Avid Technology Inc (AVID) 2012 Q3 法說會逐字稿

Good day and welcome, everyone, to the Avid third-quarter earnings results conference call. Today's call is being recorded. For opening remarks and introductions, I'd 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 of Investor Relations for Avid. Welcome 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.

Just a reminder that we will be using slides during this presentation, which can be accessed through the Events tab on the Investor Relations page of our website at www.avid.com.

Before we begin, please note that this call will include forward-looking statements. Actual results may differ materially from those results indicated by these forward-looking statements due to a variety of factors, including those contained in our most recent Form 10-K and our subsequent filings with the SEC. Our results have historically been variable from quarter to quarter, and we encourage you to review our SEC filings, including the sections on risk factors concerning any forward-looking statements we make today. Our forward-looking statements are based on Avid's estimates and assumptions as of Tuesday, Monday, October 29, 2012, and should not be relied upon as representing our estimates or 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 refer to non-GAAP financial measures. Non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles; may not be comparable to similar non-GAAP measures used by other companies. 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 on the Investor Relations section of our website at www.avid.com.

For the purpose of understanding our future business model, we've also provided some forward-looking analysis on this call on a non-GAAP and GAAP basis. 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 to Gary.

Thank you, Tom, and welcome to our conference call for the third quarter of 2012.

During the third quarter, we finalized the majority of the divestiture of our video and audio consumer-focused businesses and other changes announced on July 2 of this year. We took these actions or three primary goals -- one, to focus our business in the Media Enterprise and Post & Professional customer markets where we are a recognized leader and see the best opportunity for growth; two, to improve our growth and margin profile; and finally, three, to simplify and realign the business lowering our non-material spending by over $80 million on an annualized basis.

We've made good progress on these objectives, and we are currently on track to deliver the spending savings we had targeted and are pleased with the sequential improvement in our gross margin as a percent of revenue.

In addition, our balance sheet remains strong. We had another quarter of increasing cash. However, revenue from the ongoing business for the quarter was down year on year. We believe the majority of this decline was due to sales execution, primarily in the Americas region, and some transitional issues as we implemented our restructuring and divestment plans.

I will provide more context in a moment, but would first like to turn the call over to Ken to review the financial results for the quarter in more detail.

Thank you, Gary. On a GAAP basis, revenues for the third quarter were $127.2 million, down 23% from $164.7 million reported for the same period in 2011. $17.7 million of the $37.5 million year-on-year decrease was related to product lines which we divested in July of 2012.

Changes in currency rates adversely impacted third-quarter 2012 revenue by approximately $4 million on a year-on-year basis.

Our GAAP gross margin of 52.6% of revenue was up over 6 percentage points sequentially and down about 1 percentage point from the third quarter of 2011. Our GAAP operating expense for the third quarter was $83.3 million, down $9.4 million compared to last year's third quarter. The third-quarter operating expense included $12.7 million of restructuring costs related to the plan announced in July 2, 2012, along with updates to estimates related to prior-year actions.

Our GAAP tax provision for the quarter was $672,000. GAAP net loss for the third quarter was $17.4 million or $0.45 per share. This compares to a GAAP net loss of $7.6 million or $0.20 per share in the third quarter of last year.

Our GAAP results for the third quarter of 2012 include $11.6 million of restructuring costs and sales allowances related to the divestitures. The third-quarter restructuring cost in the operating expense line was $12.7 million. $10.4 million is related to the July 2012 action, and the remainder is related to updated estimates on prior-year plans, mainly related to certain closed facilities. The impact of the restructuring charge was reduced by $1.1 million because we benefited from lower-than-expected product returns related to the divested product lines.

In addition, our GAAP net loss for the third quarter of 2012 includes the following items -- acquisition costs gain on asset sale and other costs, which net to $519,000; amortization of intangible assets of $1.4 million; stock-based compensation of $1.7 million; and a tax benefit of $166,000 related to these items. Excluding these items, which totaled $14.4 million, the third-quarter non-GAAP net loss was $3 million or $0.08 per share. This compares to non-GAAP net income of $842,000 or $0.02 per share for the third quarter of 2011, which excludes $8.4 million of similar charges. A reconciliation of GAAP to non-GAAP results is included in the press release announcing the quarter's results.

