Avid Technology Inc (AVID) 2011 Q1 法說會逐字稿

Good day, and welcome, everyone, to the Avid Technology first quarter 2011 earnings results conference call. Today's call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Tom Fitzsimmons. Please go ahead, sir.

Good afternoon. I am Tom Fitzsimmons, Director, Investor Relations for Avid. I'd like to welcome you to today's call. With me today are Gary Greenfield, Avid's Chairman and CEO, and Ken Sexton, Executive Vice President, Chief Financial and Administrative Officer.

Before we begin, please note that this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements that relate to future results or events and are based on Avid's current estimates and assumptions. There are a number of factors that could cause actual events or results to differ materially from those indicated by these statements, such as our ability to execute our strategic plan and meet customer needs, competitive factors, or adverse changes in economic conditions. Other important risk factors and uncertainties appear in our periodic reports and other filings with the US Securities and Exchange Commission. In addition, our forward-looking statements represent our estimates only as of today, April 21, 2011, and should not be relied upon as representing our views on any subsequent date. We undertake no obligation to review or update these forward-looking statements, even if the estimates change.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles and may not be comparable to similar non-GAAP measures used or reported by other companies. The non-GAAP measures do not reflect all the costs associated with the Company's operations determined in accordance with GAAP. The most directly comparable financial measures calculated in accordance with GAAP and a reconciliation of GAAP to non-GAAP measures are contained in our press release announcing this quarter's results and are available in the Investor Relations section of our website at www.avid.com. For the purpose of understanding our future business model, we will also provide some forward-looking analysis on this call on a non-GAAP and GAAP basis. Some of our GAAP financial measures are not accessible on a forward-looking basis, and the differences between our future GAAP and non-GAAP financial measures could be substantial.

And now, I would like to turn the call over to Gary.

Thank you, Tom, and welcome to our conference call for the first quarter of 2011.

Our revenue for the first quarter was just over $166 million, which represents a 7% increase compared to the first quarter of 2010. This continues the momentum we experienced in the second half of 2010. This represents the fifth consecutive quarter of year-on-year revenue growth and the third consecutive quarter of positive non-GAAP operating earnings. This is also the first time since 2007 that we achieved a Q1 non-GAAP operating profit. First quarter revenue and earnings were improvements over the prior year and consistent with our seasonal expectations underlying our fiscal 2011 guidance provided at our last earnings call in February -- our last earnings call.

Having returned from the National Association of Broadcasters show in Las Vegas last week, we can sense great enthusiasm for the new products we announced, as well as continued momentum for the new versions of Media Composer and Pro Tools that we brought to market in the past two quarters. I will discuss more about NAB and our recent announcements in a moment, but first, I will turn the call over to Ken, who will provide more details on our first quarter financial results. Ken?

Thank you, Gary, and welcome to everyone on today's call.

Revenues for the first quarter were $166.3 million, an increase of 7% as compared to $156 million reported for the same period in 2010. The GAAP net loss for the first quarter was $5.1 million or $0.13 per share. This compares to a GAAP net loss in the first quarter of last year $13.5 million or $0.36 per share. The GAAP net loss for the first quarter of 2011 includes amortization of intangible assets, stock-based compensation, restructuring benefit, and related tax adjustments. Excluding these items, our first quarter non-GAAP net loss was $840,000 or $0.02 per share. This compares to a non-GAAP net loss of $0.12 per share for the first quarter of 2010. The items excluded from our non-GAAP results for the first quarter totaled $4.3 million and include amortization of intangible assets of $2.8 million, stock-based compensation of $3.7 million, a restructuring benefit of $2.2 billion, and a related tax adjustment of $55,000. The restructuring benefit recognized in Q1 was primarily related to lowering our estimate for severance costs related to our Q4 2010 restructuring plan.

I now will discuss the first quarter results in greater detail. The first quarter growth represents the fifth consecutive quarter of reporting year-on-year revenue growth. We had growth in products and services and across all major geographies. As I will discuss in a moment, the year-on-year growth in our video business was especially strong this quarter. The changes in currency exchange rates did not have a meaningful impact on our year-on-year comparisons.

Overall product revenue for the first quarter was $137.3 million, up 6.7% year-on-year. Our service revenue, which includes maintenance support, professional services, and training, was $29 million, up 6.3% compared to the prior year. Video revenues for the first quarter were $94.7 million, up 12% compared to the first quarter of 2010. Like the fourth quarter of 2010, we experienced good growth in most of our video product categories. We experienced growth in professional editors, shared storage, interplay asset management solutions, and broadcast products.

