Executives
Norman Stout – Chairman
Scott Tsujita - Senior Vice President of Finance, Treasury and Investor Relations
Bob Vreeland - Interim CFO
Philippe Tartavull - Chief Executive Officer and President
Analysts
Gil Luria - Wedbush
Tim Brown - Roth Capital
Robert Dodd - Morgan Keegan
George Sutton - Craig-Hallum
Vincent Colicchio – Noble Financial
Hypercom Corporation (HYC) Q2 2008 Earnings Call August 11, 2008 4:30 PM ET
Operator
Welcome to the Hypercom second quarter 2008 earnings call. (Operator Instructions) I would now like to turn today’s call over to Norman Stout.
Norman Stout
I’m going to introduce the team today and make a few brief comments. With me today on the line are Philippe Tartavull our Chief Executive Officer and President who has dialed in from our office in Germany, Bob Vreeland our Interim CFO, Scott Tsujita our Senior Vice President of Finance, Treasury and Investor Relations who are here with me in our Scottsdale office.
As an overview of the agenda Scott will read the forward looking statement, Bob will then review the second quarter financial results and then Philippe and I will discuss regional revenue trends, our transition to contract manufacturing and its impact on Q2 gross margins and provide a progress update on the integration of our newly acquired Thales e-Transaction business unit. After that we’ll take any questions from our listeners.
Scott Tsujita
The purpose of this call is to discuss this afternoon’s press release announcing Hypercom’s second quarter 2008 financial results. You should note that this conference call contains forward looking statements regarding future events and Hypercom’s future financial performance. Hypercom's management believes that the expectations contained in these forward looking statements are based on reasonable assumptions. However, it can give no assurance that its expectations will be attained.
Actual events or results may differ materially from those in the forward looking statements. Please see the company's annual reports to stockholders and its filings with the SEC including its recent filings on Forms 10-K and 10-Q as well as this afternoons press release for a discussion of important risk factors that could cause actual events or results to differ materially from those in the forward looking statement.
All participants should be aware that the forward looking statements, included in this conference call are made only as of the date of this conference call and Hypercom undertakes no obligation to update such statements to reflect subsequent events or circumstances. Our press release is posted on our website www.Hypercom.com. Please note that all prior quarter and prior year quarterly figures shown in the published financial statements and referred to in today's comments are restated to reflect the same continuing operations as reported in the second quarter of 2008.
This conference call is the property of Hypercom Corporation and is being simultaneously recorded and webcast, any redistribution or retransmission or rebroadcast of this call in any form without the expressed written consent of Hypercom is strictly prohibited.
Bob Vreeland
Our press release containing our basic financial statements has been issued and I will now speak to the highlights of our results. First, our results for the second quarter 2008 include the results of Thales e-Transactions which we acquired on April 1, 2008. Philippe and Norman will discuss the integration efforts and the progress being made on that front later on, on this call.
From a financial reporting standpoint we have completed our preliminary valuation of the opening balance sheet of Thales e-Transactions as of April 1, 2008, in order to allocate the purchase price. We might not conclude our valuation for up to 12 months and therefore could have further adjustments to the opening balance sheet which is allowable under generally accepted accounting principles.
Total revenue for the quarter was $125.4 million this included $49.1 million of revenues from the newly acquired Thales e-Transactions leaving $76.3 million as revenue from the legacy Hypercom business representing a 13% increase over the same quarter in 2007. Thales e-Transaction revenue was essentially flat compared to the same quarter 2007 as the growth in certain geographies such as Austria was partially offset by a decline in Spain where economic conditions have slowed when comparing 2008 to 2007.
The primary areas we saw growth in revenue over the same quarter in 2007 was in our North America and North Europe regions principally in our Multi-Lane and Unattended product groups as well as increases in Austria. Growth in the Multi-Lane product group came principally from sales through Motorola to large retailers and due to new PCI security product availability in Europe.
Unattended products grew in Europe our most active market in the Unattended product category related to new product introductions with existing customers as well as with new customers. The growth in Austria is principally from new market share. Where we had some revenue shortfall compared to 2007 was in Mobile product sales in Southern Europe and Mexico as well as a general decline in a variety of products in Spain. We continue to expect Mobile product sales to ramp up as certifications get completed. The market in Spain will remain a challenge and likely won’t rebound in 2008.
