Data I/O Corp (DAIO) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Data Corporation I/O fourth-quarter 2007 conference call.

At this time all participants are in a listen-only mode, later there will be an opportunity for your questions and comments, instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded.

At this time I'd like to introduce our host, President and CEO, Mr.

Fred Hume.

Please go ahead.

Thank you very much, Tom.

Welcome to the Data I/O Corporation fourth-quarter and 2007 financial results conference call.

With me today is Joel Hatlen, Vice President and Chief Financial Officer of Data I/O.

Before we begin I'd like to remind you that statements made in this conference call concerning future revenues, results from operations, financial position, economic conditions, product releases and any other statement that may be construed as a prediction of future performance or events are forward-looking statements which involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by such statements.

These factors include uncertainties as to levels of orders; ability to record revenues based on the timing of product deliveries and installations; market acceptance of new products; changes in economic conditions and market demand; pricing and other activities by competitors; and other risks including those described from time to time in the Company's filings on forms 10-K and 10-Q with the Securities and Exchange Commission, press releases and other communications.

The accuracy and completeness of forward-looking statements should not be unduly relied upon.

Data I/O is under no duty to update any of these forward-looking statements.

Good afternoon.

Revenues for the fourth quarter of 2007 were $7.7 million, up from $7.3 million in the third quarter of 2007.

Gross margin was $4.3 million or 56.6% of sales, down from 62% in the third quarter primarily due to onetime costs and year-end adjustments.

Operating expense was $3.3 million, up from $2.9 million in the third quarter primarily due to the expenses of the Productronica trade show and year-end channel commission expenses.

Net income was $1.1 million or 14.2% of sales.

Earnings were $0.12 per share compared to $0.18 in the third quarter.

Cash at the end of the fourth quarter was $7.6 million, up 85% from $4.1 million at the end of the third quarter as a result of excellent collections and substantial inventory reductions.

For the full year revenue was $26.8 million, down $2 million from the $28.8 million recorded in 2006 with almost all of the decline occurring in the first two calendar quarters of 2006.

Net income for the year was $832,000 compared to $46,000 for 2006.

Earnings per share were $0.10 in the fourth quarter compared to $0.01 in the fourth quarter of 2006.

We finished the year with a healthy backlog of $2.1 million and substantial cash at $7.6 million.

Joel will provide you with more information on the financial results for the fourth quarter and for the full year in a few minutes.

In 2006 our focus was on completing major new products that would provide the platforms for future growth.

With much of the heavy investment behind us, our focus in 2007 was on generating financial leverage by restructuring the business.

That success is best seen by comparing the second half of 2006 with the second half of 2007.

For the six months ending 12-31-2007 orders were $15.8 million, up from $15.6 million in the second half of 2006.

Revenues were $14.9 million, down $400,000 from $15.3 million reported in the last six months of 2006, but gross margin was $8.8 million, up $400,000 from the $8.4 million in the same period of 2006.

Operating expense declined $1.3 million from $7.6 million in the last six months of 2006 to $6.3 million in the last six months of 2007.

Operating income was up $1.838 million from $823,000 in the second half of 2006 to $2.661 million in the second half of 2007.

After a thorough review of our second half 2007 results we are comfortable with our business model built on annual goals of 60% gross margin, 45% operating expense and 15% income at our current quarterly revenue level and have the leverage to generate increased profitability with revenue growth.

For 2008 our focus is on delivering substantial top-line growth.

In 2007 our orders from customers and channels in Asia were down $3 million from 2006.

In the fourth quarter of 2007 re reassigned one of our managers with previous Asia sales experience to manage our selling efforts there.

We also added a second sales manager who has substantial experience selling to major accounts in Taiwan and China.

As we speak Carl [Vigle], our Vice President of Worldwide Sales, and Nick Deppen, our new Asia sales director, are flying to Bangkok for our 2008 Asia sales meeting.

