right now first quarter’s comparable, second quarter we start to see some sequential sales growth in the wireless business. Historically, this quarter has always been a seasonally soft quarter for our wireless business.

Rich Valera - Needham & Company

Got it. Could you just give us an update on AIR, kind of where you stand in terms of design wins and the funnel going into this year and I guess revenue prospects for that product line as we head into this year.

Larry Sala

Yes, our revenue prospects have not changes in the last six to nine months for fiscal 2013. We said kind of $2 million to $4 million this year and that’s still within reason of our expectations.

We’ve seen a steady growth in design-ins and continue to – and in that numbers, in the order of hundred or more kinds of opportunities that we are tracking or customers have designed us into their application and we have more than a dozen customers who are in some level of volume production now, so that people who have got more than 1000 units and are ramping up to some level of higher volume production and the flow continues and its actually been accelerating for us, so.

We said last quarter by the end of this quarter we thought we’d be at about $1 million annualized run rate of sales and that’s just about where we are, so I think its been continuing to progress as we’ve expected.

We still see the same where customers come and go. They are very intense with their design-ins and then they fall off the radar screen for whatever reason and then they pop back on and they are moving into production. So they all have very unique design cycles, very unique resources and capabilities or the types of opportunities are very diverse and the companies are very diverse in their skills.

So there is no standard lead-time, there is no standard design-in cycle; there is nothing that’s really typical in this business. Unlike our Infrastructure and Space & Defense business, which are on very consistent cycles.

Rich Valera - Needham & Company

Right, that’s helpful and one final one for George if I could. It looks like the tax rate your expecting for next quarter bumps up a bit from where you were recently. Should we think of 32 as the rate for all of fiscal ‘13?

Larry Sala

Yes, for now that’s the research experimentation credit that has popped in and that doesn’t adjust in this fiscal year, so. If that changes the rate will change, but for now lets think 32%.

Rich Valera - Needham & Company

Okay, thanks very much.

Operator

Our next question comes from Mike Walkley from Canaccord Genuity. Your line is open.

Mike Walkley - Canaccord Genuity

Larry, thank you. Larry can you just update us on the inventory transition at Ericsson. I thought they might jump up with a 10% cuts somewhere this quarter on the walk-in (ph) side.

Larry Sala

Yes, that was complete by the end of the quarter, but it didn’t finish up, so very late in quarter. So there’s just a whole bunch of system delays of getting that implemented. So as of this quarter we are through shipping any product to EG. Like I said, we finished that up in the last couple of weeks of the last quarter.

With transitions over we are now on this vendor managed inventory relationship and we actually worked through a third party distribution partner Errol Electronics, so we as somebody that process this inventory management system with Ericsson. But going forward we will be reporting Ericsson as the end customer as we recognize sales when they consume things.

Mike Walkley - Canaccord Genuity

Thanks and it sounds like you said that shipments are pretty linear, so you see kind of a balance now in the overall inventory in the channel and do you have any visibility on contracts. I think usually you negotiate the moment of summer here in terms of visibility for 2014.

Larry Sala

We are just starting to get some insight of what our customer expectations for calendar ‘13. Its still early, but it definitely looks up from what we – the demand rates we’re seeing now, so we are definitely expecting to see increased demand in 2013, but its very early and we are just getting our very first looks, so. And I would definitely expect over the next couple of months that that starts to solidify for us.

Mike Walkley - Canaccord Genuity

Great thanks. And then just on the Space & Defense bookings, record bookings of $105 million but you guidance is in the mid single digit, so you should be thinking maybe $100 million, $105 million, is that kind of the forecast range.

Larry Sala

Yes, dump them in the $100 million to $105 million is where we expect again. We do have time to see some shorter term revenue come through, but that’s sort of our expectation and we do book some things that go beyond the year. We have this contract in our backlog, which is a four to five year contract.

Even some of the more recent large radar contracts that we announced don’t really start sipping until November-ish timeframe and don’t really get to their full production rate until February, so they have an impact on our fiscal ‘13, but they actually have a larger impact on our fiscal 14. We don’t every go out too far, but our fiscal ‘14 looks today like it may be even a higher growth than we are seeing from ‘12 to ‘13.

George Blanton

Mike, about 75% of that backlog is due in fiscal ‘13, the remainder is due in fiscal ‘14.

