QuickLogic Corporation's CEO Discusses Q3 2012 Earnings Results - Earnings Call Transcript

| About: QuickLogic Corporation (QUIK)

QuickLogic Corporation (NASDAQ:QUIK)

Q3 2012 Earnings Call

October 30, 2012 5:30 pm ET

Executives

Andy Pease – Chief Executive Officer

Ralph Marimon – Chief Financial Officer

Brian Faith – Vice President, Worldwide Sales and Marketing

Analysts

Quinn Bolton – Needham & Company

Krishna Shankar – Roth Capital

Robert West – NI Technical Research

Operator

Good day, ladies and gentlemen, and welcome to the QuickLogic Corporation Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this call maybe recorded.

I would now like to introduce your host for today’s conference Mr. Ralph Marimon, CFO; Andy Pease, CEO; Brian Faith, VP of Worldwide Sales and Marketing.

Mr. Ralph Marimon, you may begin.

Ralph Marimon

Thank you and good afternoon. Before we get started, let me take a moment to read our Safe Harbor statement. During this call, we will make statements that are forward-looking. These forward-looking statements involve risks and uncertainties, including but not limited to stated expectations relating to revenue from our new and mature products, statements pertaining to our design activity and our ability to convert new design opportunities into production shipment, market acceptance of our customer’s products, our expected results, and our financial expectations for revenue, gross margin, operating expenses, profitability and cash.

QuickLogic’s future results could differ materially from the results described in these forward-looking statements. We refer you to the risk factors listed in our Annual Report on Form 10-K, quarterly reports on Form 10-Q and prior press releases for a description of these and other risk factors. QuickLogic assumes no obligation to update any such forward-looking statements. This conference call is open to all and is being webcast live.

For the third quarter of 2012, total revenue was $3.7 million, which was at the low end of our guidance range. New product revenues totaled $1.6 million, which was down 9% from the Q2 level and was just below the midpoint of our guidance. While we anticipated a decline in broadband data-card shipment, a transition in the pico projector market that we didn’t expect was responsible for the shortfall to the midpoint of our guidance. Andy will address this transition in his presentation.

Mature product revenue in the quarter totaled $2.1 million, which represents a 11 sequential decrease from Q2 level. The lower revenue is a result of lower bookings during the quarter, based on our backlog and bookings to date in Q4, we expect mature product revenue to e flat in Q4.

Our non-GAAP gross profit margin for Q3 was 50% and was above the midpoint of our guidance. The higher than forecasted margin is primarily due to the mix of product shift.

Non-GAAP operating expenses for Q3 totaled $4 million, which was below the midpoint of our guidance. The decline in expenses is primarily due to declining third party expenses related to new chip development and engineering.

On a non-GAAP basis, the total for other income and expenses and taxes was a charge of $16,000. This resulted in a non-GAAP loss of $2.2 million or $0.05 per share. We ended the quarter with approximately $24.9 million in cash. During the quarter, we used approximately $1.9 million in cash which was slightly favorable to our guidance.

Our Q3 GAAP net loss was $2.8 million or $0.06 per share. Our GAAP results include stock-based compensation charges of $601,000 and equipment write-off of $25,000. Please see today’s press release for a detailed reconciliation of our GAAP to non-GAAP results.

Now, I’ll turn it over to Andy who will update you on the status of our strategic efforts. Following this, I’ll rejoin the call to present our Q4 guidance.

Andy Pease

Thank you for joining us this afternoon. In our Q3 guidance, we anticipated that increased shipments into the secured data-card, smartphone and pico projector markets would be offset by a decrease in shipments into the broadband data-card market, resulting in essentially flat quarter-to-quarter revenue.

However, Micron, the manufacturer of the PoP Video pico projector sold display bridge division mid-quarter to Citizen (inaudible), a major Japanese manufacturer of micro-displays. During this transition, production in the Pop Video pico projector was halted, resulting in slightly lower than expected Q3 revenue.