I'm confident with this renewed focus on Asia we will see resurgence in our revenues from this very important region.

I've talked previously about our success with automotive electronics accounts in 2007.

Frost & Sullivan, a market research firm, forecasts a 68% growth in the use of microcontrollers for automotive electronics by 2011.

This provides an excellent growth opportunity for us as our solutions address the business needs of the leading customers, such as software configuration control, traceability and secure data management.

We have been communicating with the leading automotive customers and will be introducing new versions of the RoadRunner solution in 2008 in response to their needs.

This past month we introduced our new flash boost technology that is now available on our Flash (inaudible) 2 programming engine.

We see an immediate sales opportunity as our existing customers upgrade their installed base of systems with our latest technology.

Flash boost provides unparalleled programming speed and as a result will substantially improve the performance of their existing systems.

We had the first public showing of our Flash Media Duplication solution built on the FLX500 platform at the Productronica trade show last November in Munich, Germany.

This solution is being provided to the largest wireless handset manufacturer and with special software we developed is integrated into their manufacturing information system.

We expect this to be an important area for growth in 2008 as more companies preprogram content onto these Flash Media cards in both Secure Digital and MMC formats and look for automated as opposed to manual solutions.

During 2008 we plan to introduce additional new product solutions that, like the Flash Media Duplication solution, provide both vehicles for growth as well as substantial value to our customers that lift us above the commodity level of device programming.

Finally the sale of some older patents that we announced last quarter is progressing.

We expect it to close in the first quarter of 2008 adding approximately $2 million in additional earnings for the quarter and an equivalent amount of cash.

At this time I will ask Joel to provide you with more information on our financial results.

Joel?

Thank you, Fred.

Good day to everyone.

Revenues for the fourth quarter of 2007 were $7.7 million compared to $7.3 million in the third quarter of 2007, an increase of 5%.

International sales represented 83% of total sales for the quarter, a 3 percentage point decrease compared to the third quarter of 2007 with Europeans sales increasing by 15%, Asian sales increasing by 13%, and the Americas sales decreasing by 23%.

Note that during the third quarter Mexico, part of the Americas figures, had the large automotive sale of approximately $1 million.

(inaudible) increasing revenues from the third quarter 2007 related primarily to increased sales of automated programming systems, especially the ProLINE RoadRunners and the PS systems which was offset in part by declines in our non-automated programmers and programming services.

Orders for the fourth quarter of 2007 were $7.5 million and our order backlog at the end of the year was $2.1 million.

The gross margin for the fourth quarter of 2007 decreased in dollars and percentage compared with the third quarter of 2007.

Gross margin as a percentage of sales was 56.6% for the fourth quarter compared to 62% for the third quarter of 2007.

The primary cause for this change was due to factory variances for the fourth quarter of 2007 that were unfavorable by 245,000 compared to the prior quarter.

These variances included some year-end inventory cost standard changes which lower future costs; obsolescence; physical inventory adjustments; warranty costs, especially those associated with upgrading all of the FLX500's with an improved and much less costly pick head; some unusual scrap costs and a less favorable variance associated with the refurbishment of used equipment sold.

Operating expenses were higher by $285,000 in the fourth quarter of 2007 compared with the third quarter of 2007 before the amounts related to the restructuring.

While R&D costs were roughly flat, selling, general and administrative costs increased $298,000 due to three main factors -- marketing included an $83,000 increase primarily associated with the Productronica major trade show and related product launch that is not expected to be repeated; sales commissions included $116,000 of bonus level incentives to channels that has been taken out of the commission structure for 2008.

Finally, there were fewer savings in the fourth quarter related to accrued vacation usage than in the third quarter of 2007.

Our GAAP-based net income was $1.090 million or $0.12 per diluted share for the fourth quarter of 2007 compared with the net income of $1.606 million or $0.18 per share for the third quarter of 2007.

Net income for the fourth quarter of 2006 was $46,000 or $0.01 per share.