In the Services area we saw revenue growth principally in Brazil which grew by 52% over prior year as well as the addition of Thales e-Transactions which contributed $10 million in Service revenue for the second quarter 2008. As was the case last quarter in Brazil we continue to grow volumes in our large logistics contract in Brazil as well as maintain services for other top tier banks and card companies in that country.
Moving on to gross margin, our overall gross margin was 26.9% for the second quarter 2008 compared to 12.9% in the same period in the prior year. Before I discuss the details of this comparison let me update you on our transition to contract manufacturing. The short of it is our transition to contract manufacturing was complete as of the end of June. While we have some administrative paperwork activities to follow like signing off lease termination agreements there are no operational steps remaining open. All equipment and inventory has been moved.
During the second quarter we extended approximately $1.8 million directly on the shut down and $1 million indirectly related to the transition for increases in excess and obsolescence and freight. This is higher than we expected but the good news is the move is complete and we are focusing all efforts toward gross margin improvements albeit we are a quarter behind in this effort.
We expect improvements in product margin due to the elimination of dual overhead and other operational inefficiencies that were the result of having two factories open. This margin improvement will be gradual as we go forward and not immediate per se as we must work through inventories existing at June before the cost savings impact our income statement.
In comparing the gross margin between this quarter and the same quarter in the prior year there are a number of items to consider. First, the prior year gross margin includes $10.1 million in various charges for increased inventory reserves product warranty and other matters while the 2008 includes $2.8 million in the factory shut down as discussed and related indirect costs as well as $1.1 million in amortization of purchased intangible assets. Exclusive of these costs the gross margin in the second quarter 2008 would be approximately 30% compared to 2007 same quarter of approximately 28%.
In the product category our gross margin was 30.5% compared to the second quarter 2007 product gross margin of 13.7%. Keep in mind the 2008 margin included $2.8 million of factory shut down and related indirect costs and the prior year product margin included approximately $9.6 million of the incremental charges I mentioned previously. Exclusive of those costs the product margin for the second quarter 2008 was 33.5% and in the second quarter of 2007 the product gross margin was 33.8%. Product margins in the first quarter 2008 were 33.3%.
As I said, our move to contract manufacturing is now complete, albeit it took about one quarter longer than anticipated so our efforts are now more fully directed at gaining efficiencies and the benefits of utilizing contract manufacturing.
In the Services category gross margins of 20% are higher than in the same period in the prior year principally due to the addition of Thales e-Transactions and improvements in our costs structure in Brazil. These improvements were partially offset by some service margin declines in Asia/Pacific where competitive pricing has impacted our margins.
Operating expenses were $41.8 million or 33.3% of revenue compared to prior year same period operating expenses of $15.7 million or 23.3% of revenue. The large increase over the prior year reflects the addition of Thales e-Transactions including the effect of acquired intangible asset amortization of $2 million. As well, in the second quarter 2008 we have approximately $1.9 million in integration related costs.
While the integration costs are expected to decline as we move forward there still will be significant spending involved with completing our integration. Also note that 2007 contained a $3.8 million gain from the sale of our corporate headquarters where we are today and approximately $2.3 million in reversals of previously recorded stock compensation and bonuses that we deemed to be unachievable at the end of the second quarter 2007. At this point operating expenses remain under control but we are still focused on synergies and cost reductions as we go forward.
This brings us to a loss from operations of $8 million for the second quarter 2008 compared to a loss from operations of $7 million in the same quarter last year. Going forward our focus remains on achieving gross margin improvements in keeping operating expenses under control and right size for the business, having completely transitioned to contract manufacturing and having some of the larger administrative integration costs behind us our key to improving our operating results as we move forward.
Non-operating income now consists principally of net interest expense and foreign currency. Net interest expense being the result of our borrowings and the issuance of stock warrants in connection with the acquisition of Thales e-Transactions. Our interest expense was approximately $2.5 million for the second quarter 2008.
We saw an improvement of approximately $160,000 in foreign currency exchange in 2008 versus 2007. This improvement is principally attributed to the strength in foreign currencies against the US Dollar and efficiencies with our hedged currencies.
Our tax provision during the quarter related principally to certain deferred tax asset in China that were reserved as the result of exiting our China manufacturing operation. Due to our large net operating loss carry forward a discussion on our overall tax rate continues to be not meaningful.
Our net loss for the second quarter of approximately $10.9 million or $0.20 per share compares to a net loss of $5.7 million or $0.11 per share in 2007. Cash flow from operations for the second quarter was a negative $1.1 million compared to a positive cash flow from operations of approximately $2.8 million in the second quarter 2007.