Michael Walkley - Canaccord Genuity

Okay great, that’s helpful. And George just on the wireless EPS range, is that all leveraged if you are at the higher or the lower end of your guidance or is there any other mix that we should have assumed in terms of the wide EPS range for the September quarter guidance.

George Blanton

Yes, a lot of its leveraged and the upside would be if the wireless business picks up, there would be more leverage, because it would be a more favorable product mix. So we kept it wide just because we are at that critical point. We got this critical mass and if goes below that, the leverage is downward and then if it goes up we are seeing some favorable results.

Michael Walkley - Canaccord Genuity

Okay great, that makes sense. And could you just clarify this overall operating expense, $9 million to $9.5 million range right now. Is that the way to think about it or does it go up in the second half of fiscal ‘13 that you talked about some credits running out or some allocation of engineering, $6 million going away, can you just kind of walk us though about how to think about OpEx throughout the year.

Larry Sala

Yes we think that OpEx will go up 2% to 3% overall. We have done a good job reducing out cost, we’re going to put a bonus crew back in, in the first quarter. We think that we have other opportunities to reduce cost and we will reduce the majority of that bonus accrual.

So you can think of it as 2% to 3% growth over the year, the R&D is going to grow a little bit faster than that as these non-accruing funded programs will last about mid way through our fiscal. So we’d expect the R&D expense to go up between four and six percent after that.

Michael Walkley - Canaccord Genuity

Okay great. Thanks for taking my questions and look forward to seeing you guys next week.

Larry Sala

Great, thank you.

Operator

(Operator Instructions) Our next question comes from Gregory Garner from Singular Research; your line is open. Mr. Garner your line is open. We will move on to our next question. Our next question comes from Chris McDonald from Kennedy Capital; your line is open.

Chris McDonald - Kennedy Capital

Good morning Larry, good morning George.

Larry Sala

Good morning.

Chris McDonald - Kennedy Capital

George you talked about some pretty meaningful cost takeout that the company’s initiated and executed on during fiscal ’12. I am wondering if you could just help with how that translates to earning leverage when we think some potential for improved revenue growth in fiscal ‘13. I don’t know if you want to do it by segment or consolidated, but it would just be helpful to get a little more insight there.

George Blanton

Yes, may be I can do it just kind of on an overall basis. We really over the course of last year, late in the fourth quarter and fiscal ‘11 and through the first half of fiscal ‘12 we reduced our headcount by about 20% at several different locations as a result of the wireless situation and also some other business levels at one of the other locations. So that reduction has been significant.

Along with that we were able to reduce our research and development material expenditures considerably. We took a real hard look at some of our, I’ll call it discretionary expenditures for consulting and some other charges and really in think we had a real good effort by the management team to focus on reducing cost. And like I said in the notes there, we think it will be about $12 million. That would be good reducing, what I call our curtail mass to a lover level and the operating leverage as the wireless business grows will be a significant. I think we said in the past that’s over 50%.

So we think we have really done the hard work in terms of control and what we can’t control, the fixed and variable cost and if the market cooperates for us in the wireless side, we’ll see significant leverage. We feel that the Space & Defense side is very stable and that the programs we had are long running and predictable. So we feel good where we are. If we get a little help with the market, we’ll see some pretty good leverage.

Chris McDonald - Kennedy Capital

Okay, very good. And at the current revenue run rate, is the AIR product like break even, is it profitable. Can you just give me a sense for where that stands right now?

Larry Sala

No, we are still spending something on the order of about $2.5 million in R&D and AIR, so we are still ways away from break even in AIR. So not hitting that mark yet.

Chris McDonald - Kennedy Capital

That’s $2.4 million a year Larry?

Larry Sala

Correct.

Chris McDonald - Kennedy Capital

Okay, okay. So that makes breakeven I’m guessing somewhere $6 million, $8 million a year type revenue run rate.

Larry Sala

Yes, maybe a little lower than that. But they were of magnitude.

Chris McDonald - Kennedy Capital

Okay. George I think you just said 75% of the backlog, the Space & Defense backlog ships in fiscal ‘13. You wouldn’t happen to know just typically what that number might be. I’m just trying to get a sense of how much longer a time horizon you have in the backlog today than maybe what you had a year ago or what might be typical.

