Hutchinson Technology Inc. F3Q08 (Qtr End 06/29/08) Earnings Call Transcript

Aug.25.08 | About: Hutchinson Technology (HTCH)

Hutchinson Technology Inc. (NASDAQ:HTCH)

F3Q08 (Qtr End 06/29/08) Earnings Call Transcript

July 29, 2008 5:00 pm ET

Executives

John Ingleman – SVP and CFO

Wayne Fortun – President and CEO

Kathleen Skarvan – VP and President of Disk Drive Components Division

Richard Penn – SVP and President of BioMeasurement Division

Analysts

Ingrid Aja – Merrill Lynch

Sherri Scribner – Deutsche Bank

Christian Schwab – Craig-Hallum Capital Group

Rich Kugele – Needham & Company

Matt Kather – WR Hambrecht

Jayson Noland – Robert W. Baird

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Hutchinson Technology third quarter results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference call is being recorded today, Tuesday, July 29th of 2008.

I would now like to turn the conference over to John Ingleman, Chief Financial Officer. Please go ahead, sir.

John Ingleman

Good afternoon, everyone.

With me today is Wayne Fortun, our CEO; Kathleen Skarvan, President of our Disk Drive Components Division; Rick Penn, President of our BioMeasurement Division; David Radloff, Vice President of Corporate Finance; and Chuck Ives, our Investment Relations Manager.

As a reminder, we will be providing forward-looking information on demand for and shipments of the company's products, demand for design and product development, production capabilities, capital expenditures, worldwide disk drive and suspension demand and shipments, average selling prices, our BioMeasurement Division's revenue, product commercialization and adoption and results of operations and operating performance. These forward-looking statements involve risks and uncertainties that are based on our current expectations.

Our actual results could differ materially as a result of several factors that are described in our periodic reports on file with the SEC. In connection with the adoption of SEC rules governing fair disclosure, the company provides financial information and projections only through means that are designed to provide broad distribution of the information to the public. The Company will not make projections or provide material non-public information through any other means. We issued our third quarter results announcement just after the market closed this afternoon. The announcement is now posted on our website at www.htch.com.

I'll turn the call over to Wayne for some opening comments.

Wayne Fortun

Thanks, John.

We are disappointed to be reporting a loss for our third quarter, but we are encouraged by developments in both our Disk Drive Components Division and our BioMeasurement Division. In both areas, we're making the progress required to generate revenue growth and better leverage our investments in our TSA + processes and in our InSpectra StO2 systems.

In our Disk Drive Components Division, we estimate that we gained share in the overall market, and as a result, we delivered a sequential increase in net sales. That share growth resulted from our continuing emphasis on serving our customer better than our competitors, designing innovative products that help customers meet their cost and performance challenges and consistently delivering industry-leading quality at a competitive price.

In addition, we marked a major milestone in the quarter with the successful transition to volume production of TSA+ products. Volume shipments of TSA+ products began in the last month of the quarter, and we're currently expecting a sizable increase in the TSA+ volume in the current fiscal quarter and beyond. In our BioMeasurement Division, we continue to add more hospitals to our customer base for the InSpectra StO2 system. Equally important, we're working with these hospitals to establish routine use of the device.

In addition, aided by a growing number of studies documenting the clinical and economic value of monitoring StO2, more hospitals are beginning to evaluate the InSpectra StO2 system for uses in applications beyond trauma medicine, including emergency departments, operating rooms and intensive care units. All this progress will help grow the installed base of monitors and increase sensor sales, which are the keys to generating the return we expect from our investment.

I'll turn the call over to Kathleen now for a review of the Disk Drive Components Division's third-quarter performance.

Kathleen Skarvan

Thanks Wayne.

The quarter ending in June is typically a seasonally slow period for the industry overall, and for us. However, we estimate that we increased our overall suspension assembly market share, primarily as a result of gains in the 2.5-inch mobile segment. The share gains enabled us to grow our shipment volume to 189 million suspension assemblies in the third quarter compared with 179 million in the preceding quarter and 190 million in last year's third quarter.

In the 3.5-inch ATA segment, we believe that the March 2008 quarter will prove to be the low point for our share position. Although our shipments for this segment were down 9% sequentially, primarily due to seasonal slowness, we believe that after several periods of market share decline we have stabilized our share position in the 3.5-inch ATA segment. Shipments for this segment accounted for about 33% of unit volume in the third quarter compared with 38% in the preceding quarter.

The 2.5-inch mobile segment continues to be a rapidly growing segment of the disk drive market overall, and we continue to gain share there. Our shipments for 2.5-inch mobile applications grew 34% sequentially and 76% year-over-year. Suspension assemblies for the total mobile segment, which includes both 2.5-inch and 1.8-inch segment, accounted for 44% of our unit shipments compared with 35% in the preceding quarter.