On a year to date basis through June 2008 cash flow from operations is positive $18 million due principally to working capital management efforts with a focus on the timely collection of accounts receivable, managing inventory levels and accounts payable mainly related to our activities with our contract manufacturing ramp up.
I’ll now turn the call over to Norman.
Norman Stout
Now we’ll give you a brief update on some of our significant business issues and the objectives that we discussed in the past. Philippe, our shareholders and associates know we have four primary objectives for 2008:
Revenue growth in targeted markets and geographies
Improving our gross margins
Introduction of new products
Successful integration of the Thales e-Transactions acquisition
As we’ve done over the last couple of calls can you start off providing us a status update on each of these? Let’s start with growing revenue by focusing on targeted markets and geographies.
Philippe Tartavull
First, from a geographic revenue perspective for the sixth consecutive quarter the company had year over year quarterly revenue growth. Excluding the impact of revenue from the Thales acquisition we realized organic revenue growth of 13% over Q2 2007 revenue. This organic growth was primarily the result of increased revenues from North America 44%, Southern Europe 17% and Asia/Pacific 22%. South America was up only slightly but within a slight increase at $3.5 million of service revenue that’s replaced $3.5 million of low growth margin terminal sales.
Northern Europe was also up slightly and Mexico/Caribbean/Central America was down 49% including the recently acquired Thales e-Transaction business we realized revenue growth of $57.9 million or 86% compared to Q2 2007. From a product perspective and excluding the incremental $49.1 million of quarterly revenue from Thales e-Transaction acquisition second quarter Multi-Lane product revenue was up 122% compared to second quarter 2007. Unattended product revenue was up 78%.
Countertop revenue decreased by $0.8 million due to the elimination of low margin terminal sales in Brazil. Normalizing countertop revenue to exclude the prior year low margin terminal sales in Brazil Countertop revenue grew by 11%. We expect this momentum to continue through the balance of 2008.
Now let me give everyone a brief update by geography operating regions. First, the North America market, in North America as mentioned earlier we saw very strong demand for Multi-Lane products in Q2 and this in spite of a tough economic condition. In addition, virtually all other product segments except networking were up slightly in the second quarter compared to the prior year.
Year to date North America revenue is up 59% compared to the prior year driven by very strong demand for both Countertop and Multi-Lane products. We expect sales to continue to be strong assuming economic conditions remain stable.
Second, the EMEA market, with the completion of the recent acquisition we have divided the EMEA market into two operating regions, Northern and Southern Europe. Second quarter revenue in Northern Europe increased 725% from $3.8 million to $31.2 million and on a year to date basis increase of 382% from $7.2 million to $34.8 million. The increased revenue for the quarter and year was largely due to the acquisition. As a result of the acquisition we now have significant presence in those important markets compared to a very low level of penetration previously.
Second quarter revenue in Southern Europe increased by 148% from $16.6 million to $41.3 million, $21.8 million of the increase was related to the Thales acquisition. On a year to date basis Southern Europe revenue is up 71% of which $21.8 million relate to the Thales acquisition.
Outside of Eastern Europe and Spain we have seen good traction in most of the territory. In Eastern Europe we are competing against aggressive pricing by one competitor and are exercising price discipline. In Spain poor economic conditions impact our sales in the first half of the year and we expect sales to continue to be weak for the foreseeable future.
Third, MCCA, in Mexico/Caribbean/Central America we had revenue decline of $3.9 million in the second quarter compared to the prior year, primarily in Countertop and Mobile products as well as a decline in service revenue. The product revenue decrease is related to competitive pricing pressure principally in Mexico where we were disciplined in not competing in unprofitable geographies. The decrease in service revenue relates to non-renewal of a large services contract at a very competitive pricing. For the year to date revenue in the region is up $5.8 million or minus 35% compared to the prior year.
Fourth, in South America while product revenue decreased $3.3 million compared to the prior year as a result of the discontinuance of the sales of low margin terminal to support our Brazilian service business there was $3.8 million increase in the service revenue resulting from increased volume of service activities primarily with Visa Net and Ready Card. Year to date Brazil service revenue are up 54% over the prior year which has offset the decrease in negative margin terminal sales.
We do not expect to sell any significant volume of terminals in the Brazilian market until we establish local contract manufacturing to sell products at a profitable gross margin which is in process. We expect sales to start during the first quarter 2009.