General Imaging a, sales and marketing company and the exclusive worldwide licensee for GE digital cameras has acquired the right to the Pop Video design and has recently launched its ipico projector using a second generation wide engine that is roughly three times brighter. The ipico projector correlates QuickLogic’s V-technology which doubles the apparent brightness of the projected image. General Imaging is selling its ipico projector through multiple channels, including Amazon.com among others.

General Imaging is using the same supply channel partners for its ipico projector that Micron established. This has allowed General Imaging to utilize the inventory of ArcticLink II VX CSSPs, we shipped to support the Pop Video production schedule. We expect the balance of this inventory to be used during Q4 and then we will resume shipments to support ongoing ipico projector production in Q1.

When Micron sold its display division to Citizen, the key Micron executives and software engineers, who created Pop Video formed their own company called Platform Development or PDI. PDI is executing an ODM and OEM business model for the pico projector market. PDI plans to introduce two new pico projector designs in Q4, similar to the ipico, these projectors are designed to work with Apple’s iPhone 4S and earlier models as well as all iPod products. They will use the same bright light engine and ArticLink II VX CSSP used by General Imaging.

PDI hopes to have this Android pico projector ready for shipment ahead of the Chinese New Year. This design will also incorporate our ArticLink II VX CSSP for brightness enhancement.

In addition to these FL cost based pico projector designs we are working on a variety of pico projector designs that corporate MIPI based light engines. We believe at least one of these designs will be displayed at the January 2013 CES in Las Vegas.

The Kyocera URBANO PROGRESSO smartphone, has been well received by KDDI customers in Japan and will continue in production in Q4. This is the second smartphone to incorporate our VEE and DPO technologies and the third to use our ArticLink II VX CSSP. We have ongoing engagements with Kyocera for new designs that we look forward to discussing in more detail in the future.

During our May 1, conference call, I stated that we sampled our new ArticLink III VX family during Q1 of 2012, and initiated final testing, verification and characterization of the silicon.

Last quarter I said we would have all 30 variants of the platform fully qualified for production shipments by the end of Q3. We have met all of these milestones. I’m excited by the customer reception for this new CSSP platform family that includes VEE and DPO as well as our internally developed technologies called Intelligent Brightness Control or IBC and Background Color Compensator or BCC. These technologies further enhance display quality and lower power consumption in smartphone, tablet and embedded pico projector applications.

During our July 31, conference call, I stated that we had initiated ArticLink III VX evaluation and design activity with a number of Tier 1 and Tier 2 smartphone and tablet companies and that we believed several of these engagements would lead to initial production shipments in Q4. At this time, we believe we will accomplish this goal. However, we underestimated the level and complexity of each unique customer interaction required to support the implementation of RGB to MIPI bridging.

For this reason we are not forecasting the upside, I had envisioned delivery in Q4. These lost opportunities and delays are frustrating but I have made the necessary structural and process changes that will enable us to execute more efficiently with our ongoing RGB to MIPI engagements.

During our last conference call, we touched on the subject of expanding our ArticLink III strategy to include bridge only applications. We tested this strategy and during Q4 we will formally launch the ArticLink III VX platform family.

In a large number of designs, smartphones and tablets required the use of a device to bridge a mis-match between the output of an application processor and the input of a display panel. Our ArticLink III VX and VX platform families support most of these bridge requirements and consume less power than competitive solutions.

The customer decision to use a bridge display is made very early into design cycle, whereas the decision to adopt new technologies such as VEE and DPO occurs later in the design cycle and involves different functions within our customer’s organizations.

By selecting the VX, the customer gets the unique value proposition of solving their must have requirement of the bridge, while also getting the additional time to evaluate the benefits of VEE and DPO with no upfront risk. Our top priority is to convert every VX opportunity into a VX architectural win.

The expansion of our ArticLink III strategy to include bridge-only applications has enabled us to initiate reference design or qualify vendor list engagements with multiple new application processor companies. We will update you as these engagements progress.

Last quarter, I stated we would initiate production shipments on a new handset Smart Card activity design towards the end of Q3. And these shipments have begun. I also expected another design win to enter initial production in early Q1 of 2013 and this remains on track. During Q3, we won two additional architectural designs for Smart Card activity. One of these is in the handset that is scheduled to move into production in Q2 of 2013. The second is in a cellular conference phone that will undergo market validation to support the customer mix, a production commitment.