In the enterprise segment, our third-quarter shipments were down 9% sequentially, but up 30% compared with last year's third quarter. We remain the market share leader in this segment, where our technology leadership and process capabilities provide a significant advantage over our competitors. Shipments for enterprise applications accounted for 23% of third-quarter shipments compared with 27% in the preceding quarter. Overall average selling price in the third quarter was $0.79, down $0.01 from the preceding quarter and the comparable year-ago period. Due to competitive industry pricing, we are expecting ASPs to decline another $0.02 to $0.03 in the fiscal 2008 fourth quarter.

We reached an important milestone in the third quarter with the first volume production of the TSA+ program. During the quarter, we produced more than 2 million TSA+ flexures to support our transition to volume production as well as for ongoing development activities. We also shipped more than 1 million TSA+ suspension assemblies, and we currently expect our TSA+ shipments to increase roughly fivefold in the fourth quarter.

In addition, we are now working with all of the hard disk drive manufacturers to develop TSA+ suspension assemblies for their future disk drive programs. This activity ranges from volume shipments for our customer-specific disk drive programs to providing touch screen unique samples. Over the last few years, we have made a sizable investment to advance our flexure technology and maintain our vertical integration. Although our gross profit has been negatively impacted as we have prepared for and initiated TSA+ volume production, this burden should diminish with the TSA+ volume growth and process and productivity improvements that we expect over the next several quarters.

Regarding the outlook for demand, storage industry analysts are now projecting that calendar 2008 disk drive shipments will increase by 13% to 14%, up slightly from earlier expectations. The growth in disk drive shipments will generate continued growth in worldwide demand for suspensions assemblies. In this environment, we expect to maintain or improve upon our market share. However, as I mentioned earlier, overall average selling prices will likely decline by $0.02 to $0.03 in the fourth quarter. Taking all these elements into consideration, we're currently expecting net sales for the full fiscal year to be $630 million to $640 million.

I'll turn the call over to Rick now for an update on our BioMeasurement Division.

Rick Penn

Thanks, Kathleen.

As Wayne said at the beginning of our call today, we're pleased with the progress we're making in the BioMeasurement Division. We continue to add hospitals to our customer base for our InSpectra StO2 system, and the number of prospective customers engaged in evaluations is also growing.

We ended the quarter with 45 customers, and that's split about evenly between hospitals in the US and Europe. We also have 115 prospective customers that are currently engaged in evaluations of this system or moving toward purchase. As we’ve explained previously, a high percentage of these evaluations ultimately turn into sales.

In another encouraging development, several of the hospitals who are among the early adopters of the InSpectra StO2 system have now developed formal guidelines for use of the system. This is a critical step in establishing routine use of the device and advancing StO2 monitoring as a standard of care in those hospitals. We continue to focus on expanding the use of InSpectra StO2 across hospital departments, starting at the earliest stages of patient treatment, such as emergency transport or EMS for those pre-hospital settings, and then following the patient through the hospital, including areas such as the emergency department, the operating room and the intensive care unit.

Our efforts to expand clinical use of our device are being aided by a growing number of published studies that provide compelling evidence of the clinical and economic value of StO2 monitoring. These studies, in combination and with our ongoing sales and marketing efforts, are resulting in an increasing number of InSpectra StO2 evaluations in emergency medicine, OR and ICU applications.

In addition to these published studies that you can find abstracts of at our website, htibiomeasurement.com, there are also several additional studies underway to further demonstrate how StO2 can be used to improve treatments and outcomes. As we've said previously, our long-term goal is to establish our InSpectra StO2 system as the standard for measuring tissue perfusion in multiple critical-care settings. The continued growth in our customer base, the adoption by certain customers of formal guidelines for use of our system and the broadening interest in StO2 monitoring in a wider range of clinical applications are all moving us toward that goal.

I'll turn the call over to John now for a recap of our third-quarter financial results.

John Ingleman

Thanks, Rick.

Net sales for the fiscal 2008 third quarter totaled $150.4 million, up 5% from the preceding quarter and down 4% from last year's third quarter. The sequential quarterly revenue growth resulted from the market share gains Kathleen noted earlier. Net sales for the BioMeasurement Division were $230,000, up from $187,000 in the preceding quarter and $143,000 in the prior-year third quarter. Quarter three year-to-date net sales for the BioMeasurement Division was $598,000.

Revenue percentages for our top customers in the quarter were as follows

SAE/TDK, 37%; Western Digital, 30%; Seagate, 27%; Fujitsu, 5%; and Hitachi, 1%. Gross profit in the third quarter was $16.5 million or 11% of net sales compared with $18.9 million or 13% of net sales in the preceding quarter and $21 million or 13% of net sales in last year's third quarter.

In last year's third quarter, however, our TSA+ costs were still treated as R&D expenses and not as cost of goods sold as they are now. Had the accounting treatment for these costs been the same a year ago as it is today, gross profit would have been about flat year over year, despite the decrease in our revenue.