Net income included the impact of equity compensation expense under FAS 123R of $89,000 and $87,000 for the fourth quarters of 2007 and 2006, respectively.

Data I/O's cash and securities were $7.6 million at the end of the fourth quarter.

This reflects the favorable impact of early sales during the quarter being collected and the collection of the Asian distributor receivables that had been delinquent and we talked about last quarter.

For the year 2007 revenues were $26.8 million compared to $28.8 million for 2006, a 7% decrease.

Gross margins as a percentage of sales in 2007 were 56.1% compared with 53.8% in the prior year.

The gross margin percentage was primarily -- the gross margin percentage improvement was primarily due to restructuring actions taken during the first half of 2007 to lower factory costs as well as increased direct sales creating a favorable channel and price mix and product mix changes between the two periods.

The initiative to move aftermarket adapter production to our China operation is one example of the success of our gross margin improvement focus during the past year.

Not only did this lower cost, but also improved delivery times with this dedicated team and flexible production process.

The operating expense reductions were primarily resulting from our restructuring actions providing significant savings even including the net $725,000 of restructuring related charges taken in 2007.

Net income for the year 2007 was $832,000 or $0.09 per diluted your compared with a net income for 2006 of $46,000 or $0.01 per diluted share.

Net income included the impact of equity compensation expense under FAS 123R of $316,000 for 2007 and $370,000 for 2006.

At this point I will turn the conversation back to Fred.

Thank you, Joel.

While the first quarter has historically been our weakest quarter seasonally, we have the new initiatives mentioned previously that we expect will provide the basis for achieving our growth goal in 2008.

At this time we will take your questions.

(OPERATOR INSTRUCTIONS).

David [Cannon], [Point] Capital.

Congratulations, guys, on another nice quarter.

Thank you very much.

First question, Joel, if you could just reiterate -- I know there were some -- there were a couple things that affected gross margin on a going forward basis, if you could just take me through that again, kind of what a more normalized gross margin would be.

I'm assuming those nonrecurring items cost about $0.03 or $0.04, is that about right?

Yes, it's about 3 to 4 margin points were associated with variances that were, compared to Q3, much less favorable -- or unfavorable I should say -- and as a result that really caused us to be off our 60% gross margin target really by those variances.

So if we had been able to avoid those types of variances we would have been right on our margin target for the quarter.

Joel, why don't you take just a minute and walk through what those variances were for Dave?

If you could quantify them so I can model it going forward, what a normalized gross margin would be and kind of figure out what the EPS would have been excluding those items.

Okay.

Well, there was about 245,000 worth of those types of variances during the fourth quarter.

And when I look and see what types of them would not be repeated, it would be things like some of the special floor stock and scrap usage during the quarter and that would probably have been about 1.5.

You would have had some physical inventory adjustments, some obsolescence and some standards changes that probably would have resulted in about another point, point and a have.

And then you would have had sort of that demo refurbishment variance cost difference that was about another percentage point there.

So you're really talking about 3 percentage points that would be off what I would call a normal or a forecast type variance levels and obviously a little bit more than that because Q3 had some favorable variances which gave us a little bit of upside on our target for the gross margin.

So going forward, if I use 59 to 60% am I within the ballpark?

Is that a reasonable number?

Are you comfortable with that?

I'm very comfortable that that's the target that we're aiming at.

I would have to say that we're doing our best to reduce variations in the predictability of these kinds of variances, but we haven't been able to consistently be able to say that we can project our gross margin target with 1%.

So I guess I'd have to say that it can be more variable than what you've said, but that's certainly the point target that we would be aiming at.

I think, Dave, the thing that I can add is that -- a couple of things I can add.

One is that some of these things tend to reverse in the second quarter -- pardon me, in the first quarter in that we get the favorable effect of the standards change in the first quarter compared to the unfavorable effect in the fourth quarter when we reset standards at the and of the calendar year.

So that's a factor.