Due to the divestment, I will focus my revenue comments on our ongoing business. We have provided a table in our press release which provides revenue with and without the impact of the divested products to assist investors in better understanding our ongoing business.

Overall third-quarter revenue for the ongoing business was $123 million, down 14% from $142.8 million reported for the comparable period in 2011. Approximately 2 percentage points of the decline was related to movements in currency exchange rates. Revenue in Americas was down 19% year on year with slow sales in media enterprise customers, which we believe is primarily related to sales execution issues in this region.

While Europe ongoing revenue was down 6% year on year as reported, when you exclude the impact of currency translation, revenue for Europe was up 1% for the quarter and 7% on a year-to-date basis. Europe has experienced relatively strong sales to the Media Enterprise customers.

Asia revenue was down for the quarter, but is essentially flat on a year-on-year basis on a constant-dollar basis.

Our ongoing product revenue for the third quarter was $86.7 million, down 21% year on year. Video and audio product revenue were both down for the quarter. I'll provide additional comment -- additional color in a moment.

Service revenue, which was not impacted by divested product lines, was up 10% year on year. We had strong growth in professional services, which was up 40% year on year for the quarter and 23% on a year-to-date basis. In addition, our maintenance revenue was up 4% year on year for the quarter and 7% on a year-to-date basis.

Service revenue was about 29% of overall ongoing revenue for the third quarter. We continue to focus on this largely recurring stream and are clearly seeing the benefits of our focus in this area of the business.

Video ongoing revenue for the third quarter was $81 million, down 13% compared to the third quarter of 2011. The majority of our service revenue is related to video, and as I mentioned, we experienced good growth in our service business. Video product revenue was $46.1 million, down 24% year on year. Lower year-on-year product sales in the video line were due to weak sales to Media Enterprise customers in the Americas and the continued transition of our professional editing systems from hardware-based systems to software-only solutions.

Our ongoing audio revenue for the third quarter was $42 million, down 15% compared to the same period last year. Almost half of the year-on-year decline was related to lower sales for our entry-level professional audio interfaces.

The Pro Tools HD portion of the business continues to grow with strong adoption of our HDX hardware and reinforces our position as the leader in the high-end audio editing.

Now I will discuss the third-quarter results beyond revenue on a non-GAAP basis. Our non-GAAP gross margin was 53.2%, which is down about 1 percentage point year on year and up 3.5 percentage points sequentially.

For the third quarter, our product gross margin was 50.9% and service margin was 58.7%. The non-GAAP product gross margin of 50.9% was down 3.6 percentage points year on year and up almost 4 percentage points sequentially. Unfavorable currency translation accounted for about a 1% drop of the year-on-year decline. Third-quarter gross margin was also negatively affected by the final sell-through of certain divested products still in the channel when we transferred the product lines in July of 2012. We continue to bundle the first-year maintenance support which has adversely impacted product gross margin also but provides a lift to our service margins.

Our service margins on a GAAP and non-GAAP basis were up almost 6 percentage points year on year. The year-on-year in improvement was largely due to strong revenue and market improvement in our professional services portion of the business. Our non-GAAP operating expenses for the third quarter were $68.9 million, down 18% year on year and 16% sequentially, primarily the result of the July 2012 restructuring and divestment of our consumer business. The full cost benefit of these actions will not be seen until the fourth quarter of 2012.

The non-GAAP operating loss for the third quarter was $2.2 million compared to a $5 million non-GAAP operating profit in the third quarter of 2011.

Now turning to the balance sheet, we increased our cash balances by $12 million sequentially and ended the quarter with $71.4 million of cash with no draw on our line of credit at quarter end. For the quarter, we receive $13 million of the $14.5 million of proceeds related to the divestment of our consumer business. $1.5 million is being held in escrow. During the quarter, we paid out $7.9 million related to restructuring programs.

Our inventory at quarter end was $80.4 million. In the aggregate, our inventory was down $45 million since September of 2011. This reduction includes $11 million of inventory sold as part of the divestment. The annualized inventory turns for the third quarter was 3.8 turns.

Our receivable balance at September 30, 2012 was $75.1 million. The day sales outstanding for the quarter were 53 days, which is consistent with historical levels.

On the personnel side, we ended the quarter with 1480 employees and 360 contractors, down in the aggregate 388 from June 30.