As Kathleen mentioned, we began volume production during the third quarter and delivered more than 1 million TSA plus parts to our customers. As a result of preparing for and initiating TSA+ volume production, our third-quarter gross profit was reduced by approximately $10 million compared to about $9 million in the preceding quarter.

Capacity utilization in the third quarter was approximately 70%, down from 75% in the preceding quarter. Recall that in the second quarter we built inventory, which had a significantly positive impact on our capacity utilization and gross profit, and we did not receive this benefit in the third quarter. Capacity utilization was about 60% in the comparable year-ago period, during which we significantly reduced our finished goods inventory.

We began fiscal 2008 third quarter with about 3.5 weeks of finished goods inventory on hand, down from about 4.5 weeks at the end of the preceding quarter. Depreciation and amortization expense in the third quarter was around $28 million, about flat compared with the preceding quarter and down from $29 million last year in the third quarter.

R&D expenses in the third quarter were $9.7 million or 6% of net sales. That's down about $600,000 or 1 point as a percent of net sales from the preceding quarter and down $4.8 million from last year's third quarter. Again, the year-over-year decline resulted primarily from changes in the classification of the costs of running our TSA+ manufacturing line as cost of goods sold, which became effective in the fourth quarter of 2007.

SG&A expenses for the fiscal 2008 third quarter totaled $17.8 million or 12% of net sales, down from $18.4 million or 13% of net sales in the preceding quarter. In last year's third quarter, SG&A expenses were $19.1 million or 12% of net sales. SG&A expenses attributable to corporate and the Disk Drive Components Division were down about $900,000 compared with the previous quarter and $2.3 million compared with last year's third quarter, reflecting the impact of cost reduction actions taken over the last year.

In the BioMeasurement Division, SG&A expenses were about $300,000 – were up about $300,000 compared to the preceding quarter and about $1 million year over year, reflecting the growth in sales and marketing expenses for that division. SG&A expenses for fiscal 2008 third quarter include $1.6 million or $0.04 a share for stock-based compensation.

Our loss from operations in the 2008 third quarter totaled $12 million, which included the $10 million reduction in gross profit associated with preparing for and initiating the TSA+ volume production, a $5.6 million loss in the BioMeasurement Division and a $1.1 million of pre-tax charges for severance costs. By comparison, our second-quarter operating loss totaled about $9.8 million, including a $9 million reduction in gross profit associated with preparing our TSA process for volume production and $5.8 million loss for the BioMeasurement Division. In last year's third quarter, our operating loss totaled $21.4 million and included $4.9 million loss for the BioMeasurement Division and $8.7 million in pre-tax charges for severance costs and the write-off of design costs for a canceled facility expansion.

Interest expense for the third quarter was $2.9 million, about flat compared with the preceding quarter and up from $2.6 million in last year's third quarter. Interest income for the third quarter was $1.4 million compared with $3.6 million in the preceding quarter and $3.7 million in last year's third quarter. The decline in interest income is due to shifting many of our investments to more secure US Treasuries that earned lower interest rates than our previous investments.

The tax benefit in the third quarter was $4.6 million compared with $2.1 million tax benefit in the preceding quarter and a $6.1 million tax benefit in last year's third quarter.

Our net loss for the quarter totaled $8.4 million or $0.36 per share and included a pretax charge of $1.1 million or $0.03 per share for severance costs. That compares to a net loss of $6.2 million or $0.25 per share in the preceding quarter and a net loss of $13.5 million or $0.52 per share in last year's third quarter.

Cash generated from operations in the quarter totaled $14.5 million. Our capital expenditures for the quarter were $17 million, resulting in a negative free cash flow of $2.5 million. We expect our capital expenditures for the year will be about $75 million. That compares with $102 million in fiscal 2007 and $248 million in fiscal 2006.

During the third quarter, we spent $10 million to repurchase approximately 700,000 shares of our common stock at an average price of $14.51 per share. We have authorization from our Board for an additional $72 million of share repurchases. Our cash and investments totaled $275 million at the end of the fiscal third quarter. That's down from $285 million at the end of the preceding quarter, primarily as a result of our share repurchase. Our investments continue to include about $95 million of auction rate securities that are classified as long-term investments. Our share count at the end of the third quarter was approximately 22.9 million shares, resulting in a book value per share of $23.39.

Turning now to our outlook for the rest of the fiscal year, we now expect full-year net sales to range from $630 million to $640 million. That range includes about $1 million of net sales from the BioMeasurement Division.

Improving our gross profit continues to be partially dependent on leveraging our fixed costs, which in cost of goods sold totaled about $70 million per quarter. Depreciation and amortization expenses for the full year should be about $112 million. That compares with $119 million in the prior year. Our R&D expenses for fiscal 2008 should be about $40 million, while SG&A expenses for the full year will be about $72 million, down about $5 million from last year. Assuming the R&D tax credit is not reinstated, we estimate that our effective tax rate for the fourth quarter will be approximately a 34% tax benefit, due to an expected loss.