The professional editor sales benefited from the continuation of our up -- hardware upgrade promotion and customer excitement around version 5.5 of the Media Composer software. The increase in shared storage, media asset management and servers are related to strength in the overall broadcast market. Also, the growth in services was mostly related to the video business. Sales of our consumer video editing products were down year-on-year for the quarter. However, the new Avid Studio and the new version of Pinnacle Studio video editing software did not have the benefit of a full quarter of sales.

Now looking at audio. Audio first quarter revenues were $71.7 million, which was flat with last year. Pro Tools version 9 continues to generate significant excitement in the market, and Pro Tools 9 software sales were similar to those experienced last quarter and up year-on-year. The control surface business experienced good growth, with significant contributions from our Artist Series and our Systems 5 console sales. These growth areas were offset by slower sales for our recording interfaces and high-end professional products. The first quarter of last year benefited from a successful upgrade promotion for higher-end professional systems. We have positive reviews for our new Mbox recording interfaces and are excited about the opportunity presented by Pro Tools Native in the higher-end space going forward.

Now I'd like to discuss the first quarter results beyond revenue on both a GAAP and a non-GAAP basis. On a GAAP basis, we reported gross margins as a percentage of revenue of 52.1%, up 2.3 percentage points year-on-year and down 1.7 percentage points sequentially. Our non-GAAP gross margin was 52.7%, up 2% -- percentage points year-on-year. The first quarter benefited from strong sales of Pro Tools software, higher revenue on relatively fixed overhead costs, and a mix shift to some of the higher margin products in general. Our GAAP operating expense was 90 point -- $90 million for the first quarter, down $700,000 year-on-year and down $18.4 million, sequentially. The sequential decrease is largely attributable to the restructuring charges booked in the fourth quarter of 2010. Our non-GAAP operating expenses for the first quarter was $86.8 million, which represents a $3.8 million increase year-on-year and a $5.1 million decrease on a sequential basis.

The year-on-year basis on our comparison expense was down $2 million. This was offset by increases in our marketing program spend, increase in costs related to our offshore development teams, as we continue to balance the onshore and offshore mix and investments in our growth initiatives. The sequential decrease is largely related to lower commissions and bonus incentives as compared to the fourth quarter of 2010. The GAAP operating loss for the quarter was $3.4 million, an improvement of $9.6 million year-on-year. Excluding the items I mentioned previously, our non-GAAP operating profit for the first quarter was $941,000, which represents a $4.8 million improvement compared to the first quarter of 2010. Our first quarter non-GAAP profit was the third sequential quarter of non-GAAP operating profit. It is also the first time in four years that we reported a non-GAAP profit in the first fiscal quarter.

Now turning to the balance sheet. We ended the first quarter with $33.2 million of cash, which is down almost $10 million from the beginning of the quarter. The first quarter included several major payments related to last year, including bonuses for the full year of 2010, fourth quarter 2010 commissions, and payments related to the fourth quarter 2010 restructuring actions. In addition, inventory levels increased since the beginning of the year. Our inventory at quarter-end was $125.1 million, which is up $16.7 million from the end of last year. As discussed on previous quarterly earnings calls, we had increased supply in many product categories to better meet demand for existing products along with initial stocking for several new related -- newly released products.

Looking forward, we expect to see our inventory levels come down somewhat in the second half of 2011 as we better optimize our supply chain. Our annualized inventory turns for the first quarter were 2.6 turns. Our receivable balance of $95.9 million represents 52 days sales outstanding, which is in line with our historical experience. On the personnel side, we ended the quarter with 1,937 employees and 479 contractors.

And now I'd like to hand things back over to Gary, who will provide an update on the business.

Thanks, Ken.

Our results for the quarter reflect our efforts over the past few years in establishing a strong foundation on which to grow Avid's business. With faster development cycles in place and a steady focus on customer needs, we now have a wider range of new offerings in the market and are seeing increased demand for these products. We expect momentum from these recent introductions to give us additional lift beyond the get healthy phase of our transformation, as global economic conditions strengthen and new Avid innovations hit the market later this quarter and throughout the year. In our media enterprise customer segment, we are seeing signs of convergence, with the companies that previously targeted different pieces of the media production process coming together to drive the entire media production value chain, from content creation all the way through to consumer delivery. As this type of conversion continues, Avid is uniquely positioned to help customers solve extremely complex content creation, management, and distribution challenges at both the infrastructure level and with best-of-breed user tools.