I think a good example of that one is that we liquidated a very substantial layer of inventory during the quarter.

We brought inventory down $926,000 and included in that was a bunch of labor and overhead that in essence had been capitalized into inventory and then flushed back through operations this quarter.

I would tend to expect that we artificially lowered our inventory maybe a little bit less than what I would normally have expected it to be at.

And so if we build a little bit of inventory in Q1 that would end up having a favorable labor and overhead application variance where this quarter we had a fairly significant negative variance as a result of that inventory liquidation.

Okay.

And then as far as on the SG&A side, I was trying to write this stuff quickly.

There were some nonrecurring expense in there as well.

Was it around $200,000 in total?

Yes, there was $200,000 of nonrecurring not expected to happen again type expense.

One was the Productronica trade show that was a special type program that we put on there associated also with some launch activities and that was close to that $80,000 marketing change.

And then the other big one was this I'll call it onetime bonus program that we had for some sales channels that cost $116,000 that again is not expected to be taken out of our sales structure for 2008.

Okay.

It almost sounds like without some of these nonrecurring items it would have been -- we would have been closer to $0.17, $0.18 for the quarter which is interesting.

Okay.

Fred, you spoke about -- you used the words substantial top-line growth in 2008.

Is that something that we should even expect to see in the first half of this year or is that more back-end loaded?

Dave, we would certainly like to see it in the first half.

I have to be honest in terms of the way our business has tended to be structured in the last few years.

It's been more back-end loaded.

We're trying to change that and a lot of the initiatives that we've launched are really, really focused on doing that.

So it's hard to say exactly, we're very comfortable with our growth goal of 15% for the year as a goal.

How that exactly plays out on a quarterly basis is a little less easy to predict.

I see, okay.

Do you expect to be up though year-over-year in the first half?

I think last year you did like what, $11.8 million in the first half?

You know, Dave, that comes a little bit too close toward giving guidance which we're just not prepared --

I understand.

In Asia, Joel, I think you had said that Asia was up for the fourth quarter 12%, is that correct?

I believe it was 12 or 13%.

Yes, I just don't have my note right here in front of me.

But yes, it was up.

Asia was really, really bad in the first and second quarter; that's when we had the worst piece of Asia.

It started coming back in the third quarter, particularly a little bit of wireless piece, and then we saw a continued improvement in the fourth quarter.

It still isn't anywhere back to where it had been a year before, but we have been showing continuous improvement in the last couple quarters in the Asian and particular China region.

But compared to a year ago all of Asia was down.

I see.

And then what was backlog at the end of the quarter and can you give me a sense as to how much of that is shippable in Q1?

2.1 million was the backlog at the end of the quarter; the vast majority of that is all scheduled for shipment in Q1.

There are a couple systems that will be delivered in Q2 based on a delivery schedule, but other than that basically the vast majority of it is all Q1 scheduled shipments.

Okay.

This morning there was an announcement by [RIM] that their subscriber growth was going to be much stronger than they originally guided to.

And I know they're one of your customers.

Can you talk about where the momentum is in your business?

Is it more coming from higher end handset business or automotive -- what's driving this increase in sales that we've seen the last couple quarters?

Dave, it's really come in two areas.

One is in the whole wireless area where we see continued movement toward higher end handsets, handsets with greater capability delivered by companies like Apple and companies like RIM companies like Nokia.

So we have some solutions that are aimed specifically at delivering the kinds of business solutions that they need and we're going to be rolling out some additional offerings in 2008 that's focused in that area.

And the good news for us is that these companies, while they have production swings and so forth, as you know, that at least in this segment of the business there is very forward momentum going as more and more consumers shift away from low-end phones, low capability handsets and so forth into more full function units that incorporate many more features and even things like personal navigation and so forth.

So that certainly is a driving force in our business.

And those customers are going to continue to do well for us we believe throughout 2008 regardless of any short-term swings they may have in their business.