Now Wayne has a few concluding remarks before we take your questions.

Wayne Fortun

Thanks, John.

As we’ve said before, getting back into the black will require revenue growth that will enable us to leverage the substantial investments we have made in our TSA+ processes, in the Disk Drive Components Division and in our InSpectra StO2 monitoring technology in the BioMeasurement Division. In the third quarter, we made encouraging progress in both areas. In the Disk Drive Components Division, we begin to reverse our market share losses and began the transition to volume production of TSA+ components.

In our BioMeasurement Division, we continued to add to the customer base for the InSpectra StO2 system, and interest in the system for applications beyond trauma is clearly growing. Without compromising the opportunities in both these areas, we have also reduced our costs while sustaining quality levels and the unique capabilities that help us to win in the marketplace.

That concludes our prepared remarks. Mary, we'll take questions now.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Ingrid Aja with Merrill Lynch. Please go ahead.

Ingrid Aja – Merrill Lynch

Good afternoon. I was wondering if you could clarify, are you counting on share gains in the revenue outlook that you gave?

John Ingleman

A little bit. I wouldn't say it's bolstered by much. I'm looking at Kathleen, and she's agreeing with me. So it really, I think, is, Ingrid, think that went through, it's far more based on the seasonality that as we are seeing that September-December quarters ramp up, and we're citing that.

Ingrid Aja – Merrill Lynch

Okay, great. And then I was wondering, in the BioMeasurement business, how do you see the losses trending over the next couple of quarters? Do you see those trending down?

Rick Penn

Ingrid, this is Rick. We hope so. We think we'll hold steady and hopefully to down.

Wayne Fortun

Surely, with the business model the way it is, we anticipate that as we grow revenue or sales that it will start – begin to contribute and get past the starting to diminish the burden that it currently represents. And so we believe that we are showing some very nice momentum and expect that to continue.

Ingrid Aja – Merrill Lynch

Okay, great. And then finally, I just wanted to come back to the TSA+. You are seeing that increase, you said, fivefold in the coming quarter. Is that enough volume to start shrinking the losses? Or, is yield still going to be an issue there for the meanwhile – the meantime, I guess?

Kathleen Skarvan

Well. Certainly, the volumes will help offset the fixed costs, as John was saying earlier, and that leverage is very important to us. I think our expectation is that the, how do you want to say it, drag or whatever, but the impact on gross profit will be less than what we're talking here.

Wayne Fortun

I think we said in the last call, when we talked about the TSA+, that it will take three to four quarters to really get past enough volume, Ingrid, to get to the point where it is completely contributing and no longer has any signs of drag. And so we remain of that view. We're quite pleased with the progress that things are going according to plan, and the level of interest has us, now, encouraged that what should – it will be diminishing each quarter as we go through the next three quarters or so.

Ingrid Aja – Merrill Lynch

Okay, great. Thanks, so much.

Operator

Thank you. The next question comes from the line of Sherri Scribner, Deutsche Bank. Please go ahead.

Sherri Scribner – Deutsche Bank

Hi, thank you. I was hoping to dig a little more into the TSA+ comments that you made. The 1 million that you did this quarter, did you say that was one program, so that would be one OEM customer that was shipping in volume?

Kathleen Skarvan

That's correct, Sherri.

Sherri Scribner – Deutsche Bank

Okay. And for the 5 million, would you expect that – is that just one customer shipping in volume, or do you expect to have more OEM shipping in volume in the fourth quarter?

Kathleen Skarvan

We still consider that to be one primary customer. Of course, we'll continue to be doing prototype and other program work, but that is lesser volume.

Sherri Scribner – Deutsche Bank

Okay. And then --

Wayne Fortun

Just as a reminder, Sherri, that when we are in prototype, we could be counting product in, say, 100,000 or 200,000 parts kind of prototype quantities. But it won’t – within this quarter, we will not see another real volume consumer that will start taking those kinds of quantities weekly.

Sherri Scribner – Deutsche Bank

Okay. So if you get – so it sounds like you are in qualifications with a couple of customers, I think you said all of the HDD OEM customers. So it sounds like, if we were to see more volume from the second customer, you wouldn't see that until the fiscal first quarter, is that fair to say?

Kathleen Skarvan

Well, in the next fiscal year. I'm not, at this point, going to nail it down to a particular quarter. But, we certainly will see additional volume programs or customers in '09.

Sherri Scribner – Deutsche Bank

Okay, great. And then in terms of the 10 million related to the initiating and the volume production of the TSA+, I just wanted to understand a little bit better, does that continue in the fourth quarter? Is that a one-time kind of cost? How does that impact your gross margin?

John Ingleman

This is John Ingleman. It continues into the fourth quarter and beyond, and it certainly impacts gross margin. It's the cost of getting this product up and getting it to running. But, as Kathleen said earlier, we expect that we will see that diminish as revenue starts to grow.

