Autodesk Inc (ADSK) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Moldflow Third Quarter 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. As a reminder, this conference call is being recorded. I would like to now introduce your host for today's conference, Mr. Roland Thomas, President and CEO of Moldflow and Ms. Suzanne MacCormack, Chief Financial Officer. You may begin.

Welcome and thank you for joining the Moldflow Corporation Conference Call for the reporting of results for third fiscal quarter of 2003. Sue and I will make a series of prepared remarks and we will then take questions. Before we begin with those remarks, I will ask Sue to remind all listeners about risks and uncertainties surrounding forward-looking statements.

Thank you, Roland. During our conference call today we will be making certain forward-looking statements including statements related to our future business prospects and outlook. Pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, please note that any statements contained in this conference call that are not based on historical facts, are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include those detailed from time to time in reports filed by Moldflow with the Securities and Exchange Commission including the company's filing on Form 10K for the year ended June 30, 2002 and subsequent quarterly and annual filings.

Specific risk factors are also described in the press release issued by the company today in which we report our third fiscal quarter of 2003 financial results. Our comments will summarize the financial results for the third fiscal quarter and the nine months ended March 29, 2003. For more complete details of these financial results, please refer to the press release that was made earlier this morning. In addition, please note that during the course of this call we will be making reference to certain non-GAAP or pro forma financial results and measures. Reconciliation of these non-GAAP measures to the closest GAAP measures for each relevant period is also available now on our website, www.moldflow.com. Roland?

Thanks, Sue. I'm pleased to be able to report another solid quarter where we again achieved or exceeded what we said we would do as we did in the first two quarters of this year. Further, I'm pleased that the third quarter showed continuation of the trends of improved predictability and closure behavior in our customers and prospects. I'm also very encouraged by the fact that the signs of improvement we have been seeing have the appearance of being sustainable. We are reporting revenue to the third quarter of 2003 which were above the expectations we had previously set. We achieved revenues of $9.5 million which was an increase of 6% sequentially from Q2 '03 and consistent with the corresponding third quarter of fiscal year 2002. In the first two quarters we saw the leverage in the business model demonstrated by the overachievement in revenue flowing to the bottom line. This quarter, we were able to manage the additional operating costs resulting from the acquisition of CPI and still show a positive pro forma operating result by actively managing and restructuring related aspects of our development activities to balance that cost structure going forward.

Sue will provide more details regarding our operational performance for the quarter in just a few moments. Comparing the first nine months of fiscal year '03 to the same period in fiscal year '02 gives us further reason to believe that the market has at least leveled out. The overall revenue comparison in the first nine months of fiscal year '03 shows results which are very similar to the same period of FY '02. As a generalization, what I'm hearing from our major end user customer segments seems to indicate that they are moving their sentiment from "hunkering down" to planning how they will build up in a challenging environment.

Seasonally, this is a strong quarter from Japan, so we expected and in fact saw, that Japan would represent a more significant component of the revenue this quarter. Recognizable leading companies such as Canon, Matsushita Electric, Nikon, Seiko Epson, Sanyo and Toshiba, continued to expand their use of Moldflow's Design Optimization solutions by adding new modules or additional phases of existing modules within their organizations. The rest of Asia saw a more challenging environment with greater concern over the impact of the war in Iraq and the impact of the spread of SARS throughout the region.

For our business in Europe, we did not see any significant underlying trends along vertical lines of our end use customers, although in Europe and North America, we saw a number of sales to customers from the medical and professional care industries, notably Phillips Oral Healthcare, Gillette, Diam and Estee Lauder. The automotive industry was uncharacteristically soft in the quarter, primarily driven by pressures in the T01 suppliers and primarily in the United States. In the U.S. we saw the continued implementation of our Moldflow Manufacturing Solutions products, or MMS, within Tyco Electronics which is follow-on business to the large orders that we saw in Q1. We also saw Interlox, a high-quality North American manufacturer of modular plastics conveyor belting, expand their already large implementation of MMS.

Looking to our product family, the Design Optimization products accounted for 86% of total revenues in Q3, growing in absolute sense sequentially from Q2. We were pleased with these results as it represented another quarter of sequential grown for the Design Products and further evidence of improved performance from that product line. Revenues for Manufacturing Solutions products during the third quarter represented 14% of product revenues. As we have commented on in the past, we continue to see lumpiness in the quarterly revenue from these products which is largely driven by the overall larger deal sizes and longer selling cycles. Further, to the same point, we saw a number of deals delayed at the end of the quarter that we continue to pursue.

