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Anaren Inc. (NASDAQ:ANEN)

F4Q08 (Qtr End 6/30/08) Earnings Call

August 6, 2008 5:00 pm ET

Executives

Larry Sala - Chairman, President and CEO

George Blanton - CFO

George Porcello - VP of Accounting

Analysts

Greg Weaver - Private Investor

Charles John - Piper Jaffray

Steve Ferranti - Stephens Incorporated

Rich Valera - Needham and Company

Carl Overton - Private Investor

Chris McDonald - Kennedy Capital

Operator

Good day everyone and welcome to the Anaren fourth quarter earnings release. Today’s call is being recorded. At this time for introductions and opening remarks, I would like to turn the call over to Mr. Larry Sala, President and Chief Executive Officer of Anaren Incorporated. Please go ahead, sir.

Larry Sala

[Technical Difficulty] 2008 fourth quarter conference call. I am joined today by George Blanton our new CFO and Joe Porcello our VP of Accounting. I will provide a brief overview of the results of the fourth quarter, after which Joe will review the financial highlights. 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 Anaren’s Securities and Exchange Commission filings to learn more about the various risks and uncertainties facing our business and their potential impact on our net sales, earnings and stock price.

Net sales for the fourth quarter were $34.2 million, down $1.7 million from the fourth quarter of last year. The decline in Wireless Group sales was partially offset by an increase in the Space & Defense Group sales. Operating income for the quarter was $1.1 million or 3.3% of net sales. Excluding stock-based compensation expense, operating income for the quarter was $2 million or 5.9% of net sales.

Profit margins declined from the fourth quarter of fiscal 2007 due to a restructuring charge at Salem New Hampshire facility, excessive obsolescence due to a platform transition at one wireless customer, cost overruns on a development project in our Space & Defense Group, as well as poor production yields on several programs.

Wireless Group net sales for the quarter were $19.5 million, down 15.5% from the fourth quarter of last year, as a result of decline in demand for custom assembly products due to a platform transition at one customer. Increased demand for standard components continued throughout the quarter and overall wireless demand for infrastructure products remain volatile.

Sales of consumer component products were $1.3 million for the quarter, up 174% from the fourth quarter of last year due to continued diversification of design wins. We continue to see numerous new design wins for a wide variety of wireless consumer applications. Customers that exceeded 10% of Wireless Group net sales for the quarter were E.G. Components, a distributor that sells to Ericsson predominantly as well as Nokia, Huawei, Nokia and Richardson.

For the Space & Defense Group, net sales for the quarter were $14.7 million, up 15.3% from the fourth quarter of last year. The growth in net sales was due to increased production of our passive ranging subsystem products and the continued general growth in space and defense order backlog over the last several quarters.

Space & Defense Group gross margins for the quarter were negatively impacted by cost overruns on a development program for a radar application. The group is developing several subsystems for this new radar program which we believe will be a multi-year production opportunity for the group.

New orders for the quarter were $21.8 million and included contracts for passive ranging, radar and radar jamming subsystems. In addition to a strong flow of follow-on production orders, the group captured several initial production orders for programs that we believe have multi-year potential.

Customers that generated 10% of Space & Defense Group net sales for the quarter were ITT, Raytheon, Northrop Grumman and Lockheed Martin. The Space & Defense group backlog at June 30, 2008 was $64.6 million.

During a quarter, we acquired M.S. Kennedy, a Syracuse based manufacturer of hybrid electronic components and assemblies for the satellite, defense and aerospace markets. M.S. Kennedy’s analog hybrid design and manufacturing technology combined with Anaren’s microwave design and ceramic and multi-layered stripline manufacturing technologies will enable Anaren to pursue higher level active integrated microwave assembly opportunities in numerous military satellite and aerospace applications. M.S. Kennedy has a strong and experienced management team that will continue to manage their business and the company will continue to operate in its current facility.

George will now review the financial highlights.