Moving to our Smart Card activity focus, during our May 1 conference call, I stated that we initiated sampling of ArticLink II CX CSSP family in February. During the July 30 conference call I stated we were on schedule to receive our first production devices during Q3. These key milestones have been met.

Our lead customer for the CX platform is CertiVox. CertiVox has successfully completed initial testing of their encryption engine and key exchange algorithm on the CX. This allows CertiVox to move to the next phase of design optimization by taking advantage of the programmable fabric in CX resulting in improved performance and lower power consumption. This project continues to stay on schedule.

During our May 1 conference call, I also described our new Orion Reference platform for Cortex’s instruments Sitara processor. As a follow on to Orion, we later announced our CSSP reference platform called the BeagleBone Camera Cape for one variant of the Sitara processor family. This marked our entry into the catalog CSSP market.

TI is focused on rolling out its catalog strategy for the embedded market. This large and rapidly growing market is highly fragmented with many customers and countless design variations. TI is using a two-prong strategy to capture this market. First, using their BeagleBone reference design, TI presents customers with a general embedded processor solution that spans multiple applications by supporting function specific ad-on-boards called Capes.

During Q3, a TI partner introduced a Camera Cape that includes a QuickLogic camera interface CSSP. Customers could now order this CSSP with a pre-assigned catalog part number. We have several architecture design wins for our camera interface catalog CSSP that are currently scheduled to move into production during the first half of 2013. We are working with TI on a second cape opportunity for the BeagleBone reference design.

The second prong of the TI strategy, addresses larger vertical opportunities that are within the embedded markets. We are working with TI on an early stage vertical opportunity and we will give you updates as we progress.

Let’s take a moment to recap what I view as the important takeaways from this conference call. In the pico projector market the transition from Micron’s Pop Video to General Imaging ipico projector caused an interruption in what I view as an otherwise very positive trend.

Beyond General Imaging we have also won several new designs with PDI and have solid interest from other major players. All 13 provisions of ArticLink III VX have been fully qualified and are available for production shipment. Based on our customer engagement experiences in Q3, we have made the necessary structural and process changes which are enabling us to execute more efficiently.

We have defined our ArticLink III VX strategy and more formally roll that out during Q4. Early results and customer feedback suggest this will be a very successful strategy for faster customer adoption of our VEE and DPO technologies.

We have successfully passed a critical milestone with our ArticLink II CX partner CertiVox and remain optimistic in the long-term potential for this highly differentiated program.

As evidenced by our first catalog CSSP launch with TI, our Smart Card activity strategy of working with application processor partners to better leverage our R&D across multiple opportunities is showing merit.

Let me turn the call back over to Ralph for Q4 guidance and I will rejoin for closing remarks.

Ralph Marimon

For the fourth quarter of 2012, we are forecasting new product revenue will be approximately $1.6 million plus or minus 10%. We are forecasting flat revenues for several reasons. We estimate it will take one quarter for the ipico projector to absorb the ArticLink II VX inventory initially targeted for Pop Video. While we anticipate an increase in smartphone customers initial production shipments that several new designs are on the bubble between Q4 and Q1.

Finally we anticipated decline in broadband datacard and secure access datacard shipments. We are anticipating modest bookings for the aerospace test and instrumentation sectors and are estimating our mature product revenue will be approximately $2.1 million. In total, we are forecasting, revenue would be approximately $3.7 million plus or minus 10%.

As in prior quarters, our actual results may vary significantly due to schedule variations from our customers which are beyond our control. Schedule changes for existing opportunities and projected production start dates for new opportunities could push or pull shipments between Q4 and Q1 and impact our actual results significantly.

On a non-GAAP basis, we expect gross margin to be approximately 45% plus or minus 3%. The gross margin reflects lower production levels which affects our manufacturing efficiency. We are currently forecasting non-GAAP operating expenses to be $4.2 million, plus or minus $300,000. Non-GAAP R&D expenses are forecasting to be approximately $1.8 million. The increase in engineering expenses is due to additional hires we expect to make during the quarter. Our non-GAAP SG&A expenses are forecasted to be approximately $2.4 million.