Larry Sala

Yes, its pretty difficult for us, I don’t think its that unique. So I think that 75% is probably quite difficult for us.

Chris McDonald - Kennedy Capital

Okay. And then as those programs that will ramp this year in Space & Defense, as they transitioned to production, would you expect that to have an impact overall on the margins of Space & Defense.

Larry Sala

Yes, certainly as we transition these jobs into production, we could expect to see improving profitability in our Space & Defense group this year. Unfortunately Space & Defense group has also been burdened by the overall sales decline in the wireless group. So they are defiantly absorbing more overhead cost. So they should see a benefit as well, as wireless gets back to higher rates.

Chris McDonald - Kennedy Capital

And it sounds like even in what a lot of people are characterizing as a pretty tough defense environment, you are continuing to see a pretty decent pipeline of bidding opportunities and just ongoing activity in the space, is that fair.

Larry Sala

Yes, I think that’s very fair. Certainly we are exceptionally cautious in planning for the worst, but the acquisitions we made several years ago have really benefited us in getting us focused in areas where we continue to see spending in need. So the radar side, this radar monetization that we have been talking about since we made those acquisitions is continuing to happen and our contact has grown substantially because of what MS Kennedy and Unicircuit had brought to us.

And then the space side, which has been largely addressable for us with MS Kennedy continues to be very robust for us. So yes, our mix of the type of business we have in Space & Defense has changed substantially, but overall we still see a pretty robust market place.

Chris McDonald - Kennedy Capital

And have you noticed any changes in the competitive landscape. I mean there’s just been a ton of M&A and there continues to be in the space where you play in the Space & Defense side and I just wanted to try to get a sense if there is any change in competition pricing etcetera.

Larry Sala

No, I mean I would say the biggest change that we’ve seen has been just been the higher concern for cost and that’s been more customer driven I think than competition driven. So I think the fear of programs being behind schedule or over in cost is very higher in our customer base and concerns that programs that are off track, are higher priority to be canceled or reduced. And so we have seen a height in concern from customers to be on schedule and to be in the mode to trying to find ways to reduce cost as a priority. It didn’t really exist in the business a couple of years ago. But we really haven’t seen, that I’m aware off, a dramatic, any material changes in the competitive landscape.

Chris McDonald - Kennedy Capital

Okay, and the last question. In the event that R&D tax credit is passed this year, do you have a sense for the impact on the tax rate in total?

George Blanton

Yes, may be the upper 20s I think would be the impact if congress does something.

Chris McDonald - Kennedy Capital

Versus the 32 that we are base lining with right now.

George Blanton

Correct.

Chris McDonald - Kennedy Capital

Great, thanks a lot.

George Blanton

Sure.

Operator

Our next question comes from Gregory Garner from Singular Research. Your line is open.

Gregory Garner - Singular Research

Good morning gentlemen. Thanks for a nice quarter. I apologies if I repeated some questions. I fell off the line there for a moment. On the wireless, is there any visibility as to this being like a 3G versus 4G build or is this like a catch up from the ramp up in the wireless, that’s current right now. Is this a catch up from the prior demand or prior lack of building in the last few quarters, any characterization there? Just trying to get a sense for what you might see from your end users.

Larry Sala

Sure, I mean we don’t have tremendous market visibility. But from what we can gain from the forecast we see from our customers, the continuing rolling six, eight, week forecast that we get from all of our various customers, its been very consistent in that pricking up here in the June quarter that we have finished.

Staying at these kind of levels in the September quarter and improving in the December quarter. That’s been a pretty consistent thing for a while. So that doesn’t appear to be any catch up. It just seems like the market’s recovered and people are I would say spending at a little more typical levels.

We just started to get like I said, a forecast or two for calendar ’13. There is a rational pickup in business which doesn’t -- I don’t think it gets us back to where we were at the peaks, but its certainly up substantially over the rates we are running right now. So it appears that from what our customers can see, that their visibility has been relatively constant. It hasn’t changed significantly in the last few weeks and that they see and anticipate a fairly steady pickup as we go forward, whether its 4G or 3G, we really don’t have that level or visibility.

Gregory Garner - Singular Research

Okay, and the range for the forecast, I heard your commentary about the Space & Defense. I understand how there could be shipments moved from one quarter to another for causing some of that range. But is there also any effect from the wireless side that there may be a ramp-up in deliveries from one quarter to the next.