George Blanton

Thank you, Larry. The highlights of the fourth quarter income statement and balance sheet at June 30, 2008, are as follows. The gross profit margin for the fourth quarter of fiscal 2008, it was 27.5% and included $221,000 of equity based compensation expense. Absent the equity based compensation expense, gross margin was 28.1% for the quarter. The decline in fourth quarter gross margins resulted from poor yield on several production programs, a $250,000 wireless obsolete inventory charge due to the end of a production program and a $450,000 cost overrun on a development program in the Space & Defense Group compared to the fourth quarter of last fiscal year.

We expect gross margins including stock based compensation expense to fluctuate between 31% and 34% during fiscal 2009. Investment in research and development was 8.3% of net sales in the fourth quarter of fiscal 2008, up 140 basis points compared to the fourth quarter of fiscal 2007. Current R&D spending is supporting a number of wireless consumer and custom assembly product opportunities, as well as a number of current projects in the Space & Defense Group and is not expected to decline in the near future.

Operating income was 3.3% of net sales in the current fourth quarter, down 10.2 percentage points from the fourth quarter of 2007 and included $895,000 of stock-based compensation expense. Absent this non-cash equity expense, operating income was 5.9% for the current quarter. Compared to last year, the 10 percentage point decline in the fourth quarter fiscal 2008 operating income resulted from the 8.1 decline in gross margins, the 1.4 percentage point increase in R&D, and a $255,000 restructuring charge related to a reduction in personnel at the company’s Salem, New Hampshire subsidiary.

Net income was 6.3% of net sales or $0.08 per diluted share for the fourth quarter of fiscal 2008, including $0.05 per share in equity based compensation expense. This compares to net income for the fourth quarter of fiscal 2007 of 12% of net sales or $0.25 cents per diluted share which included $0.04 per share in equity based compensation expense. Excluding the equity based compensation expense, net income for the fourth quarter of fiscal 2008 was 5.3% of net sales or $0.13 per diluted share. The effective income tax for the fourth quarter of fiscal 2008 was 25.3% compared to a tax rate of 24.6% for the fourth quarter of last year. The expected effective annual tax rate for fiscal 2009, absent one-time events should be approximately 30%.

The company announced on August 1, 2008 that it had completed the acquisition of M.S. Kennedy Corp located in Syracuse, New York for a purchase price of $28 million on a cash-free debt-free basis. MSK had annual sales of approximately $22.5 million in calendar 2007. The effective price adjusting for cash and the net present value of tax deductible goodwill is approximately $24.2 million.

Anaren estimates that the effective price paid is a multiple of approximately six times MSK’s calendar year 2007 EBITDA. This transaction was financed through a five year unsecured $50 million revolving debt facility. Earnings from MSK are expected to be accretive for fiscal 2009.

Balance sheet highlights include, cash provided by operations was $4.3 million in the fourth quarter of fiscal 2008. Capital expenditures were $2.6 million in the quarter and were driven by plan expansion and renovation, as well as test equipment to support expanding volume in the Space & Defense Group. Cash, cash equivalents and investments were approximately $44.1 million at June 30, 2008, down $30.4 million from June 30, 2007.

During the fourth quarter, we purchased no shares of Anaren common stock for the treasury under the current authorization. There were approximately 1.5 million shares remaining under the current repurchase authorization at June 30, 2008. Accounts receivable were $23.1 million at June 30, 2008, up $3.3 million from June 30, 2007.

Day sales outstanding were 61 days down from 65 days at March 31st. Inventories were $27 million at June 30, 2008, up 10.9% from June 30, 2007 due to increasing levels of sales in longer lead defense business.

Larry Sala

Thanks, George. For the first quarter of fiscal 2009 which will include two months of net sales and earnings from M.S. Kennedy, we expect an increase in sales in the Space & Defense Group and a slight decline in sales for our wireless group. As a result, we expect net sales to be in the range of $33 million to $36 million, with an anticipated tax rate of approximately 30% and anticipated equity based compensation expense of approximately $0.05 per diluted share and expected amortization of acquired intangibles and inventory step-up related to the acquisition of MSK of approximately $0.04 per diluted share. We expect GAAP net earnings per diluted share to be in the range of $0.06 to $0.10 cents for the first quarter. We will now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Greg Weaver.