Sherri Scribner – Deutsche Bank

Okay. So in the fourth quarter, it sounds like it's not going to be 10 million, maybe it would be a little bit less because you're going to have about 5 million units in volume. Is that fair to say?

John Ingleman

Maybe it will be the case.

Sherri Scribner – Deutsche Bank

Can you maybe quantify how much of the gross margin impact that's going to be in the fourth quarter?

John Ingleman

No, I don’t think I am going to try to do that.

Sherri Scribner – Deutsche Bank

All right. Thank you.

Operator

Thank you. The next question comes for the line of Christian Schwab with Craig-Hallum Capital Group. Please go ahead.

Christian Schwab – Craig-Hallum Capital Group

Hi, John. Thank you for returning to guidance.

John Ingleman

Sorry.

Christian Schwab – Craig-Hallum Capital Group

(inaudible) market share, last quarter you gave us your worldwide market share and your market share by desktop, notebook, 1.8-inch and enterprise. Can you just update us on that?

Kathleen Skarvan

Yes, we'll do that, Christian. We're, again, approximately – well often, we talk about market share in increments of five percentage points because we think that precision beyond that is somewhat difficult. So we would put our market share at approximately 40% overall. And then if I go through it by segment – we'll start with the mobile, and we usually break that into 1.8-inch, 2.5-inch and, of course, 1.8-inch, we believe we have 100% share there. And in the 2.5-inch, we believe that we have greater than 40%, maybe even nipping up at 45%. Enterprise segment, that's in that 90% to 95% range. And then on the (inaudible) 3.5-inch ATA, that was approximately 25%.

Christian Schwab – Craig-Hallum Capital Group

Okay, perfect. And then, John, what type of volume do we need for the TSA+ to be a positive contribution to operating income?

John Ingleman

Well, that's an interesting question. I'm not sure that I've got a really good answer for that. I mean this is the first program that we started with TSA+. And we need to get, certainly, up the learning curve and nail the processes down. We're talking about a fivefold increase next quarter; that won't get us there. One might argue that a few more quarters – three, maybe down the road that we'd be getting close, three to four quarters down the road. And I'm not sure that I can give you the exact number or would give you the exact number for what it would take to get there.

Wayne Fortun

Christian, here's the way, perhaps, to think of it. Something that we have talked about in the past is that the current line as it was installed and therefore also manned in order to support is in the 3 million to 5 million a week kind of capacity. And so, surely, you can anticipate that we had figured, when we were running at capacity, that it is actually starting to contribute some level at the gross profit line. And so if you think about it that way, that might help you to start to model out as we progress how that should start to churn into, when it contributes and ultimately starts contributing at the same kind of level as the rest of the business.

Christian Schwab – Craig-Hallum Capital Group

Great, that’s very helpful. Kathleen, should we assume that you gain share in the note space at Toshiba and Samsung for the large sequential increase of your business at SAE/TDK?

Kathleen Skarvan

I'm really not going to talk specifically about customers, Christian, but certainly overall, we've gained share in the mobile, and we feel comfortable and think that that went very well for us.

Christian Schwab – Craig-Hallum Capital Group

And as we migrate to next-generation technology on the TSA+ and the strength in the notebook, what should we assume about ASPs in 2009 from a base of 76 to 77 exiting '08?

Kathleen Skarvan

I can certainly appreciate the question. We're just not going to talk to '09 at this point.

Wayne Fortun

We are working through the planning now and still looking at other product, other product venues that are being considered. And so, as has been typical in our history, Christian, we have seen prices fall about 3% a year. And then we have periods in which they are buoyed up because of the introduction of new technology items that help to move that upward.

And so there are some new technology things that are in the works. When they get introduced will really ultimately depend on how much does that buoy up the price. And we are, at this time, very hesitant to be very optimistic or trying to nail down when those actually come about to be introduced. And so, if you wanted to be conservative, you'd look at it and say, it's likely to be a 3% decline. And if some of these new programs get introduced enough in '09, we could see it buoyed up so that it could be something flat.

Christian Schwab – Craig-Hallum Capital Group

Great, that’s very helpful. My last question is, can you give us an update – I understand that you guys are now, as you said in your latest Q, going to currently evaluate the possible long-term advantages of establishing an Asian assembly operation, which I know your largest customers have asked you to do for a handful of years. Can you give us update on where that sits?

Wayne Fortun

Well, we have been doing our diligence, working hard to make certain we understand where do we want to be, what kind of the agreements can we reach with the appropriate authorities and so forth. We've pretty well come to, I would say, an agreement, or nearly so. But there's nothing inked at this time. There's nothing that's definitive. And so until we get to that point, we really don't want to state where we are going for sure or that the deal is done, because we haven't got, as they say, the signature on the bottom of the line.

Kathleen Skarvan

Right. We're still in negotiations, Christian, and until we complete those negotiations, we won't be making any announcements.

Christian Schwab – Craig-Hallum Capital Group

Right. But I guess it's fair to say that, in two years, you will be --?