Our other income, expense and taxes will be a charge of up to $60,000. Our stock based compensation expense during the fourth quarter is expected to be approximately $600,000.

At the midpoint of our guidance, our non-GAAP loss is expected to be approximately $0.06 per share. We expect to use approximately $2.5 million in cash, the increase in cash usage is primarily due to the lower revenue levels and lower result in margins.

Before we move to the question-and-answer section of today’s call, let me turn the call back over to Andy for his closing remarks.

Andy Pease

I would like to take a moment to give you my perspective on QuickLogic. I believe we have made substantial progress during the last 10 months and have established momentum necessary to deliver revenue growth in 2013. Going forward, we are confident, the relationships, we continue to develop with customers and partners will drive significant design activity and revenue growth in 2013.

Thanks for your continued interest and support for those of you that are on the East Coast bearing the brunt of Hurricane Sandy, our thoughts and prayers are with you.

This concludes our prepared remarks. And we would now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from Quinn Bolton of Needham & Company. Your line is open.

Quinn Bolton – Needham & Company

Hi Andy, Hi Ralph. Hi, I apologize, my cellphone dropped during the prepared comments. So, if you’ve covered this already I apologize. But you had mentioned in the script that you had made some structural changes, perhaps some personnel changes with respect just sort of the VX III and the fact that it had taken a little bit longer. But it feels like you’ve got a new point in place. Can you elaborate a little bit more on what changes were made, and why do you think this fix will sort of accelerate the time to market?

Andy Pease

Yeah Quinn, just at a very high level we have made some pretty significant structural changes within our engineering organization, particularly within what we call our SSG people that do the implementation for our customers, rather I not get into any details in terms of personnel. We are doing that as we speak. And we have actually – seeking out new personnel that would mandate each organization.

And in terms of process, we have put in several processes in place that will make us more efficient and more effective and leads our processes improvements are ongoing. But we’ve already seen a marked improvement.

Quinn Bolton – Needham & Company

Andy, it sounds like it maybe more on the implementation of some of those customer designs rather than on the sales pipeline or sales funnel itself. Is that accurate characterization?

Andy Pease

Yes it is.

Quinn Bolton – Needham & Company

Okay, great. And then just sort of looking into 2013, obviously you’ve had the change in the Pop Video that you discussed but several other pico projector wins, I know you’ve got a number of VX III design sort of on a bubble for Q4 to Q1. But just sort of looking more broadly at the year, I assume that the smartphone opportunity is still a much larger opportunity relative to pico projectors. But could you perhaps size those two opportunities, I’m sure you can’t give us dollar figures but perhaps relative to each other how you see the relative size for those opportunities as you look out for calendar ’13?

Andy Pease

Well Quinn, this is really a matter of public record. But the pico projector estimates that we’ve seen, size of market is about 50 million pico projectors by 2013. Needless to say the smartphone market is – several orders of magnitude larger than that of today. So, clearly smartphone is a large market that we’re going after.

Quinn Bolton – Needham & Company

All right, now I understand that the total units of the smartphones is much larger, I thought there was only a subset or smartphones though that required the sort of abs processor to display bridge and so that that might make it a slightly smaller chain than the entire smartphone market, I think I’ve got the interest, sounds like smartphones are much larger.

Andy Pease

Right.

Quinn Bolton – Needham & Company

Thanks very much. I’ll turn it back to the queue.

Andy Pease

Thanks Quinn.

Operator

Thank you. Our next question is from Krishna Shankar, Roth Capital. Your line is open.

Krishna Shankar – Roth Capital

Yes. So, some of the smartphones which appear to sort of been pushed out in the production ramp. Essentially you still have those designs and they’re going to ramp up in Q1 versus Q4, is that sort of how we should think about it?

Brian Faith

Yeah, this is Brian. So, as Andy said these are kind of on the bubble between Q4 and Q1 and that’s basically the range of what we’re working at right now.

Krishna Shankar – Roth Capital

Okay. And then….