Greg Weaver - Private Investor

Evening, gentlemen.

Larry Sala

How are you?

Greg Weaver - Private Investor

Fine, thanks. Welcome on board, George.

George Blanton

Thank you.

Greg Weaver - Private Investor

Just a little more color, if you could, on the M.S. Kennedy acquisition. Could you maybe give us a little flavor in terms of customer concentration, or gross margins, growth aspects of the business over the last couple years, et cetera.

Larry Sala

Sure. The business has performed generally at comparable levels to our target levels for our Space & Defense business. So, operating margins in the relatively mid-teens. Gross margins relatively in the mid to upper 30s depending, so, generally, operating already at our targeted levels.

Growth, we are looking at something on the order of 5% to 10% growth as a target. They have performed as well as that in the last several years. Their customers are people like Lockheed, Boeing, Honeywell, Raytheon; they provide various, predominantly analog and voltage regulator type hybrid modules for avionics applications, applications like UAVs, missiles, other type of just general commercial and military aircraft. Radiation higher type voltage regulators and other control modules for satellite and other space type vehicle applications.

And our interest is to making an investment there in technology to move their analog capability up to a high frequency microwave capability. We think we can do that over the course of this fiscal year and with that, go after applications that sit adjacent to what we do in radar and receiver applications.

So when we talk about radar antenna feed networks, we build the passive feed and then our customers historically have built the active module that plugs into our feed networks. This will give us the capability to build the entire solution end to end. So, we have talked to our customers. We had some internal capability. MSK was a way to accelerate our ability to provide a total solution to our customers.

Greg Weaver - Private Investor

Okay. Thanks. That is helpful. And is that GAAP accretive in this fiscal year or is that non-GAAP?

Joe Porcello

It will be GAAP accretive in the fiscal year.

Greg Weaver - Private Investor

Okay. All right. And in terms of the guidance, if you assume say $3 million contribution from M.S. Kennedy, you are guiding down about $3 million from the quote you just put up.

Larry Sala

Well, we just put up say in round numbers $34 million, with $3 million to $3.5 million coming out of them. Yes, we are in the middle of the range. We are down in that and down a couple of million. If we are at the high end of the range, we are at or, close to where we were last quarter. So yes, we are expecting a little bigger falloff in wireless than pickup in the Space & Defense business.

Greg Weaver - Private Investor

All right, that is all wireless right, because you said Space & Defense was going to grow, right?

Larry Sala

Right. Greg, quarter-over-quarter, excluding MSK just looking at the existing Anaren prior to the acquisition, we are looking at Space & Defense net sales to be comparable quarter-over-quarter and wireless to be down a bit.

Greg Weaver - Private Investor

Okay. And I might have missed it, but you said the gross margin for the rest of fiscal '09 would be in what range?

Joe Porcello

Between 31% and 34%.

Greg Weaver - Private Investor

34. Okay. Thanks, Joe. Thank you.

Joe Porcello

Yep.

Operator

And next we will go to Mike Walkley from Piper Jaffray.

Charles John - Piper Jaffray

Hi, Larry and Joe. This is Charles, sitting in for Mike.

Larry Sala

How are you?

Charles John - Piper Jaffray

Not too bad. Just start off with the question on your largest customer. If you comment on the volatility that you spoke about and maybe your expectation for the back half of this calendar year with this customer?

Larry Sala

I am sorry, I am not following you. Can you repeat the question please?

Charles John - Piper Jaffray

If you comment on the volatility you are seeing with your largest customer and maybe your expectations in the back half of this calendar year?

Larry Sala

Sure. I am sorry. If we are talking about our largest wireless customer, we have seen a platform transition for one of their infrastructure platforms that we had significant content on historically. We have content on the new generation, but it is not as high a dollar content is what we have had previously. However, the bigger impact is the fact that we are really seeing no revenue anymore from the old platform and we are still ramping up our production rates for the new platform.