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

Thanks, Ken. As I indicated earlier on the call, while we're very pleased to be on track and delivering lower spending and to have strong sequential improvement in our gross margins, we did experience some challenges in the third quarter related to revenue. With the execution of our restructuring and divestiture plans now behind us, we are completely focused on improving execution across the Company. Part of the changes we announced in July related to our organizational alignment. I'd like to highlight some of these changes.

Sean Ford joined Avid in the third quarter as our new Global Head of Marketing. As a proven and highly-regarded technology marketing executive, Sean's mandate to Avid is to work in close coordination with the sales organization worldwide to identify and implement the measures necessary to maximize demand generation and alignment with our revenue objectives.

In addition, we have moved all of our service businesses under a single customer success organization to ensure optimization of resources, outstanding service delivery, and to help us accelerate the revenue growth we've experienced in this area.

And finally, we have combined our supply and logistics organization under a single leader with a product development organization to improve end to end product lifecycle management.

We believe that tighter alignment between our R&D and manufacturing teams will improve time to market, as well as improving quality at a lower cost.

We remain encouraged by our ongoing conversations with customers and are confident in our strategy and are optimistic about our opportunities in the Americas and abroad.

The core tenants of our strategy are reinforced by the findings of a global, independent survey of 200 media organizations in post-production houses we conducted in association with Ovum. Our goal is to understand how the dramatic changes taking place in the relationship between producer and consumer are impacting the business of media producers. The key takeaway for the industry is that consumers are taking control of their viewing and that the channels for broadcasters has distributed content seamlessly and cost effectively through any device or platform in a way that satisfies consumers' demands for individualized viewing experiences.

In fact, 84% of respondents felt that monetizing viewership across multiple platforms is critical to capturing new growth opportunities. Respondents also said that an asset-based workflow, which enables a new level of automation and optimization, will drive operational agility, can create OpEx savings and ultimately lead to new business opportunities. Avid is committed to providing the creative tools, media management, multi-platform distribution and universal connectivity needed for media producers to remain competitive by addressing these challenges.

At the recent International Broadcasting Convention in Amsterdam, in addition to meeting with hundreds of customers and partners, we announced the availability of a number of new solutions that address these needs. Let us share some examples.

As part of our initiative to advance next generation newsroom solutions, we announced Avid Interplay Sphere, a cost-effective, cloud-enabled solution to help journalists tell stories from where they are happening. We continue to improve Interplay Media Asset Management or MAM, which enables media organizations to reduce complexity, repurpose media, automate workflows, and link certain business functions. To assist our customers in shaping their viewers' experience, we announced availability of Avid Multi-Platform Distribution as a primary means of enabling media producers to build a multi-dimensional viewer experience for their audiences by delivering content created once to multiple channels and the right format for each platform.

We also released Avid Motion Graphics 2.0, which allows media producers to deliver stunning visual imagery and deepen brand affiliation more cost effectively. The St. Louis Cardinals was the first major sports team in North America to purchase the product, which they will be adding to their comprehensive Avid workflow to enhance their fan experience in the 2013 baseball season.

On the professional attitude front, we announced the latest release of Media Composer 6.5, Symphony 6.5, and NewsCutter 10.5 providing fast, open workflows that greatly advance editing efficiency. These releases work with Interplay Sphere to support universal connectivity and collaborative production, giving editors the freedom to work in a distributed environment that spans multiple locations and contents.

In audio, we announced a new Pro Tools HD native Thunderbolt interface, which brings the industry standard Pro Tools HD toolset and premium conversion of Pro Tools HD series interfaces to a broader group of customers that use a laptop or other computers with Thunderbolt technology.

We continue to experience strong growth across our services portfolios that complement these products. As Ken mentioned earlier on the call, both professional services and maintenance revenues, which were not impacted by the divested product lines, were up both sequentially and on a year-to-year basis.

Our customers remain at the forefront of everything we do. And time and time again Avid customers turn to our solutions to help them create the world's most listened to, most watched, and most loved media in the world.

This past Emmy awards season was no exception. Avid customers topped the list of Emmy award nominees and winners of the 2012 Creative Arts and Primetime Emmy Awards. Many of the nominated this year used one or more Avid systems such as Media Composer, Pro Tools and Sibelius to achieve creative excellence in television production. Some of Avid's customers receiving awards for picture and sound editor for this year included Curb Your Enthusiasm, Modern Family, and Homeland.