Andy Pease

And Krishna, just before this closure, there have been some that we’ve missed with an individual launch, but we have not missed with any customer. So, in the case where we’ve missed the timing of the launch, the customer has actually pushed us to the next launch. So, to my knowledge there is no customer that is that we’re not engaged with because of this.

Krishna Shankar – Roth Capital

Okay. And then, can you talk about the market opportunity for the BX product sampling that’s a simpler product to designing at an earlier stage in the designing. Can you talk about the revenue opportunity there versus the VX? And is this the same sort of mask set or do you strip out from functionality, what’s the difference between the BX and VX in terms of the design and implementation?

Brian Faith

So, this is Brian, I’ll take that question. From an implementation point of view, you can divide ArticLink III into two pieces, the bridge and the visual enhancement piece. So, the bridge aspect is identical between VX and BX. So, that part of the design first happened or are we still supporting that. As mentioned that’s a must have and happens earlier in the design cycle so we are hoping that that’s going to accelerate some of the time to adoption. We’ve actually seen increased interest as a result of us doing a soft launch of the Family elite customers. So, they’re positive about the way this is going to change our design and architecture win profile.

In terms of the differences of the device itself, obviously BX is just a bridge so it is going to be lower margin, I don't think we’re ready at this point to say exactly what that’s going to be, it will be lower than the VX that has the added value. And in terms of actual units for each, I don't think we’re in a position right now to quantify between the two. As Andy mentioned, our goal absolutely is to convert anything that is a BX architecture win to a mass production win through the saving the VEE and DPO.

Andy Pease

The key point here Krishna, remember is when we get a BX designed into a board, when we upset to a VX, there is absolutely no engineering refer on a hardware point of view required by the customer. It’s a pretty identical footprint its signal path from the apps processor to the display is identical. All we do is enable these.

Krishna Shankar – Roth Capital

Okay. And then with BX given that its pure bridging functionality and it’s an earlier stage in the design of the apps processor. Would there be the potential for also selling that as soft or hard IP macro where you could realize some IP licensing and royalty revenues going forward?

Andy Pease

Well, all these bridging applications are actually standard IP, they consist of MIPI, RGB, LBDS and those are all standard IP blocks and frankly everybody in the industry has. So I don't think there is really an opportunity for us to sell IP – standard IP, that’s not a business model.

Krishna Shankar – Roth Capital

No, I was just thinking about providing the customer the flexibility of an IP block which can do multiple protocol conversions. And as you said, I mean, sort of adding value on top of the standard IP.

Andy Pease

Yeah, I don't think we’ve – we implied that we have got this flexible IP that can somehow transform itself from MIPI to LBDS and that’s not true. We don't have that. We just utilize standard MIPI LBDS blocks which, by the way – that’s what the customer is looking for.

Krishna Shankar – Roth Capital

Okay, got it. And then on the pico projector, several new customers, it’s nice to see that design wins for that broaden out to customers rather than Micron. Can you talk about some of the customer wins there and the potential for volume ramp with detailed discussion – it sounded like you had two or at least three new customers ramping with the pico projector technologies?

Andy Pease

All right. The first General Imaging as we said is really a sales and marketing company. And they actually acquired a license for the Pop Video. And the only difference is they used a much brighter light engine. So, I’m not really at liberty to say who they obtained license from. If you look at the ipico projector, it looks virtually identical to the Pop Video except it’s white instead of black. And they have already launched this on multiple websites and are apparently going to put this in some retail app stores in which they already merchandize a GE digital cameras.

With that, PDI, those are the guys that actually created Pop Video. And they are going to be launching two new products, filed at Thanksgiving called Go-Social and Go-Big. These two products Go-Social actually looks just like the Pop Video, it is same in color except it uses that same much wider light engine. Go-Big is wide, white ipico and it actually has a charging function in it so the unit doubles of the charge.

And then finally, the PDI guys want to launch an Android pico projector. And if you look – think about it, Android is really the larger smartphone market. And they plan on doing that prior to this upcoming Chinese New Year.