So, that was the cause of this shortfall for last quarter as well as somewhat in the current quarter. In addition to that, as we progress through this year, we expect to gain additional content on this new platform, but our expectation is that will be largely in the second half of this fiscal year and not in the first half, if it is the large infrastructure customer that you are asking about.

Charles John - Piper Jaffray

Yes, exactly. Thanks for that color. And then on your consumer division, we are seeing a nice small, but steady uptick for the last three quarters. You are obviously diversifying the product range there. Has this reached a point where it can begin to grow meaningfully in fiscal '09 or should we still remain pretty conservative about its growth trajectory?

Larry Sala

Well, you know, we are confident that the group, the product line is going to continue to grow. I would not say, we certainly do not believe that it is going to grow at this kind of year-over-year rate that it did in the past quarter. However, we are expecting to get back to where we were before we lost our largest customer in this product line. So, we would expect growth rates in the consumer product line alone to hopefully be something between 30% and 50% a year depending on how readily adopted some of our new products are and how quickly things transition into production.

The bright spot of the group is they have had numerous new product introductions in the last year, have a far, far more diversified base of design wins and customers. So, no very high concentration with any one customer any more, and in this previous quarter, you know, they saw substantial growth with no contribution whatsoever from their prior largest customer. So, they feel like they have a much broader and more stable base of business, as well as a higher number of new design wins that they hope can transition to production here.

Charles John - Piper Jaffray

Okay. That helps. And real quick on the balance sheet, seeing the accounts receivable slightly higher for the last two quarters, around $23 million, should we read something into this or is it just more a function of longer sales cycle and can we expect it to trend back in the next several quarters?

Larry Sala

Yes, you should definitely read into it that our Space & Defense business is not operating very well. Their shipments are being skewed towards the end of the quarter. And so it’s kind of artificially, I would say, driven up our receivables. We really have not seen any gross change in payment terms or mix of our business, and we would expect as they continue to resolve some of these issues that they have had and linearize their shipments more that we will see receivables come back to our more traditional levels.

Charles John - Piper Jaffray

And you are expecting this to happen in the back half of fiscal '09.

Larry Sala

Yes. You know, they are still struggling a bit. You know, it improved somewhat fourth quarter last year over the third, but we do not expect to see real material improvement back to where we were till probably the second half of this year.

Charles John - Piper Jaffray

Okay. And finally, Joe, if you could give the breakout for the stock based compensation by line item?

Joe Porcello

Yes, I will have to get back to you on that one. I do not have it in front of me right now.

Charles John - Piper Jaffray

Okay, sure, thanks.

Joe Porcello

Same breakout as it was last quarter basically.

Charles John - Piper Jaffray

The same rating by line item.

Joe Porcello

Yes, same weighting by line item.

Charles John - Piper Jaffray

Okay. Thanks guys, and welcome aboard, George.

George Blanton

Thank you very much.

Operator

And moving on, we will go to Steve Ferranti with Stephens Incorporated.

Steve Ferranti - Stephens Incorporated

Thank you. Congratulations guys on closing M.S. Kennedy and welcome aboard to George. Just a follow-up on the prior line of questioning in terms of the product transition at your major infrastructure customer, you expect overall value or opportunity size within that customer to increase, despite the lower content per base station at least out of the gate?

Larry Sala

Well, as we stand today, you know, we are still somewhat ramping up our production volumes. The demand profile is exceptionally volatile and limited visibility. So, we do not have a long forecast from them, and we have one product designed in. So, as we stand today we are definitely seeing lower dollars for similar volumes of platforms. We do expect that this platform will sell in higher volume than the predecessor did and we do expect that we can get more dollar content designed in as we get to the end of this calendar year.

However, obviously, there is certainly risks associated with both, we have no real ability to predict the volumes that they will sell this platform at, as well as how likely it is that we can get these other products designed in. We are in that process and it is moving along, but we will not know for sure until we actually get demand allocation for production from them.