Once again we saw that our strategy of taking our Shotscope products from small pilot implementations followed by further penetrations of those accounts or "pilot to plant to corporate" as we call it, is appearing to take hold as the majority of the quarter's sales were additions to installations in existing customers.

Looking at our products, we have been keeping you up to date on the progress towards our vision of a common hardware platform and integrated software environment on the manufacturing shop floor which we call Moldflow Manufacturing Solutions, or MMS. I have been indicating that the next phase of the integration would be released in the March quarter following on from the hardware integration phase completed and released during the last fiscal year. Version one of MMS was released on schedule and incorporates the functionality of MPX and Shotscope, an applications framework which contains a new level of modularization. This will provide greater flexibility when optimizing the components of a system to meet a specific set of requirements and enable more efficient implementation of systems requiring the combined functionality of what were the MPX and Shotscope products.

The Moldflow International User Group was held in Pittsburgh from April 1st to April 3rd. We were able to attract more than 175 users of all Moldflow technologies who traveled from across the United States and 14 other countries despite concerns about international air travel arising from war and disease. Many participants also took advantage of the pre and post conference training and certification opportunities offered. At the conference, we successfully previewed MPI 4.1 which is planned for release this summer. The release is targeted to extend our capabilities to analyze the warpage of true three dimensional components that are made from fiber filled materials which are common materials in structural or load bearing parts. It also includes simulation of capabilities in two new fields by supporting the simulation of (indiscernible) dynamic (indiscernible) system and Trexel's new cell microcellular foam which both are variations of the injection molding process aimed at faster production or higher production quality. We also included a range of tools aimed at increasing the productivity of the Moldflow Analyst.

I thought it might be appropriate to take this opportunity to restate the four fundamental objectives that we laid out at the beginning of the year as imperatives for creation of long-term shareholder value in our business and to summarize our progress toward these objectives to date. Number one was to manage the business conservatively within the reality of the economic climate while remaining positioned to capture the upside potential when corporate spending levels returned. We have continued to manage spending tightly and have not strayed from our plan. As a result, while we entered our year with an expectation of breakeven at the pro forma PBT line, we now expect to achieve pro forma PBT of well over a million dollars.

The second was continue the pace of innovation that we have become known for, in order to insure that we retain customer loyalty, protect our maintenance revenue base and have strong competitive position. I've just summarized for you some of our most recent product announcements as I have in earlier calls, all of which we believe accomplish these objectives. In addition, maintenance renewals continue at a very high rate, validating our position on this. Third was to seek out opportunity for expansion of our business through potential acquisition. The CPI acquisition provides us with the opportunity to expand the breadth and depth of our manufacturing product line. As CPI was an established player in a relatively limited geographic segment, integration plans are in place to deliver CPI products with English and local language support capabilities into additional geographical markets over the coming year. Fourth, to continue our long standing commitment to conservative financial reporting and strong corporate governance standards. Our board and management team remain committed to pursuing Moldflow's business opportunities in a manner consistent with the highest ethical and professional standards. We have been active in overseeing our compliance with the new regulations and adoption of practices in this area.

Let me now turn to the outlook. In the previous two years, the transition from our third to our fourth quarter was accompanied by a worsening in the economic environment and buying behavior of our customers which had a consequential effect on our revenues. I'm pleased to say, based on current visibility, that we have not seen that phenomena this year, although of course, there are remaining uncertainties surrounding recent world events. As a result, our guidance of Q4 will be for revenues which are sequentially up from our Q3 guidance and in a range which is similar to our actual Q3 results. I will now hand over to Sue for more detailed review of the operating results and guidance for the future.

Thank you, Roland. Total revenues for the quarter ended March 29, 2003 were $9.5 million. This is up 6% sequentially from the December quarter and was about the high end of the range of expectations we set out for the quarter in our last quarterly earnings call. Both favorable currency movement, which accounted for approximately one half of the sequential growth, and a higher level or orders, in particular for MPI products in the Japanese market, drove the over-achievement. The level of revenue in fiscal Q3 was essentially unchanged from the same quarter a year ago. Currency movements and the weaker dollar did provide a benefit to us in the quarter on a year over year basis of approximately 10% and on a local current basis, total revenues were down approximately the same amount. In a similar way for the first nine months of the year, total revenues of $26.7 million were essentially flat with the same period of the prior year while on a year over year basis the positive effect of currency movement was approximately 6%.