There was an announcement this morning, Continental -- we had announced a major order last year from Continental, an automotive electronics manufacturer based in Berlin, headquartered in Berlin, and they announced today their earnings for 2007.

Their sales were up 12% to EUR16.6 billion and their forecast for 2008, they said -- this is their Chief Executive's quote, "Despite the clouds hanging over the economic environment we are sitting clear targets strengthened by our Siemens [video] acquisition in 2008.

We intend to improve the total calculated sales generated in 2007 of around EUR26.4 billion".

So you can see that's up substantially from the 16.6 billion that they reported and of course it pushed their share price up and we see a lot more opportunity with them as with the other automotive companies that have already committed to their next generation electronics systems and telematic systems and those are real opportunities for us as well as the new solutions like the Flash Media Duplication.

Okay.

One of the things that I would point to for 2007 is that much of our sales really came from new customers this year and the number of new customers, particularly OEMs, was really a good thing from being able to see customers that can be repeat customers as well as the fact that many of these customers weren't just capacity type buys like our programming center business which was actually down in 2007.

Okay.

Let me ask you another question.

I see cash was up substantially, almost $3.5 million, and it seems like you have a bit of a high-class problem right now.

By next quarter when you collect the money from the patent sale you'll probably the North of $10 million in cash, what do you intend on doing with that?

Would you guys consider a buyback or a dividend?

What are some of the things, if you've even thought about it at this point, what are the things that you're considering at this point?

We don't have any plans for a buyback or dividend at this point in time.

As I mentioned, we've got a number of new growth initiatives that we've launched and some of them take us into new areas and that could require some cash depending on how these plans unfold.

So we're certainly taking a wait and see attitude right at the moment on this.

Cash is good so that's really our plan at the moment.

Were there any 10% customers?

Yes, we had orders from one that would be a 10% customer, but from not from a sales standpoint.

What percent was adapters?

That order, by the way, was it just at the cusp of 10% or significantly above?

Just above.

You asked for about how much were adapters during the quarter.

Around the same 21% level for adapters.

We kind of mixed that in with some aftermarket pieces that makes that a little bit bigger piece of the business, but probably about the 20% level.

Okay.

I'm going to let someone else pose some questions.

I'll go back in queue and possibly ask a follow-up or two.

Thank you.

David Segelov, Leviticus Partners.

Great quarter.

Can you just go into a little bit about your new product, what markets that product opens up for you, what the potential is, some of the new customers potentially and talk a little bit about security?

Well, yes, I'll address that, Dave.

We introduced at Productronica the Flash Media Duplication solution that we've been delivering to the largest handset manufacturer, and this is more duplicating content onto flash media cards.

These would be things like SD cards, micro SD cards, MMC cards, mini SD cards.

This can be pre program content, it can be navigation maps for portable navigation devices, it can be navigation maps for your automotive navigation system.

The automobile manufacturers are currently using DVD players inside of the automobiles and they load the maps into the automobile by loading a DVD into the DVD player.

And that's a very high failure rate item from a warranty standpoint and the automobile manufacturers want to get that optical system out of the automobile and replace it with a truly electronic system where the maps are loaded on SD cards or MMC cards.

And so that's an example of what we mean by this Flash Media Duplication initiative.

It's basically loading these content maps on these SD cards and there are a number of reasons why you want to get away from these older formats, older style of media.

CDs can become scratched, DVDs can become scratched and, in addition to the problem, they're not rugged in this more robust environment that you need where you have huge temperature swings as well as a lot of shock and vibration.

And as we look out in time and consumers want the convenience of carrying more and more of their digital information, their movies, their music and so forth around with them, it's just a heck of a lot easier to carry it around in a very high density flash media card that you can put in your pocket rather than carry it around in stacks of DVDs.

So you can envision a lot of applications where this preprogramming has real potential.

And so that's really the focus of this solution.