Steve Ferranti - Stephens Incorporated

Do you think in terms of the overall sales for that customer in this particular platform, do you think we have bottomed here, either in the June quarter and what you are forecasting for the September quarter, and that, you see levels start to ramp from here?

Larry Sala

Yes. We are hopeful that the bottom is this current quarter we are in. Last quarter, in the June quarter, we did see some mix. We did see some demand from the old platform as well as, demand, but we are more self-limited on our ability to supply for the new platform. So, in the beginning of the quarter, we were supplying to the old platform and that tapered down throughout the quarter. And as the quarter progressed on the new platform, we went from shipping almost nothing at the beginning to getting to some significant volumes by the end.

So as we enter this quarter, it is all based on our content in the new platform and the demand for the new platform. So, we believe, we are hopeful that this is the bottom and we will see stronger results as we go forward through the year.

Steve Ferranti - Stephens Incorporated

And could you characterize I guess the level of customer concentration in your custom wireless business. I mean obviously you have got the one large infrastructure customer. How much of your custom business are they and how many other larger customers are there in your custom business?

Larry Sala

Well, that largest customer of ours, if we look at it as a total or on the basis of our custom business, they are typically something between 40% and 50% of our custom assembly business, comes from that one customer.

Steve Ferranti - Stephens Incorporated

Yes. Okay. And with what you have got in the pipeline today, do you see that concentration perhaps diminishing in a positive way in the sense that other customers might be growing?

Larry Sala

Yes, we definitely do. We have seen currently some volatility and demand from those other customers that were already designed in with, and, we are more optimistic about those other design wins generating meaningful dollars to start to diminish, the concentration more in the second half of this fiscal year than in the first half.

Steve Ferranti - Stephens Incorporated

Okay. And then last one for me; you had a nice backlog exiting the, exiting fiscal '08, have you added to that backlog since the close of the quarter?

Larry Sala

No, I do not believe so. I think we have been eating into backlog a bit. Some of the very large orders that we saw at the end of Q4, we are certainly something is arriving a bit earlier than we thought and falling into the fourth quarter. So, we still expect to have a good quarter of bookings here, but, we do not expect to maintain that type of book-to-bill ratio. And in the first part of the quarter here, we have been shipping more than we have been booking so far.

Steve Ferranti - Stephens Incorporated

Okay, very good. That is all I had. Thanks, guys..

Larry Sala

Yes.

Operator

(Operator Instructions) Moving on, we will go to Rich Valera from Needham and Company.

Rich Valera - Needham and Company

Thanks. Good evening, and my welcome to George as well. Just hoping to get a sense of where the more normalized model would be once you had full quarter of MSK and some of these issues behind you that pressured this quarter and presumably might pressure the September quarter as well. Could you give me any sense of where you think say like a December quarter might be in terms of a gross margin? I know you gave a range for the year but presumably that would be higher as you work through the year as well as maybe, OpEx or an operating margin type of profile on a more normalized basis.

George Blanton

Yes. Gross margin probably by Q2, Q3 is going to be in that 33% range; 32.5%, 33%. Operating expenses should be dropping down into the low 20%, low to mid-20s and should scale down throughout the year. We will probably end up the whole year probably right smack between 20% and 25% somewhere. However, they will scale down as the volume comes up.

Rich Valera - Needham and Company

Okay. And then you gave a number for both an inventory step-up charge as well as what I believe the quarterly intangible amortization. Presumably the inventory is just one-time, can you give what the ongoing quarterly amortization would be?

George Blanton

It looks to be about $300,000 to $320,000 a quarter.

Rich Valera - Needham and Company

Great. And what happened with the tax rate? What drove that up, was it MSK or was it something else that drove it up to 30%?

George Blanton

Part of it is MSK. Part of it is the increasing defense business, which is all domestic versus the business that is going on in China. China obviously has a lower tax rate bill and part of it is the expiration of the R&D credit.

Rich Valera - Needham and Company

And if that is renewed presumably retroactively what would that do to your tax rate?

George Blanton

Given the business level we have got now, it will probably be 1%, maybe 1.5%, not more than that.