On a regional basis for the quarter, we had approximately 35% of our revenues in Europe, 40% in Asia Pacific and 25% in the Americas region. On a year to date basis for the first nine months, our revenues by regions were 36% in Europe, 36% in Asia Pacific and 28% in the Americas region. Revenues for the third quarter compared sequentially as follows. 33% sequential growth in Asia Pacific, approximately flat in Europe and 13% lower in the Americas. This sequential result was not surprising in that it is similar to seasonal patterns we have seen in prior years. As the March quarter has typically been a strong quarter for our Japanese operations due to the traditional Japanese companies' fiscal year end in March. Sales in Japan represented 28% of our total worldwide revenues and 34% of our total worldwide product revenue in fiscal Q3.

When compared to the same quarter of the prior year, revenues for the third quarter were up in Europe and Asia, 4% and 19% respectively and down 22% in the Americas. We had 34 quota carrying sales reps on board at the end of the quarter. Product license revenues were 4.6 million and these revenues were up sequentially 9% from Q2 and down about 8% from the comparable quarter of last year. We added 77 new customers in the quarter and approximately 40% of our license revenues came from these new customers. Service revenues were $4.9 million and were sequentially up 4% and grew by 10% over the same period of last year. Within service revenues, maintenance and support revenues represented approximately 87% of the total and were up by 13% year over year due to growth in the installed base from new product sales over the last year, continued strong attach rates on new product revenues and from favorable foreign exchange movement.

Revenues from other services, including training, consulting and material testing, were lower by approximately 5%. Revenues by product families for the quarter were as follows. Design Solutions products - $4.0 million or 86% of total license revenues, Design revenues, while down 6% from Q3 of last year, increased sequentially by 21%. During the quarter we shipped a total of 130 seats of MPA and MPI bringing us to cumulative combined seat counts of just under 7,200 seats. For the Manufacturing Solutions products, we recorded $627,000 in revenues or 14% of our total software revenues. This compares to $800,000 of revenue shipped in the same quarter a year ago in which these products represented approximately 16% of our product revenues. This level is indeed sequentially lower by 34% than the revenues from these products in Q2 and reflects the lumpiness of this product line revenue which is characterized by larger deal sizes.

We shipped 49 new seats of the Shopfloor products this quarter, bringing us to cumulative seat counts of 1,776 installed seats of these products. Turning to our net results, we reported a GAAP net loss of 6 cents per share in the third quarter and this compares to a GAAP net income per diluted share of 5 cents reported in the same quarter a year ago. Our pro forma net income results for the quarter was $99,000 or one cent per diluted share. This compared to pro forma income of 6 cents per diluted share in the same quarter a year ago. These pro forma results for the third quarter are of each of fiscal years 2003 and 2002 exclude non-cash amortization changes related to acquired intangible assets and in 2003 exclude certain charges, impairments and write-offs related to our acquisition of CPI.

Again, I'll refer you to the supplemental information provided in the press release issued today for a comprehensive reconciliation of these and all other non-GAAP amounts. For the first nine months of 2003, our pro forma net income per share was 6 cents and compares to 12 cents in the same period of the prior year. These pro forma results for the first nine months of each of fiscal 2003 and 2002 exclude non-cash amortization charges related to acquired intangible assets and in 2003 exclude the previously mentioned acquisition charges and in 2002 exclude a non-recurring net gain on the sale of certain long term assets and investments. Pro forma income from operations, again excluding non-cash amortization and acquisition related charges, was $277,000 in the third quarter and was above our range of expectations due to the higher revenues in the quarter.

The CPI acquisition was completed in the early part of January and the operations of this business after the combination were neutral to pro forma earnings per share in the quarter, excluding the impact of the non-recurring charges and this compared favorably to our expectations. The previously mentioned acquisition related charges totaled approximately $507,000 net of tax. The charges include some severance cost related to the consolidation of R&D activities and staff, certain write downs of assets including intellectual property and inventory that became obsolete as a result of the planned product and technology strategy which is to incorporate the CPI product into our current production monitoring software offering.