Larry Sala

Absolutely. I mean we would generally say, we come into quarters thinking that we set the guidance at the mid point and our gut typically telling us there is more downside than upside. Its just I’d say a general rule of thumb, the way we feel coming into a quarter.

On the wireless side, its now for us more than 50% of the business is on a vendor managed inventory basis. So it’s all depended upon how much inventory our customers fully consume every day and week as we work our way through the quarters. So a lot less I’d say true visibility that we have.

We used to have quarters driving our expectations and they were typically running six weeks ahead or four weeks ahead any way of shipments and so we could get a sense for at lease momentum in the market place. Now we have forecast and we get those forecasts updated ever week, but we tend to believe that those forecast don’t have the same level of detail and focus that they did when they were actually placing orders with us.

So that’s an unknown for us now every quarter and it could be positive, they could pull a lot more than we expect or it could be negative. So we’d say just generally there is probably a $1 million plus or minus of volatility in wireless and there is probably a couple of million of dollars plus or minus of potential in the Space & Defense side in any given quarter.

Gregory Garner - Singular Research

Okay and on the AIR products, if I remember the last quarter you mentioned that there was maybe I think it was 10 different AIR products that were starting to ramp up into production that would have been towards the end of the fourth quarter I believe and then I believe your commentary earlier from one questioner was, that was at a about $1 million run rate, but it should be about a $2 million to $4 million run rate for the whole year, fiscal year ‘13.

So I just wanted to make sure I had that run rate data metric correct and also, is there any color you can give us as to how many different products are ramping and any insight into what these AIR products are doing, the ones that are ramping up.

Larry Sala

I mean we have a family of about a dozen different AIR products in the market place. There is some small variations that increased that number substantially, but fundamentally there is 10 to 12 really different AIR modules. These have all been different kinds of applications, so there is really no one opportunity that’s driving our expectations of any significance. And they go through as I said these cycles, where we have hundreds of customers that we are engaged with in any particular period of time, who are either using our products on a small run basis, enquiring about applications or trying to use our products.

If we talk about design-ins, those are people that we can confirm have actually laid out their design to accept our part. It doesn’t mean they are projects going forward, it doesn’t mean that it’s any kind of guaranteed revenue stream for us. But we have at least confirmed that they’ve designed a product and it’s designed to use our part.

But when we talk about design-ins its people who have actually moved into some level of production. We know that they have a design that that’s going forward into some level of production. So those are all different kinds of applications sizes and scales.

This is a market we sell all through third party distribution partners. So we get monthly point of sale date where we see what’s actually being purchased by our customers. And like I said, we have got more than a dozen of those folks who have bought more than a thousand product units and obviously at some level of production buying there and we have a customer or two who have bought more than 10,000 units from us and are at higher levels of product.

But we don’t get that data till the end of the month, we don’t really have like real time insight into what customers are buying in any day, week or month. But the general run rate of the business right now is about a $1 million a year if you analyze our sales rate run rate right now. And when we look at the programs that we know about and the customer’s forecasted usage where we have design wins, it generates that kind of $2 million to $4 million a year of revenue next year.

Obviously some of those will disappear and not be successful and there is a lot of new ones that will hopefully come into being every quarter as we go forward, but that’s generally the insight into the business that we have.

Our expectations from our product side, is we will be introducing new products for new protocols pretty much ever quarter to every six months. So we will introduce four to eight new types of components, AIR modules next year, hopefully addressing new standard protocols where there is a lot of activity.

Gregory Garner - Singular Research

Okay, thanks, I appreciate it. That’s helps quite a bit. Just one question on the Space & Defense, is the backlog at this high level. Is that spread over two years or is there any indication for how much is for fiscal year ‘13 versus after that.

Larry Sala

Yes, we said about 75% of our backlog is shippable in ‘13 and that’s pretty typically for us.

Gregory Garner - Singular Research

Okay. All right great, thank you.

Operator

Our next question comes from Bhakti Pavani from CK Cooper. Your line is open.

Bhakti Pavani - CK Cooper

Hi George, hi Larry.

Larry Sala

Good morning.

Bhakti Pavani - CK Cooper

Good morning. My question is related to the Space & Defense side. With the uncertainty relating to sequestration and say for argument sake sequestration happens. What kind of impact would Anaren Space & Defense group have? I mean have you see any kind of pull back in any of the programs are delaying funding. Could you share some of your visibility in that area?