Rich Valera - Needham and Company

For the year?

George Blanton

Yes.

Rich Valera - Needham and Company

Okay. I do not know how much more you can say on this, but just trying to understand the probability of a recurrence of the numerous issues that you had this quarter and -- in the past year and a half, there has been a varied assortment of issues, but focusing in on this past quarter, it sounds like you had cost overruns in the defense area.

So I want to get a sense of where do we stand on that, do we think that is behind us, have you accrued for that or will they impact you going forward? Then, another big chunk was, it sounds like around the ramp of the new platform for your big wireless customer and just want to get a sense of where do you think you are there and when you get to get beyond that where you are not seeing the pressure from the inefficient ramp? Thank you.

Larry Sala

Yes. In general, the cost overruns we feel like we are in much better shape in this quarter. We were producing multiple qualification units and still have to produce qualification units for this particular radar project, and we have accrued for the total cost overrun that we anticipate to finish these deliveries and qualifications. So that is why the number was so large. We did not incur that whole number last quarter…

Rich Valera - Needham and Company

Right.

Larry Sala

We only incurred about 25% of it last quarter and the rest of it is going to be incurred as we deliver the remaining qualification units that we have to deliver.

Rich Valera - Needham and Company

Sure.

Larry Sala

So that one, barring that we either have more inefficiency in getting this done than we anticipate should be fully accrued for. There were numerous other issues when we talked about efficiencies and yields, we had some supplier issues where we had material that came in that was outside of specifications that was mislabeled and misrepresented by the vendor that caused some significant yield issues on both sides of our business.

Some of the ramp up with these new CCG customers caused us to have some yield issues there of just getting new products into high production that fell in last quarter that we believe should not be repeated again, now that these programs are in volume production and we are running. So, there was a reasonable number that we feel will not be repeated, but as you said, throughout the last 6 months or 9 months new issues continue to come on the table.

So, we are yet to say never until we execute for a quarter or two here, and make ourselves believers as well.

Rich Valera - Needham and Company

To the best of your knowledge though, is it fair to say there is some residual pressure in the September quarter, maybe from some of these yield issues that borrowing any new issues by the December quarter that you would expect these to be largely behind you. I mean I do not want to put words in your mouth, but…

Larry Sala

No, I think that is well said. There will definitely be residual issues this quarter. We still have not cleared up all of the significant yield issues that we ran into last quarter. So, we definitely expect that it will be something that we work off between now and the end of the calendar year.

Rich Valera - Needham and Company

Okay, that is it for me. Thanks, guys.

Larry Sala

Yes.

Operator

And moving on, we will go to Carl Overton.

Carl Overton - Private Investor

Good afternoon gentlemen. I am one of the larger private investors. Can you hear me?

Larry Sala

Yes.

Carl Overton - Private Investor

Okay. I will try to get through this quickly. Back, I have been an investor over ten years. Back in 1998, there was approximately 7 million shares and you went through your transition period where you tripled it out due to and then you came back down to about 20 million shares. Back then, you had a market cap of about $140 million, $150 million at that time. You generated about a $100 million through some equity based put into your accounting that you used to do stock buybacks.

So, over the course of time you had probably earnings per share at the $0.06 to $0.12 a share back in 1998. We are right back to that situation right now. You are generating probably more than twice your revenue that you did ten years ago, but your market cap is even lower than it was ten years ago.

So I have three questions. One, does management have a handle on what is going on now, meaning you have got a whole picture in front of you that you guys feel that you can handle what is happening and put a lot of this behind you to get your earnings per share up, considering M.S. Kennedy should be adding about $0.06 to $0.08 a share in earnings per quarter itself.

Two, are you guys concerned with this stockholder, shareholder value with what’s gone down from $20 a share down to $8 at its lowest and now $10?

And then three, does Anaren have a two to five-year plan of where you guys see yourself with your marketing of your products, meaning do you have a product design level that you are heading towards, that you are going to create some kind of footprint in the marketplace and take market share from others, so that you have a drive to a certain level that you are trying to achieve?