Interest and other income net for the quarter was $157,000 and was below our forecast due to hedge related costs. With respect to income taxes, the provision for income taxes in fiscal Q3 was in line with our previous forecast. On the balance sheet, cash and marketable securities at March 29th were $50.3 million with no debt, an increase of $1.1 million over the prior quarter end. Cash generated by operations was $1.4 million during the third fiscal quarter. Capital expenditures including capitalized software costs were $387,000 and the resulting free cash flow was $1 million. This level of free cash flow was above or guidance level for the quarter due primarily to higher deferred maintenance revenues resulting from the overall higher level of business in the quarter. Net unrealized foreign exchange translation gains on cash invested overseas, primarily in the Australian dollar, increased our U.S. cash balances by $832,000. Finally, accounts receivable at $6.8 million represented 64 days sales outstanding at the end of Q3, just two days lower than the same quarter of last year and consistent with historical trends, was up sequentially by 8 days, This level continues to be lower than our own average DSO targets and reflects continued success in cash collection efforts during the quarter.

I'd now like to provide you with a view of our business outlook for the future and in doing so, I remind you that this summary will include forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those projected. So you should refer to our Form 10K relating to the fiscal year ended June 30, 2002 and to today's press release for a description of those risks and uncertainties. In addition, please refer to our website for a full reconciliation of non-GAAP measures contained in our outlook to the relative GAAP measures. We have said in each of our earnings calls this year that we built our fiscal year 2003 operating and financial plans conservatively and, accordingly that we planned to manage to breakeven pro forma profit before tax and a modest increase in free cash flow over the course of the fiscal year. We are tracking well ahead of that plan at this point. With our first nine months results and current expectations for Q4, we project pro forma PBT of approximately $1.4 to $1.7 million for the year and we expect that this will result in a free cash flow of $700,000 to $1 million over the course of the full fiscal year.

For fiscal Q4, with our current visibility, we expect that our total revenues will be in the range of approximately $9.1 to $9.6 million. We expect our gross margin on total revenues in Q4 to remain at approximately 88 to 89% and we expect that total expenses for R&D and SG&A will be slightly higher than Q3 to a level of approximately $8.4 million. The expected increase in operating expenses in Q4 was due to a combination of factors including higher marketing costs related to our international user group conference and the upcoming NPE tradeshow, a major biannual plastics industry event, and higher sponsored research costs. Therefore, in Q4, we expect our income from operations to be between a loss of $200,000 to income of $100,000 excluding non-cash amortization. We expect other interest and income and expense net to be approximately $200,000 for the quarter and therefore, we anticipate pro forma PBT to be in the range of breakeven to $300,000 for the June quarter. Further, consistent with the first three quarters in our plan, we expect we will have a total income tax provision of approximately $225,000 in fiscal Q4 resulting in a total income tax provision of $900,000 for the full year. These factors, taken together, result in our expectations that projected pro forma earnings per share in the fourth quarter will range from a loss of two cents to income of one cent. And finally, we expect positive free cash flow in the range of $500,000 to $800,000 in the fourth quarter. And with that, Roland, I'll turn it back to you to summarize.

Thanks, Sue. So to summarize before I open to questions, I believe that we have continued to demonstrate the ability to execute well by delivering at or above plan. Our market position and financial resources remain strong. These recent results add to the confidence which began to form in Q1 and has continued to build in Q2 and now in Q3. While our end use markets are not seeing explosive growth, they do appear to have stabilized and are building back some spending into their plans. If this continues, and we have no reason to believe that it won't, we would expect to see a return to a moderate level of year over year growth in revenue as the calendar year progresses. We have said that we maintain the capacity to capitalize on our return to growth when capital spending returns in our end markets. Within this context, our focus will be on earnings growth and realization of the leverage that underpins the business model. And with that, we'll now be happy to take questions.

Thank you. If you have a question at this time, please press the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Okay, our first question comes from Dennis Wassung from Adams, Harkness & Hill

Thank you very much. A couple of quick questions. First off, I missed the number of new seats in the Design Solutions section of the business and the cumulative seat total.

Dennis, we did 130 seats of Design Products so the cumulative total is just under 7,200.

Okay. And you said 49 new seats in manufacturing brining it to 1,776?

Correct.

Okay, great. Thanks. Looking at the - - first on the balance sheet, the deferred revenue jumped pretty handily in the quarter. If you could just comment on that - - is that mostly new maintenance contracts coming online or if you can just talk a little bit about that, it would be helpful.