Lastly, Asia/Pacific second quarter revenue increased by 22% over the prior year as a result of increased Countertop terminal sales. Year to date Asia/Pacific revenue is up 15% due to increased networking equipment sales in Asia and increased service revenue in Australia. We continue to expect strong Countertop revenue from Southeast Asia and Pacific countries such as Malaysia, Thailand, New Zealand and Australia.
In conclusion, we expect to continue to see growing momentum for the second half of the year from our new products and distribution channel in most of our significant markets.
Norman Stout
We want to congratulate our people on the revenue momentum and we certainly look forward a robust second half revenue growth. The second objective was improving our gross margins. We noted at the end of the Q1 conference call that our product margins has been significantly impacted by transition costs related to our move to contract manufacturing and that we expect the gross margins to gradually improve over the next eight to 12 quarters as we see both a continuous cost improvement from our contract manufacturing and also cost benefit from our redesign of existing products.
Philippe can you update us on product gross margin improvement progress?
Philippe Tartavull
First of all I want to make sure to everybody on this call that we are not satisfied with our gross margins. That being said, our gross margin improvement roadmap is comprised of two initiatives. The first initiative is pricing discipline. As I noted earlier we have exercised pricing discipline in all markets and as a result we have missed out some business. We will continue to choose not to compete for some business where pricing competition does not reflect value pricing or where we lack the competitive profitable product.
The second initiative is the reduction of our product manufacturing costs. This initiative is broken down into completing our move to contract manufacturing and reducing the [inaudible] cost. With regard to competing the move to contract manufacturing third quarter will be the first full quarter of contract manufacturing of Hypercom products as we have now completed the transition to Venture.
There have been two issues related to the transition. Shut down costs and learning curve. We did incur some significant shut down costs in Q2 as well as certain pay up costs such as warranty, excess higher cost air freight and obsolescence reserve that negatively impact product gross margins. Those costs were higher than we expect them to be and are the result of learning curve related competent vendor transition, demand for casting and lead time planning. We are forecasting on reducing those costs over the next several quarters to achieve a long term product gross margin improvement plan.
Q2 product gross margin of 30.5% was negatively impacted by $2.7 million or 2.9% of the result of those charges. We are cautiously optimistic that future quarters will not be impacted by additional shut down costs also the liquidation of the legal entity and lease exit until not completely finalized.
Related to the improving the learning curve, the synchronization with Venture is improving and to this end we also have a super chain IT roadman that we utilize for existing Oracle ERPC stand integrated with Siebel CRM to generate significantly more real time information from watching customer demand with supplier availability. We have already begun to implement this roadmap with the full implementation timeline of approximately nine to 12 months.
With regard to reducing the [inaudible] costs there are several initiatives. The first one, we have added to our team experienced industry procurement specialist with our super chain organization. The team is currently negotiating component costs based on our increased scale as well as utilizing more dual sourcing to encourage competitive pricing.
We expect to see significant savings in the next several quarters as we realize the benefits of those lower component costs. We believe that this activity can increase our product gross margin by 3% to 4% over the next 12 to 24 months.
Secondly, we have begun the process of product line convergence. With convergence will ultimately give us further procurement scale, eliminate higher costs on redundant product and replace them with lower cost versions where appropriate generating product gross margin improvement of 2% to 4% when completed in 12 to 18 months. This 2% to 4% improvement is in addition to the 7% from contract manufacturing.
Third, we are redesigning some of our existing products to a lower cost basis. This activity should also increase product gross margin over the next 12 to 18 months. In conclusion, while I am disappointed with the gross margin in Q2 we are making progress. We are approximately a quarter behind where we expect to be at the beginning of the year in terms of realizing improved product gross margin but we have a clear roadmap of how we get from where we are in Q2 to significantly higher product gross margin.
Norman Stout
I think I can summarize for everyone that we’re not happy with Q2 gross margins but we still expect eight to 12 quarters of continuous gross margin improvement and we see visible improvement in Q3 and Q4 now that we’ve completed our transition to Venture and as we continue to focus on reducing component and manufacturing period costs.
Our third objective was related to new product introductions. Last quarter Philippe you noted the release and initial traction the T4200 product family and also the L4150. You also mentioned that the M4200 family is expected to be a significant contributor to 2008 revenue. Can you please give us an update on acceptance of these products?