In the case of this manufacturer that I mentioned in the handset area, there we have the solution fully integrated from a software standpoint into their manufacturing environment so they can release jobs to it, they can set up jobs where these cards get duplicated and they can specify quantities and so forth.

They can monitor the quality of these cards.

So then security is another layer that we can add on.

And I'm really not prepared to go into that because that's another whole dimension of what our value proposition is built around and obviously we have customers to whom that's incredibly important.

I've mentioned in the past Apple and RIM and so forth.

Can you give a theoretical example of what sort of protection you could provide?

You know, there's, I mean -- yes, I can do that.

One of the key things that accompanies very often need is they need to be able to manufacture in locations which are remote and in the process of manufacturing in a remote location you're in the -- you have to transmit a file, a datafile, it might contain the operating system of your phone or your portable navigation device or your set-top box, and in many cases that file that you transmit is a very critical file, it's a file that you don't want widely scattered around on programming systems, manual programming systems that might be set up on benches all across a manufacturing facility in Asia for example, where you have literally hundreds of people that might have access to that datafile.

So you want to be able to encrypt it in some manner, you want to be able to transmit it and so forth.

So that's an element of protection that you want to wrap around it.

You want an auditable trail so that if something happens that you can go back and find out if a leak occurred, if something inadvertently got copied or some of the IP was stolen that you can trace it back and you can identify when that occurred, where it occurred, who committed it.

And you have an accountability record so that you can enforce your controls over your manufacturing supply chain.

So there are a lot of issues in this area.

We've been involved in this more a number of years.

We've provided solutions to set-top box manufacturers where we provide a secure programming environment where they can program in encrypted serial numbers which they have control over, no one else has access to and that's a key to their pay-per-view model in their set-top box manufacturing.

Just going back to the automobile example, have they started to bring out models in 2009 that would incorporate the sort of flash system or is it more theoretical than that?

No, there has been an edict issued by a number of manufacturers that they want the DVD players out of the cars by 2009.

I don't know exactly where each different manufacturer is on that time schedule, but we do know in fact that a number of firms have committed to that.

So if that in fact occurred you would see orders in 2008?

You know, that would seem logical, Dave.

I wouldn't want to make that commitment.

I understand, but if it's going into the 2009 model it would seem logical that you would see some orders in 2008.

Right.

And of all of our customers the automotive accounts are the ones that give us the greatest lead-time, the greatest insight.

We just got an order from an automotive manufacturer in the fourth quarter and they're not actually going to be using it at capacity for nine months.

They're basically going to do some pilot runs on it for setting up this line, getting everything ready.

So you're absolutely right.

I think the other thing is, in particular the comment with regard to automotive, is that they are somebody that really understands our value proposition and the quality initiatives that we deliver.

And so that's a customer set that we have a unique ability to serve better than any of our competitors.

And have you changed your model at all selling to the automobile industry in terms of trying to get a recurring revenue stream?

I would have to say that of all of our businesses it's the ones where our recurring revenue stream is the most predictable in the sense that they are far more concerned about quality, they're far more concerned about configuration control.

If they have a product recall, David, the costs associated with that are enormous.

So they're very concerned about the quality.

And so we just don't see the leakage there with the automotive customers where they won't mess around to save a penny.

Essentially they won't put their business at risk to save a penny a part on the programming cost.

Great, thank you.

Marcel Herbst, Herbst Capital Management.

Good afternoon.

Congratulations on yet another nice quarter.

Thank you very much.

I wanted to ask you when in the past you spoke about your initiatives to improve the revenues in Asia you mentioned that -- first, Motorola might be picking up again; and secondly, you mentioned a new opportunity with Samsung and I just wanted to see if you can update is on that.

Well, we have -- we really don't talk about -- specifically about particular customers because, unfortunately, it's very difficult to predict the buying behavior of an individual customer and in the process of selling to a major account.

Any handset manufacturer anywhere in the world, they go through a pretty elaborate process of selecting equipment, evaluating equipment before they commit to placing orders and we're just never sure what's going to happen until the order places.