Wayne Fortun

Could you repeat that?

Christian Schwab – Craig-Hallum Capital Group

It would be fair to say that sometime within the next two years you will be manufacturing some level of suspensions?

Kathleen Skarvan

I think if things go according to our plan, that that's very likely.

Operator

Thank you. Next question comes from the line of Rich Kugele with Needham & Company. Please go ahead.

Rich Kugele – Needham & Company

Thank you. Just a couple questions. I guess, first, when you look – now that the TSA+ is shipping, what did the competitors put up against it, and how did that compare to what is potentially out there from an additive basis today?

Kathleen Skarvan

Could you elaborate a little bit more on that?

Rich Kugele – Needham & Company

Well, I'm just trying to figure out – before it was a speculative project, prototype work, still some changes that were going to be deployed. And so now, it's actually shipping, it's in a product, presumably. So like what is Magnacomp, for example, putting up against this, as a next-gen solution? Or, do you think that – where I'm going with this is, is it potentially a product that gives you an advantage, again, just like TSA did at the time, where you can go and perhaps use this to regain share on the desktop?

Kathleen Skarvan

Well, certainly, right now, the only viable additive supplier in addition to ourselves is Nitto Denko in Japan, and we have a lot of respect for Nitto Denko. They have a good product. We believe our product is comparable, and we think over time we may have the opportunity to even have an advantage based on our knowledge of the overall industry and that we are vertically integrated and produce suspension assemblies. I'm not sure that I can comment on Magnacomp. I haven't heard a lot from there about if they are even producing anything. But it's our understanding, again, that Nitto Denko really is the competitor that we are looking toward.

Wayne Fortun

Yes, that’s surely the – Nitto Denko is surely what we view as the only real viable competitor for an additive flexure, but they do not make suspensions. And then, as you asked, Rich, in terms of a means for us to perhaps have some advantage is that we would be the only vertically integrated suspension maker making these additive flexures, and we think that gives us an advantage in two ways. One is, we know how to integrate that flexure and make changes on both ends of the process to make our process run the best that it can at the lowest cost and meeting the functionality that is required. And secondly, we will be able to make these flexures at a cost that which our competitors are going to have to be buying them at a market price. So that may also give us some advantage long-term in being competitive.

Kathleen Skarvan

I would add another, a third point, which maybe really is related to your first point is, we believe that time to volume, time to market is so extremely critical to our customers and being vertically integrated is one way that we do that very well.

Rich Kugele – Needham & Company

Okay. Just one last question on TSA+ before I move on, to September. As TSA+ ramps, do you think that this will be additive or will help the blended ASP, or is it too early to call? Or does it depend on the actual segment it's in? Any thoughts on a preliminary basis?

Kathleen Skarvan

I think right now we're not expecting it to be a great deal different than the current environment that we have for pricing, and we will (inaudible) differences occasionally by segment. But I'd have you consider it similar to our current product.

Wayne Fortun

Yes, I agree. I think, if you recall, Rich, we've been talking about how our TSA extended, which is a much more sophisticated TSA product and complicated as well, is now 70% of our volume or something like that. And it really is a competitive product to an additive type flexure. And so what we're doing now is coming in with the additive flexure of TSA+ to be able to handle that further extension of where the technology goes. And in all likelihood, we are very confident it will be lower cost than our current TSA extended product. So I don't think you should look at it as a price change as much as a cost reduction, ultimately, a cost reduction avenue for us.

Rich Kugele – Needham & Company

Okay, that's helpful. And then, in terms of September, what are your expectations for the suspension sequential growth? Should we assume that the gross margins increase sequentially because of that better utilization? And any magnitude would be helpful.

Kathleen Skarvan

Well, certainly, we expect the seasonality to improve our overall volume as we go through this quarter and then ultimately into the December quarter. As far as the gross margin, I'll let John talk a little more about that.

John Ingleman

Well, again, we're not giving gross margin guidance. But I think it's fair to say that the important things from a profitability standpoint are leveraging our investment in the TSA process, and we had planned to ship more product there. And we also have to do better with respect to the BioMeasurement Division and we don't expect to see that improve that much quarter over quarter. We think next quarters BioMeasurement will be about the same spend rate that we've had currently. So that should help you at least directionally on the gross margin.

Rich Kugele – Needham & Company

And you had mentioned back in April that revenue breakeven was probably something more in the $175 million range. Is that still the case?

John Ingleman

Yes, it's in that range.

Rich Kugele – Needham & Company

Okay. Great, thank you very much.

Operator

Thank you. Next question comes from the line of Matt Kather with WR Hambrecht. Please go ahead.

Matt Kather – WR Hambrecht

Seagate recently floated the possibility of outsourcing some heads, and I assume, therefore, suspensions for the first time on the head side externally. How do you guys think about that strategically? And, what are some of the things that you are doing maybe to address that?

Wayne Fortun

Just to make sure, Matt, because we didn't catch you at the very beginning, did you say that Seagate was sourcing heads on the outside?