In a few minutes, I will provide some details on one of the announcements that we made at NAB last week, a revolutionary breakthrough that will help customers navigate this type of convergence, as well as the continued evolution of the media production process. An [IVE] news report cited that in 2010 the worldwide TV industry grew up -- grew by a bit more than 7% compared to 2009. In the US alone, the industry experienced 4.5% growth in 2010, compared to a 0.7% decline in 2009, and global revenue for pay TV was up by 8.4%, along with ad revenue growing at 5.8%. In the world of online broadcast media, the online video platform provider Brightcove reported that US newspapers produced 2.4 million videos in 2010, which is more than three times the next largest media vertical, and Google has announced plans to hire more than 6,000 employees as part of its transformation to a global media company.

These trends are complemented by a range of investments in Avid solutions from large enterprise customers. We booked significant orders from Discovery, CBC, and HunanTV in the quarter. In addition, we have initiated a project in the Middle East, a brand-new center with two production environments that will leverage a range of Avid audio and video solutions, including Media Composer, NewsCutter, and Pro Tools editing systems, ISIS shared storage, Interplay asset management systems, iNEWS broadcast automation, and AirSpeed Multi Stream systems. This project reflects our strategy to grow our business in emerging markets, and although our shared storage solutions are deployed at well over 700 customer sites worldwide, this customer is the first emerging market customer with plans to deploy a 12-chassis ISIS system.

Switching to our professional customer segment, the market is emerging from the economic crisis of the last several years, but the current pace of recovery is gradual. Stereoscopic 3D production continues to be of interest, driven by continued consumer demand for 3D viewing experiences. Last quarter, we talked about growth in theatrical 3D production and increase in the number of 3D-capable theater screens worldwide. We also are seeing recently announced partnerships, such as Samsung working with RealD, to incorporate the same projection technology found in 3D movie theaters and the Samsung's new TV lines. The goal here is to eliminate the need for home users to wear expensive, battery-powered glasses, enable them to wear the same 3D glasses at home that they wear in the theater. The expectation is that this will help to drive faster adoption of 3D TVs in the home than we've seen recently, which will facilitate greater assumption -- consumption of 3D content that is finding its way into homes via new dedicated 3D TV channels and 3D video on demand services.

A few other indicators that point towards positive movement in our professional customer segment include an increase in 2010 of nearly 13% for cinema advertising over the previous year, up from $584 million in 2009 to over $658 million in 2010. The decision by Netflix to enter into the content creation and ownership business, which relates to the convergence trend I discussed earlier, a statement from Bloomberg Business which currently lists Video Editor as a top 10 career choice in 2011, and we continue to enjoy positive reviews of our both our Pro Tools and Pro Tools Native products from our customers, as well as influential industry sources such as Sound On Sound Magazine, Electronic Musician, earwire.com, and Pro Audio blogs.

Lastly, I should mention that the horrific earthquake and tsunami in Japan has created a massive tape shortage from a range of Japanese manufacturers that produce a large portion of the popular tape formats used in feature and episodic television and to create camera masters and dailies from film shoots. This is fueling a movement among media businesses to shift their media acquisition and production capabilities to file-based formats. The creative enthusiast market is also exhibiting strength coming out of the recession, particularly in the areas of digital audio work station software and digital DJ gear.

Reports for the consumer video editing software market in Q4 2010 and early Q1 2011 point to strength and recovery as well, with four consecutive months of double-digit year-over-year revenue growth. Other categories, such as studio monitors and MIDI controls continue to grow but are experiencing growth at slower rates. [Avid] was down year-over-year for the quarter in the sector, but the recent introduction of the Pinnacle Studio 15 and Avid Studio video editing software, Torque 2 DJ software and synthesizer will enable us to capitalize on the upward trend taking place in the market. These new solutions were released during the first quarter, and with a full three months of availability in Q2, we expect to a boost in these areas.

We also expect to see growth in the traditional musician category with the introduction of version 9 of our Pro Tools MP software that we announced a few weeks ago at Musikmesse conference in Germany. Pro Tools MP 9 appears to the large number of M-Audio enthusiasts and beyond as a scaled-down version of Pro Tools software that works with a range of M-Audio hardware interfaces. And when it hits the store shelves in mid-May, we are looking forward to capturing a significant piece of growth trajectory for digital audio work station recording software.