Larry Sala

Sure. We don’t have any real specific identified potential impact that we are aware of; the last continuing resolution over a year ago. We have seen a number of delays in a lot of different programs that we have. I would say we haven’t seen that I am aware of any meaningful cutbacks in volume.

Certainly we’ve seen quantities reduced here and there, but we’ve also seen recently with a large radar contract we announced, that order was almost twice the size of our expectation. So that program was actually accelerated in volume from what was budgeted and what was guided by our customers.

We’ve also seen a positive impact from foreign sales. Our OEM customers, especially on the radar side have been quite successful in FMS opportunities and so we’ve seen a higher exceptions of sales as a result of stronger FMS sales, both on the radar side and the receiver side of our business.

So yes, we are seeing some delays. I’d say nothing out of the ordinary. Our bigger concern right now I would say is another continuing resolution this fall, which is highly likely, which last time definitely had an impact. It probably delayed a good percentage of activity in the business, something in the order of six months last time. So I think that’s probably almost an absolute likelihood of happening.

And then sequestration, we generally looked at it across our business and say, no one piece of business in this coming fiscal year is probably more than $6 million or $7 million for us. So any one program being significantly impacted is not going to be a substance or devastating type for bloat for space and defense, but we are obviously very cautious and ready to react if need be.

Bhakti Pavani - CK Cooper

Okay, fair enough. Last year you had a big counter IED program, which got canceled. How does that program look like and what is the revenue run rate for the program that you’re seeing in fiscal 2013.

Larry Sala

Yes, so that program, it wasn’t actually canceled, it was just completed and it was completed in March of last year. So it was completed 15, 18 months ago now for us. So we had really no revenue from that contract in fiscal ‘12 and we don’t really anticipate any meaningful revenue from that contact in fiscal ‘13.

Long term, our customers still leads us to believe that we should see some long term revenue, either very late this fiscal year, but more than likely in our fiscal ‘14. But the magnitude is much smaller than prior cycles of that business. So whereas before it was $10 million, $12 million a year, going forward it were $5 million a year, that would probably be more likely.

Bhakti Pavani - CK Cooper

Fair enough. Any kind of opportunities you see in the commercial markets with regard to the existing product pipeline that you have.

Larry Sala

Like I said, on the wireless side we are certainly seeing increasing demand and increasing expectation just generally. I would say its focused around any particular geography that we are aware of, but I’d certainly think those expectations are accelerating 4G build outs as we move into calendar ‘13 and proving trends outside the US.

On the AIR side, we just talked a lot about it. It’s a lot of different applications, no one of which is a big percentage of that business. But outside of that, no other individual opportunities that we think are going to be positive or negative for us on the commercial side.

Bhakti Pavani - CK Cooper

All right. Just a quick housekeeping questions. What kind of CapEx exemptions should be considered going forward into 2013?

Larry Sala

We’ve been spending at about 4% of sales or so, and we’d expect to stay in that relative rate in ‘13.

Bhakti Pavani - CK Cooper

Okay, thank you very much.

Operator

Our, next question is a follow up from Rich Valera from Needham & Company. Your line is open.

Richard Valera - Needham & Company

Thanks. George in reference to your OpEx guidance for I think an increase, you said a 2% to 3% of total OpEx, what is the base line there and is that an annual number?

Larry Sala

The 2% to 3% I would say yes, that’s annually year-over-year and the base line, if we looked to Q4, I think it would be slightly higher in Q1 of this fiscal year, because of that bonus accrual. I don’t trend upward like I said because of the R&D expense increasing as some of these funded programs are a lot mid-way through the year, so I’d say increase is somewhat sequentially. It can’t be that specific at this point, but somewhat sequentially over the four quarters.

Richard Valera - Needham & Company

Right, and so I presume the R&D being up, I think you said 3% to 4%, that would also be on an annual basis.

George Blanton

Right, right.

Richard Valera - Needham & Company

Okay, perfect. Thanks George.

George Blanton

Sure.

Operator

And I’m showing no further questions at this time. I will now turn the call back over to Larry Sala for closing remarks.

Larry Sala

Great. We appreciate your participation and we look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and have a wonderful day.

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