Wrapping up, as always, we are steadfast in our commitment to providing our Media Enterprise and Post & Professional customers with open and innovative solutions that enable them to produce and distribute the world's best movies, music, and TV programs and then anticipate and meet the needs of a rapidly-shifting technology climate. We believe that Avid is uniquely qualified to meet the creative needs of our customers and that our proven best of breed solutions and in workflows enable them to address evolving business requirements.

With that, I'd like to turn the call back over to Ken.

Thank you, Gary. As discussed earlier, we have largely completed our restructuring and divestment plans. These actions lowered our operating expenses for the business and improved our operating leverage as we focus on higher margin business.

I'd like to touch on our current expectations for the fourth quarter of 2012. Before talking about current expectations, I would like to remind everyone about our earlier disclaimer regarding forward-looking statements. Again, we undertake no obligation to review or update these forward-looking statements even if the estimates change.

For the fourth quarter, we expect a sequential improvement in revenue from our ongoing line of business, but we also expect fourth-quarter ongoing revenue to be down compared to the fourth quarter of 2011, further impacting our expected GAAP net loss for the full year.

On a non-GAAP basis, we expect to see operating expenses decrease by 15% to 20% year on year for the quarter. We expect to report a non-GAAP operating profit for the fourth quarter that may not reach breakeven for the full year of 2012.

We still expect full-year non-GAAP taxes and interest to be $5 million to $7 million for 2012. The full-year 2012 non-GAAP operating profit or loss excludes stock-based compensation, amortization of intangibles, restructuring and other charges, costs and allowances related to divestitures, acquisition costs, and loss on assets held for sale of about $55 million to $60 million.

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

(Operator Instructions). Mike Olson, Piper Jaffray.

A couple of quick questions. Why do you think there was a reversal of the ongoing segments growing year over year in Q2 and then declining in Q3? I know you mentioned some sales execution issues in North America, but was there any change do you think in underlying industry demand or competitive environment?

You know, I really don't. I think that there continues to be a lot of opportunities out there. I do believe there is a slower decision cycle in some cases as a result to the macroeconomic uncertainty, and we've seen it in a couple of competitors that have reported those results. But nevertheless, I think we're engaged in more conversations of larger magnitude than we have been in a long time.

I think folks are looking for clarity of the macroeconomic situation in Europe. We commented on that. We did comment specifically about sales execution issues in America. That is where the divestiture has had the greatest impact in terms of the reallocation and resorting of sales resources that are there. And, of course, people are waiting for the outcome of our elections in a couple of weeks here in the States at the macro level.

Nevertheless, I think there is strong demand. I think we -- what you see is the cash being spent afterwards. As you know, there is a lot of money being spent politically this year, which means strong caulkers, particularly at the local stations where a lot of that money is being bought in the individual states that are at risk.

So we are optimistic about market demand right now.

And then do you think that we're going to see a continuing trend of product revenue growing slower than services revenue? Is that something that you are almost in some ways pushing for given services margins are higher than product? And is a mid-50s gross margin a reasonable expectation as we think about Q4 in 2013, if that is the case?

Let me take the services question; I'll let Ken take the gross margin question.

I think we will see an increase in services. It is being driven a bit by professional services, but mostly by our support services or what we refer to as customer success by our support services. I know for those who have been following our story for a long time, one of the things that we said we wanted to focus in on was more recurring revenue and maintenance services or support services are certainly recurring revenue.

The second thing that we have done is that we have as a result of wanting to increase this recurring revenue, we have started bundling into all of our new products such as our ISIS 2000, which we spoke about our added Motion Graphics. We have started bundling in first-tier support, which we had not done previously.

So as underlying product sales are growing at whatever rate they are growing, the fact is that we are including more service revenue in our products, and we are seeing -- we started doing that about 18 months ago or so, and we are seeing at least on a preliminary basis, the tax rates being -- obviously, they are 100% when we include it in the product, but the renewal rate is, I should say, coming in at a higher percentage than we had been before.

So I think you will see us proactively growing that maintenance revenue as a source of recurring revenue and more stability in our revenue streams.

And Ken, I'll let you comment on the gross margins.

On the gross margin front, the divested products that were sold in July generally ran, not all of them, but from an overall group, those were some of the lower-margin gross margin products within our product families. So I would anticipate that as time goes on, we would start to see some improvements in the overall product gross margins.