Now, I would like to spend a moment covering our presence at the National Association of Broadcasters show, which took place in Las Vegas last week. The level of customer enthusiasm and engagement was tremendous, and the industry is taking notice of the success and momentum we are driving with our unified brand, our explicit focus on helping customers achieve success, the evidence of our openness with third parties, and the new pace of innovation we are setting with continued advancements in R&D. We kicked off the show by unveiling Interplay Central, our latest groundbreaking innovation demonstrates Avid's integrated media enterprise strategy in action. Interplay Central is a lightweight, web-based portal BlackBerry mobile app that serves as a single entry point to all of Interplay's media production capabilities. It is designed for on-the-go media professionals who are working remotely, so they can use their browser-based interfaces instead of standalone software applications to access the tools they need to do their work.

The first implementation of Interplay Central will serve the broadcast market and allow field journalists using a laptop computer to sign in to the web-based portal and pull media assets, review sequences, edit video and audio content, and create stories right from a web browser. Field journalists with BlackBerries can also use the Interplay Central mobile app for browsing or viewing news, cues to stories, and editing story content as well. The benefit for broadcasters is that journalists no longer need to physically be in a facility to access the tools they need to do their jobs, nor do they need to have bulky media production applications loaded on their laptops. All they need is a browser and Internet access, and they can easily plug into the content creation, management and distribution process from any location. This is a paradigm shift for our industry and one that will truly enable businesses to deliver greater speed, visibility to assets, team collaboration, and workflow agility.

Also for our media enterprise customer segment, we announced two market-focused solutions that will deliver a cost-effective, tightly integrated production work [flows]. The first is a brand-new offering called Avid InGame which enables sports marketing organizations within leagues, teams, and facilities to deliver better fan experience and brand awareness using their media assets. The second is version 2 of Avid's NewsVision solution. Our completely entry-level newsroom solution now allows local and regional broadcasters to achieve greater agility and efficiency with file-based news production.

In our professional customer segment, we announced news in two areas. One regarding our expansion of our market-leading open ISIS shared storage platform with ISIS 5000-16 and the other related to our Yukon protocol and greater Native third-party support for our Artist Series of controllers. These announcements were completed by a technology preview of 3D stereoscopic capabilities that are currently in development, as well as by a roster of Avid customers who shared their work and perspectives on the media production challenges they face every day. Some of the customers who presented in our booth conclude Kevin Smith, Director of the indie film Red State, plus post production teams from behind the feature film Tron Legacy and popular television shows True Blood, Top Chef, and Frontline.

Moving beyond NAB, I would like to close my remarks by pointing out that both Avid and our customers continue to be recognized with industry awards. Our customers once again topped the list of award nominees and winners at ceremonies that honor music, film, and television industry professionals. More than 45 customers who used Avid audio and video solutions received nominations at the 2011 Annual Academy Awards held on February 27, with Oscar wins going to customers in the Best Motion Picture, Sound Editing, Sound Mixing, Original Score, Original Song, Documentary Feature, Animated Feature, Visual Effects, and Foreign Language Film categories. In addition, 2011 marks the 11th consecutive year in which every nominee for a Sound Editing Oscar has used Avid's Pro Tools software.

Avid customers also participated in the 53rd Annual Grammy Awards, with more than 100 customers and music school graduates contributing to Grammy nominated projects, including those who recorded and mixed every song or album nominated for a Grammy in the Record of the Year and Album of the Year categories. Avid received a range of awards in the first quarter for products like our VENUE SC48 live sound system and our Artist Series of controllers. In addition, last week during the NAB show, our new PhaseFind technology a new [NF] phonetic search add-on option for Media Composer, was recognized with a TV Technology Star award, the videography best in show video award.

Overall, we are pleased with our performance in the quarter. As the markets we serve continue to rebound and we deliver on the commitments we have established for the year, I am enthusiastic about the way we have kicked off the year and look forward to building even stronger momentum in the months ahead.

And now I'd like to turn the call back to Ken, who will discuss our financial outlook for 2011.

Thank you, Gary.