With respect to Motorola, I mean Motorola had a lot of difficulties in the first half of last year which had a big impact on us, primarily because they were building capacity and built capacity up beyond what they were able to sustain in the first and second quarter of last year.

So they ended up with some excess capacity and that rippled all the way through the supply chain, through their EMS companies, their manufacturing partners and impacted us.

We know they have plans to introduce new models, they've introduced some new models and we'll just have to wait and see how that demand grows as they use up the capacity that they have and get into a position where they need new capacity.

But they've got to be back in the growth mode before they're actually needing that capacity.

Now we have a new sales management team in Asia, we've got a renewed focus there.

We've taken a lot of initiatives.

We're signing up new distributors around Asia for China and other areas in Asia.

And as I said, we're having a sales meeting, the guys are on the plane right now flying over there for that meeting.

So I'll know a little bit more about Asia in the next few days as I get secondhand the info on what really transpired at the Asia sales meeting, but we have good hopes for Asia in 2008.

That sounds good.

Everybody talks about slowing economy lately and I was wondering, have you actually seen from your current customer any signs of weakening demand in the beginning of this year?

We really don't see anything related specifically to economy.

Our business is such that there are major capital investments, they're generally driven by new product introduction plans, dates and schedules for new products and support for those new products, particularly with our OEM customers.

Programming centers are a little less predictable but certainly with our OEM customers it's more predictable, it's more planned.

The programming centers that serve the smaller and medium-size companies, they continue to report good results, companies like Arrow and Avnet.

So we just don't really see anything at all related specifically to the economy.

In our business there are always situations where customers have their new product introduction schedules slip, and so where we might have thought that they were going to place an order in the second quarter, we end up getting the order in the third quarter and so forth.

But we just haven't seen any change in our business outlook that we can specifically relate in any way to the economy.

Excellent.

Thank you very much.

(OPERATOR INSTRUCTIONS).

And gentlemen, there are no other participants queuing up -- excuse me.

Steve [Spence], UBS.

Gentlemen, good afternoon.

Any thoughts at all on stock repurchase?

No, we don't have any thoughts on that at this point, Steve.

We're planning on holding our cash for really the new businesses that we're in the process of creating.

And so not that we have any specific plans right at the moment for spending the money, but we just don't have any plans to buy back any stock right now at the moment.

In terms of in a very general sense to the additional cash to support obviously a higher -- some balance sheet issues for AR and inventory and the like and the new initiatives, would there be a level, would it be safe to assume that if cash grew -- I'm picking a number here -- at $10 million or higher that you folks would be revisiting that question?

Or are the anticipated needs for capital greater than that?

We don't have any anticipated needs at the moment that are greater than that, Steve.

This is something that the Board obviously talks about on a frequent basis.

But as I said, we don't have any plans at the moment.

Okay, thank you.

Robert [Cathage], [Lothe Canals] Capital.

I just wanted to ask you kind of a big general question.

In this past half of the year when things started picking up for you guys, I was going to say if you could kind of characterize something that occurred differently than what you expected that was a pleasant surprise?

Was it more of the direct sales effort?

Was it the response of the or the appreciation of the value added from the automakers?

Can you give us some description of something that might have been a pleasant surprise that kind of made things click?

I think we're always pleasantly surprised when we're able to close some significant business.

I think that on the pleasant side I would say that we've had major customers that were doing well, companies like RIM, companies like Apple, companies like Nokia.

So that certainly was important for us.

We had success in penetrating the automotive area.

And Bob, I can only say that while, yes, we reported on the Continental order and that was one order that was a significant order, in -- our automotive business was virtually about 25% of our business in 2007 and in 2005 it was only 15% of our business.

So the success that we got was to a large extent the result of planned efforts that we had made over the two previous years.