And I did indicate in this last quarter because we still had some sell-through on some of these products at very low gross margins and we did get a little bit of that impact, at least in the current quarter. But I'd anticipate that as we move forward, that people should start to see the overall gross margins for the business improve.

So I would say that we saw some improvement sequentially here in the third quarter, but I would hope as time goes on, we'll see further improvement down the road.

Okay. Thanks a lot.

[Peter Ruse], private investor.

I've got a question about one of the products with Avid, which is Sibelius. Sibelius is a new patient software program, which was originally developed in England by two brothers and was purchased, I think, in 2006 by Avid. Earlier this year in July, Avid announced to close down the offices of Sibelius in the UK and outsource all of the development to the Ukraine, which brought a massive outpouring of protest among Sibelius users. I have been following this for a couple of months now, and it's just overwhelmingly negative. Avid at this point, in users of the program at least, we've got an all-time low. They really just don't trust the Company anymore and have already mentioned, this is the last upgrade number, 7 is the last upgrade they will ever buy because they are not going to pay another penny to Avid because you know these guys are just a bunch of ruthless corporate raiders almost. I mean what are your plans for the future for Sibelius?

First of all, I don't think that's an accurate representation of what we've done. As a Company, we have many development centers, and one of the reasons that the Company had acquired Sibelius before I had joined was to combine it with the world's leading digital audio workstation.

In fact, we did release 8 of Pro Tools combines many of the composition features of Sibelius into Pro Tools, so you do have those composition capabilities.

With the announcement that we did make in July in terms of as we were taking a look at simplifying our entire structure, was, in fact, to close specifically our Sibelius development center in the UK. But that doesn't mean that we are continuing to do Sibelius development ourselves. We are doing that work, and the leader for that group is actually here in the Boston area. We are doing development for it in Daly City, and it is correct that we are combining it with some outsource services, much as we have done with our entire development team. That's not news. We have been working with third-parties for some time.

We're very committed to the Sibelius line. I think we have a customer base that likes to purchase great products. I think they've jumped to some conclusions, and I don't think it's fair to say it's overwhelming. There had been a strong sentiment by a few people, but in fact, our sales continued well during the course of the quarter.

That's not to say we don't listen to our customers, that we are glad our customers share their thoughts and speak up for us, but Bobby Lombardi, who is leading the product management effort for that, has been out there on the road, and we've been hearing from several of our customers about the things that we are doing to invest into the product.

Well, if I may follow up on that, though, the plan was to seek people in the Ukraine with talent who can use it and in computer technology that could program for Sibelius. And the last that I've heard, and this was several weeks ago during a meeting with the British Association of Composers, Authors, and Publishers, at which Bobby Lombardi, the now Senior Product Manager for Sibelius, was present, and he indicated that Avid was desperately trying to keep onboard the few remaining programmers that were still in the UK. And that they had a very hard time finding people in the Ukraine, which, frankly, doesn't really surprise me because it's a very small niche in a very specialized market.

Do you have a question, or is it an observation you're making?

Well, I have a question. My question is this. Do you really -- are you confident that you can replace the people that were laid off back in July? And what does it look like right now? Because from a user perspective, I mean I can see for many users that I would say, well, I think practically the product is going to be dead because they can't find new people realistically.

We are confident. Thanks for the question. We have combined this. Operator, can we move on to the next person, please?

(Operator Instructions). [Jeff Brunswick], [Coach Street Capital].

Just a couple of quick thoughts. Could you give me the employee count? You kind of ran through that. What were the quarter-and employees, and is that the go-forward count post all restructuring and divestitures?

It's pretty close. I said we ended the quarter with 1480 employees and 360 full-time contractors.

Got it. Okay. So that's about the right number. And is that including the Ukraine or not? I'm kidding.

Yes.

My next question would be you mentioned about the bundling of service and product for the first year, and you're pleased with the renewal rate. What is the renewal rate?

Quite honestly, I would tell you I just don't have the number off the top of my head. So I don't want to -- I don't want to misrepresent that.

It is -- there was another conversation on it earlier today, and it's been running net-net higher than where we've been. And I'm not trying to be evasive, I just don't remember the number.