Although we do not provide quarterly financial guidance, I would like to start by making comments about the normal seasonality of our business, from both a revenue and an earnings perspective. In most years, revenue for the first quarter is generally the lowest quarter in the year and usually down sequentially from the fourth quarter of the prior year. In addition, revenue for the fourth quarter is usually the highest revenue quarter for the year. The timing of revenue -- recognizing revenue on larger transactions can cause results to deviate from these normal seasonal patterns. Because a substantial portion of the operating expenses are not variable with revenue, sequential changes in revenue can have a significant impact on earnings. As a result, earnings generally tend to be much higher in the second half of the year when compared with the first half of the year. It is not unusual for the fourth quarter to have a disproportionate percentage of the total year's earnings. In addition, due to our tax losses and credit carry forwards, our income taxes will not vary in proportion to changes in pre-tax operating profit.

Now I'd like to update our annual guidance. Overall, our results for the first quarter were consistent with our expectation as of our last earnings call on February 4, 2011, and were consistent with the seasonal patterns experienced in prior years. Based on the first quarter results and current market conditions, our guidance for 2011 revenue and non-GAAP earnings remain unchanged as of today. For 2011, we expect revenue to be approximately $700 million to $720 million, and we expect our non-GAAP operating profit to be about 5% of revenue. We continue to expect year-on-year improvement in our non-GAAP gross margin as a percentage of revenue and a modest increase in our non-GAAP operating expenses. We expect our non-GAAP taxes and net interest expense to be around $6 million to $8 million for the full year.

The non-GAAP net income I just outlined will exclude the following charges. Stock-based compensation, amortization of intangibles, restructuring and other charges, and related tax adjustments. Based on what we know today, we expect that these items to result in a $23 million to $28 million of charges for 2011. This expense estimate has been lowered by $2 million since our previous estimate because of the benefit realized in the first quarter, due to the lowering of our estimated related to prior-year restructuring activity, as discussed earlier. At the midpoint of our range, including these costs, would result in a modest GAAP net income for 2011.

This concludes our remarks, and we would now be happy to take your questions.

(Operator Instructions) We will go first to Paul Coster with JPMorgan.

Thank you.

Ken, can I just ask you to elaborate a little bit on the last point, which is the $23 million to $28 million of non-cash charges. That's for the entire year or for the remainder of the year, if you can just clarify that rather obvious point. And in doing so, can you state what you think the stock comp cost for the whole year will be?

Well, the guidance I gave, whether it was revenue earnings or even for these items which are included in GAAP earnings but not the other, those are all annual guidance information. So, that's all fully loaded up for the full year, not just for the remaining piece of the year. And I previously said that for the full year in February, that would be $25 million to $30 million of expenses and I've now lowered that all by $2 million.

On the stock-based compensation, I would say that, you know, $3.7 million is what we had sitting in there for the first quarter, and I would expect that number won't differ a lot by quarter, but could go -- could go up slightly, because generally, our key performer grants to employees happens in the -- early in the second quarter of this fiscal year. So, it would increase slightly as the year goes on. So, let's say you end up the year somewhere in the $16 million range or a little bit higher for a stock-based comp.

Okay.

The -- going back to revenues for a second, I didn't quite understand the comment regarding Pinnacle and the consumer business. Are you saying that it was down because the product was introduced late, or are you saying it was down at all? I didn't really sort of, I -- put two and two together there.

Yes, Paul, this is Gary.

So, the product wasn't late. So, we introduced two new products in Q1. We introduced Pinnacle Studio 15, which was the next release of our Pinnacle Studio line. And we introduced Avid Studio, which is a completely, from the ground built up for the more advanced creative enthusiast, still a on-the-shelf type of product. In fact, we were very fortunate that Best Buy has agreed to continue to carry not only the three original Pinnacle Studio SKUs but the Avid Studio SKU as well. It does leverage some of our professional technology. What Ken stated is that we didn't -- because of the introduction of Pinnacle Studio in late February and the availability of Pinnacle Studio in late February and Avid Studio in mid-March, we didn't have a revenue for the first -- for the full quarter for that product. This will be the first quarter that -- Avid Studio is a brand-new product that we have. And we do, of course, are seeing -- you might remember a couple of years ago that our Pinnacle hardware line, we said we were just going to let run out over time, which continues to -- indeed continues to run out over time.

Thank you.

You also mentioned that there was a new mix of onshore, offshore development, and I'm just wondering if this is pointing to a potential cost save, that you are at the moment seeing overlapping development teams and that you'll be rationalizing those two teams later on this year, and it will be part of the operating margin expansion story?

Yes, I think what you are seeing, Paul is actions that we've we really started talking to you all about in mid-2009 and that we continued through last year with the changes that we have made. You certainly will see that benefit continued through this year and it will be part of the operating margins. I think Ken commented -- Ken, was it three -- around $3 million in compensation savings in the quarter? Something like that?