Matt Kather – WR Hambrecht

Seagate has recently floated the idea of going to the merchant market for heads. And with really there only being one supplier who now has integrated suspension capability, I wonder how you guys are thinking about that, and what other things, maybe, that you're doing to prepare for that possibility in 2009?

Wayne Fortun

Well, I think that because MPT already has a share, a notable share at Seagate, it may not be much of a change in terms of the relative shares within Seagate for each of the suspension makers. It's just Seagate may shift it around to whenever it is that they might be acquiring with heads, using that MPT suspension in combination. But of course, that's going to be up to them and, ultimately, the competitive nature of how one wins the suspension business is meeting the needs of the OEM, or the drive maker, and doing that price competitively. And so it will ultimately boil down to, does the suspension work in their drive and help that drive performance meet the expected market requirements?

Matt Kather – WR Hambrecht

That's fair. But I guess at this stage, is your view that that will likely unaffect your share? Or, it remains to be seen if that will impact you at all, just given that MPT has already sourced in a lot of the drive programs, as you mentioned?

Kathleen Skarvan

Yes, I think it's the latter, Matt. But we see that they are already using them as the source, using MPT. And as far as the impact for us, we don't expect it to be more negative than – more negative.

Matt Kather – WR Hambrecht

Okay. Just maybe for, John, just looking at the model here, and obviously you aren't giving guidance past September, but do you guys have any – do you have hopes of being able to return to profitability this year? Are you willing to go out and say that, or are you still looking towards next year as being profitable again?

John Ingleman

Well, of course, we're not giving guidance, so I'll reiterate that again. Certainly, we will be going through and are going through planning for next year, and we'll give guidance as we move ahead. I think that there are, certainly, things that we've done that go on beyond that. And that's that we expect to see the suspension assembly market to continue to grow at approximately 10% next year, something in that range. And we think it's prudent to think about that growth. As Kathleen said, it won't be with ASPs going up. They will probably come down, and we've talked about that being something in the 3% range.

We will continue to have TSA+ investments although that burden should diminish as we go through the year. We certainly have BioMeasurement Division investments that we are making, although we believe that loss won't grow, should be about the same or less than it is this year. And certainly, we've talked about the fact that we'll be having an Asian operation sometime in the next couple of years, and that is another possible small drag on P&L. So stay tuned, we'll see how the year turns out.

Matt Kather – WR Hambrecht

I guess, last thing, I've asked this in the past, and you've said for investors to be patient on BioMeasurement. But now, with some talk of 2009 and possibly the third year of the losses being equal or just a little bit less than they were this year, I don't know where the Street is. But I'm looking at my model, and basically all of the income that we have you earning in a recovery scenario is essentially offset by the BioMeasurement.

Said another way, you could double your net income by spinning this off or selling it. So, once again, I pose the question. If we were to fast forward through 2009, given that this is really – even though the technology might be borne out of some of the measurement processes that you guys have invented, how long should investors be patient? And, is this really going to be a core business of yours, if you can't get this up to the $20 million or $30 million in revenues?

Wayne Fortun

Well, if we can't get it up to $20 million or $30 million in revenue, no, it will not be a core business of ours. On the other hand, we think that we are making very good progress. The momentum is building, and if you look at, as we've talked about, our $1 million revenue target for the year in '08 and you look at what our cumulative revenue is for '08, up to this point, you can sense that we are making that momentum shift continue, then we believe that this is creating the kind of installed base that we should anticipate things to accelerate.

So, when asked this before, and my view has been, it all rides on not necessarily just the number itself, but it rides on the slope of the improvement. And we will watch that carefully as we progress through this coming year, and if that slope of improvement continues to have us seeing that there is truly light at the end of the tunnel and not unreasonably long tunnel, then we're going to stay the course. Currently, that is our view, and we are looking ahead to saying that there is a time when people will no longer be asking us about the burden, they will be asking us about the contribution.

Matt Kather – WR Hambrecht

Okay. Thank you, appreciate the answers.

Operator

Thank you. Our next question comes from the line of Jayson Noland with Robert W. Baird. Please go ahead.

Jayson Noland – Robert W. Baird

Thanks for bringing me on. First, just to follow-up the previous question, is it fair to assume that TSA+ could help stem some of the revenue deceleration to TDK?

Kathleen Skarvan

Well, we certainly look at TSA+ as a way to decelerate the share losses that we've experienced in the last few quarters and look at it as something that will help with our overall growth. Relative to TDK, I'm not sure I would say it that way.

Wayne Fortun

I don't think it links as closely to TDK as much as its links to the functionality at the OEM and really plays to our design wins, and the design win ultimately determines what suspension they use. Just as a reminder, along those lines, SAE/TDK can try to promote their suspension, but if it doesn't get qualified in the drive, they will buy the suspension elsewhere. And currently, if you look at our share at SAE, we have the lion's share of their business.