Larry Sala

Yes. I will certainly answer that one for you. We absolutely have a concern with shareholder value. We are all significant shareholders as well and have been for a long time. So, we have got far more of our compensation in stock than we do in cash.

From a valuation standpoint, it is pretty crystal clear. We have continued to grow our top line and we have had poor margin performance for most of the last year. So, earnings are crystal clear and we need to improve our margins back to where they were historically, and we are working through those issues. We have talked about different start-up issues and yield issues on particular projects, but we are continuing to address those and believe that we are adequately equipped to address those issues.

We have grown at a 20% compound annual rate for ten years. So, we are confident we can continue to grow our business. We have a clear three-year objective. I believe it is articulated in our proxy. And we are working toward that objective.

And that objective is, compound annual growth at 15% or more and margins, operating margins of 15%.. So and I think our objectives are clear. I think we have a strong appreciation of shareholder value and I think we are equipped. We have made some changes, we have added some management strengths, and as well as some engineering talent and we are dealing with the issues.

Carl Overton - Private Investor

Thank you very much. It is just that, a year ago if you remember right you had record revenues and you had record earnings. In one year, you have gone significantly down on your earnings, but your revenue stayed the same. And then when you said poor yields, is this just simply underbidding some contracts?

Larry Sala

No. I mean, well from a revenue standpoint, I think we have made it crystal clear that the record revenue in the prior year was largely the result of one contract that came and went in a year. And we made it clear when it came, it was going to be a short-term piece of business and we were crystal clear when it left, that we did not expect it to be replicated. So, we actually had a strong year of base growth in our business last year to offset that $11 million contract and still grow.

However, it was a lot of development work, which is never at high margins for us. And the loss of some high revenue or high margin consumer business that was replaced by some custom and military business, that is much lower. That coupled with some poor execution on some development projects, hurt our year last year.

Carl Overton - Private Investor

Well, thank you. Maybe I understand what you are saying. If you are putting money in R&D and you are prepping now during the very bad cycle and you are trying to get yourself ready for the future; that is what any investor wants to hear. Is that what you are saying you are doing?

Larry Sala

Absolutely. We are continuing to aggressively invest in areas that we know and areas that have been our niche for a long time and continue to identify opportunities to grow and pursue them.

Carl Overton - Private Investor

Thank you very much.

Larry Sala

Thank you.

Operator

And moving on, we will go to Chris McDonald from Kennedy Capital.

Chris McDonald - Kennedy Capital

Hi, good afternoon.

Larry Sala

How are you?

Chris McDonald - Kennedy Capital

Good. Could you just provide an update on some of the ferrite opportunities, magnitude, timing, et cetera?

Larry Sala

Yes. We have been a little disappointed actually with our ability to get some of these ferrite opportunities to production. We still have, easily a half dozen different opportunities. Timing-wise, we are hopeful that we will see the first of opportunities. The one new platform we are on with the largest customer is a ferrite opportunity. However, in addition to that, that one really replaced a previous one we were on.

We would expect hopefully in the second quarter here to see revenue from one of these, say half a dozen ferrite opportunities on the wireless side, I am speaking to and to production. We are quite confident in the second half of the year, we will see a number of them moving into production.

We have supplied qualification units or at least design verification units on I think three different opportunities in the last quarter. We are right now in this current month shipping initial volumes, hundred type quantities on two or three different applications to get final qualification done. So, it is moving along, but just not at the pace that we had hoped.

Chris McDonald - Kennedy Capital

Okay. And as those transition to production, that will help diversify the customer base from a custom assembly standpoint, correct?

Larry Sala

Absolutely. It should all be their new incremental revenue and most of it with new customers.

Chris McDonald - Kennedy Capital

Okay. And any better visibility on the CalAmp business at this point in time?

Larry Sala

No more visibility as I said. We have not seen any revenue from them. We have a decent dialogue. Our best estimate if that business returns for us, it will be early in the second half of the fiscal year or early next calendar year.

Chris McDonald - Kennedy Capital

Great, thank you.

Larry Sala

Sure.