$2 million.

$2 million in compensation charges, and a little bit of that is that reflection of the shift in resources. But at this stage, we have a pretty stable mix in our product organization between our offshore and onshore. And you shouldn't expect to see that substantially change at this stage in the game.

And then lastly, would you be kind enough just to elaborate on this point you made about the disruption to tape production in Japan and what that means, precisely? I mean, are you actually literally seeing customers coming to you and saying, this is it, we've got to move now, or what is it you were referring to there?

Literally, we are saying, having -- so -- one particular manufacturer of tape plants in the earthquake affected area. They aren't -- they are not able to produce tapes at the rate they had been able to prior to that. We literally have customers coming to us and saying, okay, that is the final straw, we have got to accelerate our file-based work flows. We have customers saying, okay, we've got to figure out how to do it right, eventually. We're actually going to use some generic, Internet-based things for moving files around right now, between sites. But it's like anything else, these folks who would've eventually gone to file-based work flows, this is just accelerating the process.

Okay. Thank you very much.

Next up we will hear from Mike Olson with Piper Jaffray.

All right. Thanks. Good afternoon.

Just a couple of quick ones here. Video was the highest year-over-year growth that we've seen in quite a while. And audio year-over-year growth went from double-digit revenue growth in 2010 down to basically flat in Q1. Is this a trend going forward that we should expect video growth to outpace audio for the next few quarters?

You know, I think -- I don't know if it was you, Mike, or someone else who asked me that same question, or the reverse question a year ago when audio was doing well [in] video. We see a mix because of product introductions we had very strong, as you might recall from the period of summer -- from the summer period of about July, when we started new audio hardware introductions all the way through to November when we did the Pro Tools introductions. We saw a very, very strong audio uplift in 2010.

What -- and I think, you know we had -- we have an -- we released over 60 new products or refreshes last year. Those occur at different periods of the time. We continue to see Pro Tools -- Pro Tools 9 to -- as Ken mentioned, to perform extraordinarily well in Q1. We saw a strong uplift in our media enterprise as a segment, which of course, has a lot of video revenue associated with it. So, we are getting some of the -- we are getting some of the benefit of that, but I wouldn't describe it as a trend one way or the other. I think you'll see some -- because of the nature of large orders, et cetera, which has more impact on video than it does on audio. You'll see those numbers move back and forth with each other.

Okay.

And then on the margin side, non-GAAP gross margin and operating margin took a little bit of a step back this quarter, and it sounds like you are thinking gross margin will generally move higher throughout the year as well as operating margin. Do you expect margin in Q2 to be similar to Q1, and then it really ramps in the second half of the year, or will it start to actually move higher in Q2?

Well, first off, we're up year-on-year, and the one comment I made is that, remember, there is an amount of fixed overhead that's sitting in there, that the variable margins on most of our product revenue are generally in the -- in much higher levels, in the mid-60% to 70% range in many cases. If it is pure software, it could be 95%-plus. So, what happens is that if revenue sequentially increases, the overall gross margins will look like it increases. Increased or improved, whereas from a per unit by per unit basis, it really -- it could remain relatively the same.

So, to reiterate what Ken said, on a year-on-year basis, our gross margins were up and our operating profit margins were up.

Right.

Go ahead.

And so, based on the guidance we set for the remaining part of the year, you'd expect that if we are successful in increasing the revenue as the year goes on, you would see those -- you would see gross margins improving and operating margins improving throughout the year.

Okay, so each quarter -- basically, a year-over-year improvement each quarter is likely.

There is -- correct, because there is over 50% leverage for increases in revenue.

Okay. All right. Thanks a lot.

Because not -- operating expenses, you only have about, let's say, 3% that's variable. And so, if you have that much leverage in your gross margins and 3% variable, unless we make other planned increases, a substantial amount falls down to the operating earnings line.

All right. Thanks very much.

Thank you.

There are no further questions in the queue. I would like to turn the call back over to Mr. Gary Greenfield for any closing or additional comments.

Well, thank you all. Thank you all for joining us. As we commented, we are very pleased with the -- we're very pleased with both the progress on the continued momentum on the revenue growth, as well as the momentum on the operating profit as well. So, we will thank you for taking the time and joining us today. We will talk to you next quarter.

Once again, that does conclude our conference call for today. We thank you for your participation.