Because I think that would be an interesting thing. And just, again, quickly, a math thing. So the allowances on accounts receivable on a new run rate were $14.6 million on $75 million in receivables. And last year they were about roughly the same as $15.9 million for an allowance on a much bigger $104 million receivable number. Why is that? Why is there a higher number, higher balance against a smaller number? Just a quick little -- and then I will ask real questions.

So let me take a quick look at that or whatever and --.

Okay. We can hold that off, but that's a question I'd be interested.

And so how sustained -- obviously, it is an interesting comment that your sales in Europe are up and your sales in the US are down. And I guess the question is, so we're talking the US issue up to transitional or lack of the confidence you'd like in the transition. But what do you see, again, as far as why is Europe, do you think, holding up, and how sustainable is that?

I have commented on every call about our concerns in Europe. I think we have an exceptional manager in Europe. And I think we've been challenged by sales execution here in the United States.

Nevertheless, I continue to be concerned if one of these bailouts has to actually occur, or whatever it is, in Europe. But I do think we have an exceptional manager there, and I think we need to see the same type of sales execution that we see in Europe occurring here in the Americas.

(multiple speakers) Go ahead, Ken. I'm sorry.

I was going to say, going to back to that sales returns and allowance account, and that is that so this does include things that would be sold in the channel and what the estimates of what those return rates would be, not just -- along with provisions for any bad debts I would tell you that receivables, if you look at numbers of days in receivable on a net basis were pretty much consistent year on year, and, in fact, our over 90 days have been running for most of this year at below historical levels.

And so we're not really having -- it isn't really a big instance of bad debts, but really more of the sales returns and allowance accounts as it relates to sales in the channels.

Got it. So, in other words, the number represents sales that have occurred that may or may not have been through divested issues. And so that might come down looking forward as that number just starts working through the channel? Is that --?

Well, most of it would have been worked through the channel now. I'm just saying that it's in relationship to how much the channel business is in the receivables there. In some cases, too, you could have an unusual quarter where you have what I'll call large acceptance deals. So that could run through in a particular quarter, too.

But for the most part, there's nothing -- on the surface of it, I can't point to one item to say that this is what would have changed it at all. I could tell you looking at the health of the receivables, they're in very good shape. And from a net basis, they are tracking really -- day sales outstanding are tracking very closely to where they were at December of last year.

Got it. Okay. And so looking forward to 2013, one of the -- you've laid out in several prior calls the original restructuring announcement, and then the second-quarter call, this idea of, again, a mid-50s gross margin trending higher than that. I am looking at 2013 to get a base case and, once you clear everything out, a mid-50s gross margin number.

And then I'm just still a little confused about the R&D versus SG&A spend that gets you to your double-digit adjusted non-GAAP numbers. And maybe you could just help clarify that for 2013.

Well, we haven't provided anybody with any guidance for 2013. However, if you take the third-quarter operating expenses, we're now getting close down to what I'll call a normalized level. You could see where it is in relationship to how much it is as a breakeven. As I indicated, gross margins for the quarter were probably negatively impacted somewhat by some of the sell-through on the divested products. So when we get through all of that, we would hope to see some increase in the gross margins moving forward. And then with that, I think it really then -- you can start to do the math because there aren't many -- most of the operating expenses are not variable. So it really gets down to what revenue level do you need to achieve based on that operating cost base.

What about the -- the question I've always had is the R&D line, which has been for a lot of quarters sort of $29 million and $30 million a quarter, this past third quarter dropped to $23 million. And my question is, is $23 million or $24 million times 4 the new run rate that fits the new company?

The answer is yes, that the third-quarter expenses should be pretty close to what the new run rate would be. You'll see some slight changes in it. Again, we'd have some things goes through there in the quarter like stock-based compensation that might go up or down a little bit by quarter. So you can't always take it and multiply it by 4, but for the most part, you wouldn't be too far off.

So you're suggesting that the stock could go up, therefore, stock comp could go up somewhat?

No, no -- the stock-based comp --

I'm kidding. Gentlemen, thank you very much for your time.

Thank you.

And that's all the questions we have. I'll turn things back over to management for any closing or additional remarks.

I'd like to thank all of you for joining us today. If you have any further questions, Ken and I are available for follow-up after today's call. We look forward to speaking with you next quarter. Thanks.

And, once again, that concludes our conference. Thank you all for your participation.