Krishna Shankar – Roth Capital

Great, thank you. And my final question you mentioned reference designs with several smartphone apps processors. I know you’ve highlighted Qualcomm reference design, can you give us an update on the apps vendors that you are working with and reference designs?

Andy Pease

Yeah I wish I could Krishna, but if you notice I did say that these are all new application processors. So this is companies beyond the ones that you already know about. Unfortunately we can’t say much more than that just yet.

Krishna Shankar – Roth Capital

Okay. Thank you.

Andy Pease

You’re welcome.

Operator

Thank you. (Operator Instructions). Our next question is from Robert West of NI Technical Research. Your line is open.

Robert West – NI Technical Research

Hello, good afternoon, Andy and thanks for taking this call. I wanted to ask you a question if I could back on the Sitara product line, the BeagleDot. Did I understand correctly that you did have a little revenue on Q3 and will have more on Q4 or did I misunderstand that?

Andy Pease

I think you may have misunderstood that, Bob. We actually did the launch of the BeagleBone in line with our camera cape and we actually did an eight week joint tour with TI. But we don’t believe that product will shift to this until 2013. Frankly, that’s always been the plan.

Robert West – NI Technical Research

Okay. Thank you for that clarification because I just missed that. I have a question on the CX as well. How are you moving through the process of bringing that from sampling to production status can you give any color on that?

Andy Pease

Well, the CX now as I said in my prepared remarks, is in production status and it is frankly is samplable. As a matter of fact the CertiVox people are using working versions of the CX. And as I’ve said they’ve already ported their software onto the CX and are currently optimizing it right now.

Robert West – NI Technical Research

Okay. Very good. And thank you for that clarification. Does that suggest that you were asked about a quarter or two back that first CX revenue for CertiVox would possibly be in Q4 ‘13. Does that still look like a good estimate to you?

Andy Pease

Right now after we – just meeting with the CertiVox guys, we believe that that is still on schedule. But you know, there is a lot of time two year in Q4 of 2013. But so far things are looking very good.

Robert West – NI Technical Research

Excellent, that’s good, Andy. Thank you for that. I wanted ask you – or pullback and ask you a couple more questions of broader category. Back at the spring ROTH Conference you noted that the typical OEMs smartphone and tablet volume runs 500,000 to 5 million units annually. And does that continue to look a good planning number for this marketplace?

Andy Pease

Yeah, we would say that our Tier 1 smartphone definitely is in the 500,000 and I believe I saw that at 2 million, but 5 million would be a super high runner. That maybe a little higher runner than we would see because again we target high-end smartphones but that’s still looks valid, the 500,000 and we see that by the way.

Robert West – NI Technical Research

Okay. Well, that leads into a second question you have a limited market experience today. But I wanted to ask give or take a little, if, your initial group of smartphone volumes have fallen within these parameters?

Andy Pease

Brian.

Brian Faith

Yeah, actually, Bob this is Brian. So the smartphones we have today have fallen into the low end of that range definitely.

Robert West – NI Technical Research

Great. Thanks, Brian for that update. And a follow on in this general area for investor planning purposes as $2 give or take a little a good planning estimate to years for your visual and connectivity products that you’re selling into the smartphone and tablet markets?

Andrew Pease

You know, Bob, we have such a wide range of ASPs. It’s kind of hard to nail down an average ASP. Certainly we have products that sell higher than that and we have product that sell lower than that in the kind of defense, but – so I’m not sure how to answer that and really give you any accuracy to tell you the truth.

Robert West – NI Technical Research

Okay. Thank you for the color – for the color on that in any case. I think that that’s all I’ve got. I really thank you. I feel good about the conference call and good results and best wishes for Q4.

Andy Pease

Thank you. Thank you, thank you Bob.

Operator

Thank you. I’m not showing any further questions in the queue. I’d like to hand the call back over to Mr. Andy Pease for any further remarks.

Andy Pease

Well, thank you for joining us again. Our Q4 2012 earnings call is scheduled for February 6, 2013 and we look forward to hearing from you and talking to you then. Thanks again.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This conclude today’s program. You may all disconnect. Everyone have a great day.

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