Philippe Tartavull
The update of the new products is as follows: First, the T4200 product family has had very good traction in line with our forecast. The product family is doing very well in North America, Europe and Asia/Pacific. This quarter we will introduce the new product in the T4200 series. This product will fill our need for more basic application product that can be sold at the lower ASP while being cost effective. We expect this product to be sold in South America, Eastern Europe, and Asia and to certain customers in North America. This will be our first release of a redesign of an existing product to a lower cost basis.
Second, as you have seen in the numbers that Bob discussed the L4150 Multi-Lane product has been very well received in North America. We have been able to capture increased market share of the Multi-Lane segment.
Third, the M4200 product family which is our Mobile segment, this remains our most challenging vertical due to two reasons. First of all our product is still being certified with our customers as the certification process has taken longer than originally anticipated. Secondly, we did have some software issue. These issues were identified before delivery of any of those products. The issues are currently being resolved so we can begin delivering M4200 product very shortly.
We believe that our common product platform for Countertop and Mobile products remain the competitive advantage. We also believe that we have two other potentially significant revenue generating product verticals, NX100 and e-health. This is our healthcare business. This product line comes from our acquisition of Thales e-Transactions. Also, we currently sell those products predominantly in Europe. We believe we can also sell significant quantity of them in North America and Asia where demand exists.
Norman Stout
Our fourth objective dealt with our acquisition. Please give us an update on the integration activities related to the acquisition of the Thales e-Transaction business unit and discuss whether we were on tract to realize our planned synergies.
Philippe Tartavull
From a process perspective we are on track with integration activities such as combining supply chain and resources, product convergence activities, reducing overlapping operating expenses and eliminating redundant personnel. As of the end of Q2 we are tracking a synergy savings and headcount reduction as of June 30 consolidated headcount including contracture has been reduced by 42 with a similar additional amount expected in the second half of 2008.
We are well into the process of migrating the e-Transaction business to our operating system and network while controlling integration costs such as IT, accounting, lego and tax fees within plan. As we noted before we acquired Thales e-Transaction because we believe it will bring long term value to our company through a concerted sales footprint, operating expense synergy from the elimination of duplicative R&D and increased manufacturing scale for gross margin improvement.
We believe that as a fourth quarter exit rate for 2009 we can expect consolidated product and service gross margin in the 34% to 36% range.
Norman Stout
We look forward to reporting continued progress on our objectives in future calls. We’ll now open it up for Q&A.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Gil Luria – Wedbush.
Gil Luria - Wedbush
You gave a fine breakdown of the geographies would you mind giving us the breakdown by Americas, EMEA and Asia/Pacific?
Norman Stout
Are you talking about revenues?
Gil Luria - Wedbush
Yes please.
Bob Vreeland
The EMEA is about 58% of the total. Asia/Pacific is about 22% of that total and the balance being the Americas.
Gil Luria - Wedbush
I imagine the Asia/Pacific and the Americas portion from Thales is small that’s almost all in EMEA.
Bob Vreeland
Correct.
Gil Luria - Wedbush
Can you tell us what the currency benefit was in the quarter?
Bob Vreeland
There really wasn’t that much currency impact to this quarter from that because the rate for the Euro was fairly consistent throughout the quarter. That would relate to the Thales side of the equation and then from a legacy Hypercom we really were not impacted that greatly by foreign currency as a lot of our revenues are based on US Dollar.
Gil Luria - Wedbush
I think you just gave us some good guidance toward the end there 34% to 36% gross margin exiting the fourth quarter of ’09. In terms of revenue growth the other big piece there what can you share with us in terms of your expectations for growth, is it market rate of growth, how do you perceive market rates of growth being right now.
Norman Stout
Philippe, Gil’s question there when you think about revenue growth and where we’ve been looking back to Q2 and the last six quarters we’ve had continuous revenue momentum how does it look going forward?
Philippe Tartavull
As we have mentioned in the past we will continue to forecast in selected country where we believe we can continue to get traction. That’s obviously includes countries like North America, Northern Europe and certain selected countries in Southern Europe as well as some selected countries in Asia. This is clearly in line with our strategy. I don’t think we can provide guidance in terms of year to year revenue growth.
Norman Stout
I would want to point out if we talked about even with the tough economic times in North America we achieved those revenues in Q2.
Gil Luria - Wedbush
It seems that on the Hypercom side you’re probably growing faster than the market and Thales side it’s been flat for a little while.