Sure, it is indeed virtually 100% deferred maintenance contract revenues. And that comes from a combination of two factors. Typically we see a seasonal spike in that number due to the fact that a number of - - a disproportionate percentage of our maintenance contracts renew in this quarter, in the March quarter, as well as the strong quarter we had in Japan meant that we had a significant spike up.

And lastly, if you could talk a little bit more about the manufacturing side of the business. Obviously lumpy business, down as a percentage this quarter and sequentially - - any signs that that will return in Q4? And I guess what do you see as sort of the more of a steady state percentage of the business? Obviously, you're trying to grow that piece. Where do you think that could be for the year and for next year?

Dennis, the Q3 result, as we mentioned during the earlier comments, was viewed a simply a reflection of the lumpiness in the business so I don't see it as being anything intrinsic. The sort of growth rates that we have been experiencing over more systemically over a number of quarters, put it in the 25-35 range and I don't see any reason why systemically it would change out of that range.

So 25 to 35% growth?

That's where it's been, that's where it's tracked sort of systemically and I don't really see any reason why it would change systemically.

Okay, and lastly, if you could talk about the MMS 1.0 release, obviously sort of a new product release here combining a couple of products. Other than just adding MPX and Shotscope together, what else is involved with that product and I guess how receptive are customers to this new integration of products and does that give you an additional or a higher price tag that goes along with that?

All right. The primary focus of this really is the approximate number of specific breaches - - the primary focus really was to create a new underlying applications environment that does allow us to bring these products together. But not just to accumulate them, to be able to deploy them in a more modular way. The implication of this from an installation perspective is that the usage patterns that a number of our customers have of different modules within our application suite, it differs from customer to customer and from their objectives to their objectives and this was seen as a little bit inhibiting with the totally bundled solution as it was before. So we see the ability to get more of the modules into more customers hands as the net outcome of all that. As far as how receptive it is right now, that's really too early to tell as the product has only just been released. The only comment I can really make to receptiveness is that the acme decision to structure it this way was done in response to what we saw from the market so it's anticipated that it will make that name.

Can you comment on the pricing on that and I guess the overall pricing environment in general?

The modulization doesn't have a net net significant change to the old pricing modules. The overall pricing environment really has remained pretty much unchanged throughout the course of the year.

Very good. Thank you.

Our next question comes from Jason Krashow from Braidt.

Hello. How are you guys doing? Nice job on the quarter. A couple of quick questions. The first, on the Manufacturing Solutions, you said that a couple of, I guess, deals were postponed or slipped at the end of the quarter. Can you give us sort of any idea of sort of what sort of size or sort of the magnitude of the deals that slipped and what sort of expectations you have for closing some of those deals sort of over the next couple of quarters?

I can't really speak deal for deal. But there's a typical spread of what we see in the manufacturing transactions there. The - - it's not that those deals have gone away and so the normal risks of closing any deal, we would expect to be able to close them in a sales cycle. It's not as if they've disappeared from the table, so we just continue to manage those deals as normal.

Okay, and the sales cycles for Manufacturing Solutions would be what?

I'm sorry?

The sales cycle as far as the length for Manufacturing Solutions is typically what as far as a time period?

It's typically in the 6, maybe a little more.

So 6 to 9 months type?

That's probably correct.

Great. Next question, just - - maybe a little bit confused on the guidance. I think, Roland, in your commentary you talked of Q4 to be sequentially up but then obviously I guess in the written guidance you're looking for about 9.1 to 9.6. Did I mis-hear that or am I misinterpreting sort of what the commentary was?

No, what I had said was that our guidance for Q4 was sequentially up from our guidance in Q3. Our guidance in Q3 - -

Oh, okay, I'm with you. With what the previous guidance was - - I'm with you. Okay, fair enough. Last question - - where do you guys stand on the share buyback is the first question. Obviously, you know, cash on the balance sheet still continues to look great and actually it grows. Have you guys, given these price levels, would you consider being a little bit more aggressive on the buyback?

This is always one of those delicate questions and we do still have the capacity to buy back more stock and we're balancing it against the other opportunities that we have for using our cash balance.

What's the status as far as how much you have left on that facility?

We have approximately a quarter of a million shares remaining on that facility that could be purchased.

250,000, okay. That's pretty much about it. Keep up the good work. Thanks, guys.

Next question comes from Sean Leonard from Praedium Capital Management.