Operator

And now we will go back to Greg Weaver.

Greg Weaver - Private Investor

Yes, a bunch of random ones here. Joe, what is the interest rate on the Revolver roughly?

Joe Porcello

LIBOR plus a 100.

Greg Weaver - Private Investor

Okay. And what do you foresee in terms of CapEx in 2009 and specifically as it relates to M.S. Kennedy?

Larry Sala

Well, total CapEx including the investments we want to make that M.S. Kennedy should be something on the order of 5% or less. We were trying to hold our base CapEx to about 4% of sales this year, and with the additional investment to get the RF capability in an MSK, we will probably be closer to 5% total.

Greg Weaver - Private Investor

Okay.

Larry Sala

More consistent with the way we operated before the plant expansions.

Greg Weaver - Private Investor

Alright. And on the consumer side, Larry, can you remind us what it was for fiscal '08 in terms of your total revenue there in consumer wireless?

Larry Sala

It was about $4 million, $3.9 million maybe.

Greg Weaver - Private Investor

Okay. 3.9 and you are looking for 30 to 50 percentage growth this year.

Larry Sala

Yes.

Greg Weaver - Private Investor

Okay. And in terms of the restructuring in New Hampshire, what is the associated operating expense savings with that?

George Blanton

In total, we expect to take about $2 million out of the payroll so far.

Greg Weaver - Private Investor

And did we see any of that benefit in the just reported quarter?

George Blanton

No, not really.

Greg Weaver - Private Investor

Okay. And how long does it take before that all rolls in?

George Blanton

We will see some of it in the first quarter or as we go through the year.

Greg Weaver - Private Investor

Okay. In terms of the movement of the Ceramics operation to China, how is that going?

Larry Sala

From a product standpoint, the movement's going well. We are in the process now of going out and notifying customers of the move. So, we are hopeful by the end of this quarter, we have got customer acceptance to run all the production out of China. However, this is obviously not all within our control. So, relatively large handful of products that make up the vast majority of the revenue are in there, final internal qualification now or qualified and we are putting together the packages to get our customer approvals.

Greg Weaver - Private Investor

Okay. And just on the defense side of things, in terms of the flat outlook there sequentially, this is not a function of the amount of work that you can potentially have to do, it is more a function of getting it out the door at a good margin.

Larry Sala

Well, you know, it is somewhat both. I mean last quarter we had high $14 million shipment quarter. So, you know, it is almost a $60 million annualized rate, so with a $64 million backlog or whatever, that is pretty typical of what we would expect the rate to be this year. We will have to see how orders progress and what happens here. But

Greg Weaver - Private Investor

So, ex any surge in bookings if you are looking for a $60ish million for the year in Space and Defense?

Larry Sala

Yes, something in that relative order of magnitude.

Greg Weaver - Private Investor

Okay. Just lastly, on the Space & Defense, how about on the crew, any update there?

Larry Sala

Well, Syracuse research did announce a new crew contract, a related contract and we believe that we have as we have said before, that we will participate if that becomes another significant production program for them. So, we have been working with them, we have had products delivered for qualification by them and we have seen some small orders from them, but we have not seen yet any follow through from the more material orders that they have announced recently. However, if that were to play out, we would expect to have comparable or greater dollar content per system than we had on the previous generation.

Greg Weaver - Private Investor

So, at this point in terms of what you are looking for, you are assuming in fiscal '09 that nothing much happens for accrual?

Larry Sala

Yes, I think we still have a couple or a few million dollars in as we did last year for follow-on and support of the things that we have been doing with them, but nothing more material than in the first quarter or two.

Greg Weaver - Private Investor

Okay. Thank you very much.

Larry Sala

Yes.

Operator

And no more questions at this time. I will now turn the call back to our presenters for closing remarks.

Larry Sala

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

Operator

Thank you. Ladies and gentlemen, that will conclude today's presentation. Thank you again for joining and have a wonderful day.

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Source: Anaren Inc. F4Q08 (Qtr End 6/30/08) Earnings Call Transcript
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