Philippe Tartavull
I think your assessment is correct. I think we are going; there is only one Hypercom now, on the Hypercom prior the acquisition we have been growing a little bit faster than the market and flat for the Thales side.
Gil Luria - Wedbush
What do you expect your debt balance, do you expect it to increase your debt balance over where you ended June?
Bob Vreeland
Yes, just by the function of how the accounting works on that with the loan discount that balance will increase relative to the interest basically is what gets tacked on to the principal balance.
Gil Luria - Wedbush
Is there still a payout coming at the end of the year if Thales hits its goals?
Bob Vreeland
Correct.
Norman Stout
We certainly would hope that the payout is such as it benefits us tremendously if we have a great second half of the year.
Gil Luria - Wedbush
Are they on track to achieving that payout?
Norman Stout
It’s a total consolidated bottle between all of Hypercom, as Philippe said, its one Hypercom so it’s in total. Right now it’s tough to predict that with six months to go.
Operator
Your next question comes from Tim Brown - Roth Capital.
Tim Brown - Roth Capital
I want to touch on the gross margins, I think you gave some guidance for the Q4 run rates but if we look out into ’09 and some of the longer term comments am I doing the math right thinking that you’re going to be in range of 38% to 41%.
Norman Stout
As we look out there pretty far we certainly think we can with our product line, with the contract manufacturing, the things that Philippe talked about cost and plus the synergy and scale from our acquisition that we would be able to get close to our competitors on a long term basis. It’s certainly a lot of small pieces and I think under Philippe’s direction the team is probably focused on each individual small task at hand to get there. We look at is as a month by month timeframe over the next six, seven, eight, ten quarters.
Tim Brown - Roth Capital
On the SG&A are you potentially going to give us any guidance on where you think that goes to maybe like a Q4 type run rate or a target run rate?
Norman Stout
We talked about it that there was some headcount reduction Bob maybe if you could go where that headcount reduction was in Q2 and what you see going forward.
Bob Vreeland
We had a reduction of about 42 individuals and probably half of that was R&D related. We have about 21 people today. The other was really spread somewhat within SG&A and a bit even in manufacturing areas. That’s a little hint on where what we would might see in terms of some savings off of those numbers.
Tim Brown - Roth Capital
I assume that will continue through the second half as part of the integration.
Norman Stout
Philippe you want to touch base on that as we look forward over the next six to 12 months of the integration. Nine months from now will be one year into our integration where you’d kind of see some potential synergies.
Philippe Tartavull
If you just look at the costs basis obviously the biggest improvement in terms of cost utilization is going to be in R&D where when we finish our product convergence. So you would see quarter after quarter some decrease of our R&D expenses.
Tim Brown - Roth Capital
I was just curious on one comment you made was the Unattended and the e-health products from Thales it sounds like you are going to introduce into some other geographies, is that something we should look for in the second half, can you give us some color on the timing.
Philippe Tartavull
We are preparing the introduction of the NX100 so I think you need to look at that more in the first part of next year for any significant sales I would say in North America.
Tim Brown - Roth Capital
On the e-health or the MedCompact the terminals in Germany can you give us some color on the size of that opportunity?
Philippe Tartavull
It’s very difficult to size it because it could be very large or it could be in the $5 to $10 million range. We are depending a little bit on the German government and the speed of the introduction but overall the market could be as big as 8,000 terminals.
Bob Vreeland
On the revenues where you asked about the Americas, EMEA and Asia/Pac, the EMEA I said 58%, Asia/Pac is 12% not 22% there was a typo there, so, 12% on Asia/Pac, 58% EMEA and the balance about 30% being the Americas.
Operator
Your next question comes from Robert Dodd - Morgan Keegan.
Robert Dodd - Morgan Keegan
I have a gross margin question to clarify because I may have misheard, 34% to 35% gross margin for the run rate Q4 is that the product or total gross margin.
Norman Stout
We said 34% to 36% and that was total. That’s before the amortization because we have an amortization charge in there.
Robert Dodd - Morgan Keegan
That is quite an improvement, when you’re saying, I’m having a little bit of problem mentally matching that up with the way you talk about gross margins you won’t see a rapid improvement, it’s eight quarters of taking on improvement yet that would tend to imply that particularly on the products side a pretty substantial ramp up over the next two quarters. It seems to me that you sound more conservative than that 34% to 36% number. Can you help me get my head around that?