Jayson Noland – Robert W. Baird

Okay, thanks. That's helpful. John, on modeling for next quarter, is it fair to assume that R&D comes down in absolute dollars sequentially as that cost shifts over to the COGS line?

John Ingleman

Well, I think what we gave is guidance of $40 million for the full year. And I just can't do the math right here, but you can do that math. When we talk about COGS, that really goes back to last year. Quarter four of 2007 is when we made that change and pulled costs out of or expenses and costs out of and reclassified them to report more appropriately as cost of goods sold.

Jayson Noland – Robert W. Baird

Okay. And have you given a COGS breakdown, variable versus fixed costs, or can you give that roughly in percent terms?

John Ingleman

Yes. Well, what we've said is, it's 50% plus or minus 5 points. And I think what I said in my prepared remarks was that the fixed piece of COGS was about $70 million a quarter.

Jayson Noland – Robert W. Baird

Okay, that’s great. And then one last question, just any comment on use of cash for the next quarter or two? I think you mentioned a $72 million authorization.

John Ingleman

Well, will you be more specific? What are you asking?

Jayson Noland – Robert W. Baird

Just expectations for buyback for the next quarter or two.

John Ingleman

Well, we are authorized. We have what we are authorized to do, and we'll do what makes the most sense at the time.

Jayson Noland – Robert W. Baird

Thanks, guys.

Operator

(Operator instructions) And our next question is a follow-up from the line of Sherri Scribner with Deutsche Bank. Please go ahead.

Sherri Scribner – Deutsche Bank

Hi, guys. Actually following up on that share buyback question, your shares now are trading this quarter around $12, $13, and you have the authorization. I'm just curious why you only bought back about 10 million in the quarter, why you didn't buy back more?

Wayne Fortun

Well, the prudent thing seemed to maintain cash and liquidity, and that's what we did through the quarter.

Sherri Scribner – Deutsche Bank

Okay. And then, in terms of the biomedical division, you said about 1 million for the fiscal year. If I look at the fourth quarter, that implied a pretty big jump in revenue in the fourth quarter. I'm getting about 75%, and that's assuming that you are doing a full million. Is there something there? Do you have another business win? Is there some sort of visibility that you have that expects you to have that much revenue in the fourth quarter?

John Ingleman

Sherri, we just got an increasing customer base and use is going up, and we feel – as Wayne talked about earlier, watch the slope of the line. That's really what we're watching. It's moving up. We think, as we move into '09, we will move it up some more. So I think you've got the math right, and the fourth quarter should be pretty good.

Sherri Scribner – Deutsche Bank

Okay. So then, in terms of, if we look at fiscal '09, I know you are not giving guidance, but would you expect to double that revenue in fiscal '09 for the BioMeasurement Division? I mean what are you seeing there?

John Ingleman

You bet. And then – I am sorry. We certainly think that, again, if you take a look at how this year has progressed, Sherri, and this is one of those kinds of products in which the installed base starts to become users of the sensors. So you don't have to build an entirely new round of revenue every quarter, because that installed base is starting to consume those sensors on a repeat basis. And so we think that – the reason we think that this momentum has the ability to carry, and therefore I think you're thinking about it in an appropriate manner, is that this thing should build pretty nicely as we go into '09.

Now, we are at this time ready to give any kind of annual guidance for '09. That will come in the next quarter, because we're still working out our plans and are not prepared to do it. But you are getting the picture, and it isn't because we have to go out and sell an entirely new set of customers every quarter to bring in the revenue. But this installed base of monitors starts to become routine consumers, and that's why we talk about the importance of getting to routine use in the hospital and a standard of care, because now that base of monitors starts consuming more and more sensors that are $150 each, every week and every month and every quarter.

Wayne Fortun

Yes. We are really encouraged by the use of the product beyond just with trauma patients, and that's, I think, a key point. We have been heading in that direction, and the momentum is, I'd say, increasing in areas beyond trauma. So we'll give you a better feel next time around on '09.

Sherri Scribner – Deutsche Bank

Okay, that's super helpful. And then I just want to clarify. I think, John, you said that the costs in that business will be about the same in the fourth quarter as they were in the third quarter?

John Ingleman

Yes, that's about right.

Sherri Scribner – Deutsche Bank

Okay, thank you.

Operator

Thank you. And Mr. Fortun, there are no further questions. I'll turn it back to you for closing comments.

Wayne Fortun

Well, thanks, all. We know that we're asking for your patience. One the other hand, we think that we are meeting what we said we wanted to do and are progressing in a way that would say that there is light at the end of the tunnel and that we will start to earn your trust as you have been riding with us this long. Thank you.

Operator

Thank you. Ladies and gentlemen, that will conclude today's teleconference. If you would like to listen to a replay of today's conference, please dial in to 303-590-3000, or 1-800-405-2236 and enter the access code of 11117429 followed by the pound sign. We thank you again for your participation, and at this time you may disconnect.

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