Hi. Congratulations on a good quarter. I just wanted to follow up a little more and get a better feel for Design Solutions, whether or not we're actually seeing a return of demand in that business or if it's - - I guess, more specifically, out of the $500,000 sequential increase, do you think that - -what percentage of that is CPI and what percentage of that is local currency? What percentage of that is actually demand?

Well, just to be clear in the Design Solutions, CPI fits into the manufacturing side, so that doesn't feature into the Design Solutions.

So manufacturing was down even with CPI?

Yes.

Okay.

CPI, of course, ended up selling into a space where we had an existing product selling and we felt CPI gave us some additional advantage, so it's not a completely incremental piece as far as that's concerned. But the Design Solutions?

Suzanne E. Rogers MacCormack Yeah, on a sequential basis, approximately half of our growth came from currency and I think that holds true within the product families as well.

Okay, so but it doesn't apply to each side, so actually almost 10% sequential growth just on a pure demand basis?

That would be fair enough, right.

Great, that's outstanding news. Congratulations.

We have a follow up question from Dennis Wassung from Adams Harkness.

Hi, just a couple of more quick questions here. You talked about maintenance renewals being fairly high. Can you quantify that? Has that changed at all throughout the year? Obviously with the environment seeming to stabilize a little bit for you guys, it seems like customers are maintaining those maintenance contracts. Any change there and if you can add any quantification that would be great.

Yeah, Dennis, our renewal rates continue to be in the high 80% level, low 90% kind of level, varying by region and by product. And that, I think, reflects the continued technical nature of the products and the continued investments that we've been making on delivering additional functionality in the products. The products tend to become inculcated into the design process and the design review process. And so I think that's why we continue to see very high renewal rates.

Has that pretty much been stable throughout the last, call it 18 months?

It has. It has, we really haven't seen a drop off. Where we have seen a count drop off on a "one of " kind of basis, it has been situations where companies have been consolidated perhaps in the lower end of some of our markets as a result of economic issues. But across the entire maintenance base, it has not had a significant impact on us.

Okay, and a quick question on the buyback. Did you disclose the number of shares you bought back in Q3? And also, I'm missing the number for Q2. If you have that data, that'd be helpful.

We actually did not buy back shares in Q2 or Q3.

All right. And last question - - more on the cost structure. Looking forward here as we get into Q3, obviously expenses going up a little bit sequentially, will you start to see any benefit from the integration of CPI or I guess, what are your plans in terms of the cost model looking forward past Q4? Obviously, you haven't given guidance for next year, but what can we expect in the model here? Pretty much a flat cost structure going forward or, obviously, marketing and sales increasing in volume, but any helpful insights there would be great.

There's a couple of pieces to that. Q4 historically has some additional expenses. There are back end marketing expenses which tend to fall into Q4. As far as CPI is concerned, we had, when we acquired CPI, resulted in having some small development things in too many locations and what while we're adept at multi-site development, we were balancing that against the cost of the infrastructure being spread across a number of sites, so we reduced the number of people in development in our Wilsonville, Oregon site and then consolidated them along with some implementation activities into either the Melbourne or the Ithaca facilities. At the same time, we added some critical mass back to the CPI site, so we took some consolidating actions as a result of CPI. We don't plan anything broad based. However, we do have continuous improvements to more surgically optimize the business, an example being recently building a team to focus on implementation and develop systematic process to make implementation of our manufacturing products better and more cost effective. So there's a number of initiatives across the company, some of which relate to CPI and some of them don't.

Okay. A quick follow up there on the marketing and sales, sort of the increase from Q3 to Q4, sort of seasonal. Does that mean you probably expect to see that drop off from Q4 to Q1?

Yeah, I think if you look at our historical trends, you typically do see a bit of a drop-off because we tend to have some events costs in our fiscal Q4 specifically. As I mentioned, the NPE trade show and the user group, so we're looking, of the total $200,000, approximately increase in expenses that we see coming into the fourth quarter, the lion's share of that number is coming from these increased levels or events that are happening in the fourth quarter. So I think it's a fair assumption those are down a little bit in Q1.

Okay, great. Thank you, guys.

Again, if you have a question, please press the one key on your touchtone telephone. We have no more questions at this time and I'll turn the program back to you.

Okay. At this time I'd like to thank you all for your support and I look forward to speaking with you again as we report on our fourth fiscal quarter. Thank you and goodbye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a good day.