Norman Stout
Philippe said exit rate ’09 not ’08 so not two quarters. Then again we’re trying to also set expectations out there that we think we can beat. While it does sound like a long ways from today I want to commend Philippe and his team because they’re taking this on as one bite of a big elephant, one bite at a time because you have to do it step by step and concentrate on it that way. We talked about a lot of pieces of that gross margin improvement and within those pieces there are a lot of subsets of each one of those.
Philippe Tartavull
Also what you have to take into consideration is the cycle so each time we get a cost improvement by the time it cycles through and you can get it on the P&L between two and three months. We cannot have an immediate effect.
Bob Vreeland
The important part there one being the ’09 clarification there and then I think we’re just cognizant of the fact that the costs savings have to work their way through inventory that’s just an important measure to understand.
Robert Dodd - Morgan Keegan
If I can go back to the inventory question that was one I had as well. Your inventory is $40 million that’s 30 days why does it take more than a quarter the way it works through the inventory or is that the component cost?
Norman Stout
It does not from that inventory and then also when you’re working with contract manufacturers you have to deal with any components that they maybe have acquired as a result of forecasting it’s not our inventory. Those you do have to negotiate at time if they’ve already procured some items where there are anticipated savings so they do have to work through that as well.
Robert Dodd - Morgan Keegan
On the certification process Philippe mentioned that the Mobile had taken longer than expected and had some software issues. Did those software issues require going back and recertifying any product?
Philippe Tartavull
No, absolutely not. We don’t need to go back to certification and we have basically completed the issue so we should be able to sell in September.
Operator
Your next question comes from George Sutton - Craig-Hallum.
George Sutton - Craig-Hallum
A question on your being fairly forthcoming in a couple markets where the competitive landscape is challenging like Eastern Europe where you mentioned an aggressive competitor and also in Mexico some price pressures you’re seeing there. My sense is with the entry level T series terminal coming out that will help you competitively in those types of markets where you’re seeing that price competition is that a fair assumption.
Philippe Tartavull
That’s absolutely right. That’s why we’re making sure that we lead this devise as quickly as possible.
George Sutton - Craig-Hallum
Is there a way to estimate how much business you might have been moving away from over the last few quarters relative to what you might be able to actually provide a bit for?
Philippe Tartavull
I don’t want to go there. I think when we come back to those markets with our new product we will continue to grow.
George Sutton - Craig-Hallum
Can you give us a little more color on the Multi-Lane strength that you’ve seen recently and you mentioned the Motorola relationship going well, obviously that had been challenged for a while what has changed there and what kind of outlook do you have for Multi-Lane.
Philippe Tartavull
First of all the Multi-Lane market in North America it’s a very important market. The second point is if you remember last year we have a big success with a large retailer Best Buy. Based on that we were able to expand a little bit more quickly in a number of large retailers. Both with the help of Motorola and going direct we were able to grab more market share. We expect that to continue during 2008 and certainly in 2009.
Norman Stout
We’ve talked about this before Philippe has changed the team some. He had Heidi Goff join him as President & MD of Americas and Heidi’s had a chance to work on the team. I don’t know if you want to address some thoughts about the team for everybody.
Philippe Tartavull
We restructured, we have a very good product and we have now our main capital is also very good so the two combined together obviously give us the success.
Operator
Your next question comes from Vincent Colicchio – Noble Financial.
Vincent Colicchio – Noble Financial
Could you give us some help modeling for amortization of intangibles this year and next year?
Bob Vreeland
We’ll see the remainder of this year about $6.5 million that’s in total on the amortization of our various intangibles that we have. In ’09 it’s about $13 million. As you can see its split a little bit between the cost of sales and operating expenses.
Vincent Colicchio – Noble Financial
So $6.5 in total for ’08 is that what you’re saying?
Bob Vreeland
For the remainder of ’08. I would encourage you to take a look at our Form 10-Q on that particular question it will help out a little bit as well.
Operator
At this time there are no further questions.
Norman Stout
Philippe maybe if you could have a couple closing remarks I know you certainly stressed the revenue momentum we have and now that you’ve got your emphasis and our whole team is emphasized on cost improvements is there anything you’d like to add for our shareholders before we adjourn.
Philippe Tartavull
No, I think I want to make sure that everybody understands that clearly our focus right now is to continue our momentum in sales but more importantly it’s clearly to increase our gross margins so that’s where we’re going to focus all of our attention.
Norman Stout
We want to thank everybody for joining us.
Operator
Thank you for joining today’s conference call.
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