And so if you go into my table just off my office write now today you'll see several automotive magazines, automotive space -- Harald Weigelt, our Vice President of Worldwide Sales is on the cover of one, I'm on the cover of another.

It's just a result of conscious efforts that we've made in the last couple of years to increase our presence significantly there.

And then I think the other thing that was a pleasant surprise to me is how well the team pulled together during the middle of the year when we were finally at a point where we could pull the trigger on our significant restructuring efforts to substantially lower the breakeven and also, at the same time, drive up our gross margins.

And again, that was largely the result of some planned actions that we had taken like transferring our adapter production to Asia.

And so these were things that we were -- had been talking about and the great surprise and pleasure was in really actually seeing it all come together and come to pass.

And our RoadRunner product, for example, has been around for a long time, but we were just really successful in 2007 with driving it into a bunch of new accounts where they could see some tremendous value with it.

So that's how it came about.

And as far as going forward, what do you think is something that you're kind of keen on that you'd like to see take place as far as something that's significant and important and also in kind of a general way for the Company in '08?

I think, Bob, it's a continuation of a change that I made this last year in terms of my personal style and how I'm managing the Company, in terms of being more directive and more demanding in terms of our management systems and management processes.

And that's essential for achieving predictability of financial performance and success with our models.

It's creating and reinforcing a sales process that consistently delivers the kind of orders that we want quarter after quarter, month after month so to speak.

An operations activity that consistently delivers the revenue and the gross margins that we need month after month and it's a product development process that delivers the new products.

We introduced a new product development process at the start of 2007 -- January 2007, a very simple process written up on a one-page piece of paper, but with some incredible check points, some control mechanisms and I have to say that the team has just done a fantastic job this year of implementing that process and driving it through the organization and scheduling the reviews and conducting the reviews.

Things like customer driven product definition.

We've ramped up the engagement with customers in the early stages of product definition by an order of magnitude I would say in terms of the level of engagement.

And so it's really a matter of building off that base of management stability that we created in 2007 and executing that which will cause this great predictability and growth engine to be realized.

I think we demonstrated in 2007 that we could get the financial leverage.

If you take the third-quarter results and the fourth-quarter results and add them together we made $0.30 earnings per share in the second half of the year.

That's a significant number and it speaks to the financial leverage going forward and so we're just determined to achieve it.

And did I understand you were saying that there was a goal of 15% top-line growth?

That's correct.

Okay, I wasn't sure.

Thanks very much, Fred.

Thank you, Bob.

Steve Spence, UBS.

Gentlemen, in light of the international sales component can you give us any guidance for your tax rate for '07?

Steve, that's continually a challenge.

We have the very large NOLs in the United States, so we really don't expect a domestic tax component of any significance, a little bit of state taxes possibly.

But internationally we still have some remaining NOLs in most of our subsidiaries, so they'll be sheltering a little bit of income, but there will probably be a little bit of tax in some of the jurisdictions as we finish using up those NOLs.

My best predictions might be that if we achieve our plans there will be a 10 to at most 20% potential tax.

But I'm going to be doing my best to skew the results so that we have most of our profits in the United States where we do not end up having to pay a tax because we would be using those NOLs carry forwards.

Okay.

And in terms of the figures which you've just released, essentially those are untaxed?

Essentially because we had NOLs that covered it in basically all jurisdictions.

Okay.

And in terms of the numbers that you just cited there for, we would want to tax effect.

And looking at the second half that you just referred to, we'd want to tax effect that at some rate going forward?

Joel gave you this number of 10% to 20%, I'd be disappointed if the number was over 5%.

But this is one of the more difficult ones.

The jurisdictions we're really talking about are Germany and China.

And so we do know where to focus, we do know where to control and that's what we're doing, Steve.

Fair enough.

Thank you.

Gentlemen, there are no other participants queuing up.

Well, thank you very much for joining us on the call today and we look forward to speaking with you at the end of the first quarter.

Thank you very much.

Ladies and gentlemen, that does conclude our conference for today.

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