Data I/O Corp (DAIO) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Data I/O second-quarter 2010 earnings release.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session with instructions being given at that time.

(Operator Instructions).

As a reminder, this call is being recorded.

I would now like to turn the conference over to your host, Data I/O Corporation President and CEO, Fred Hume.

Please go ahead.

Thank you and welcome to the Data I/O second-quarter conference call.

With me today is Joel Hatlen, Vice President and Chief Financial Officer.

This afternoon, Joel and I will discuss the second quarter of 2010 operating results.

Before we begin, I would 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 upon 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.

We had another great quarter.

Revenues were $6.6 million, up 69% from the second quarter of last year.

Net income was $859,000 or 13% of sales, up from a loss of $683,000 in the second quarter of last year.

The team did a great job of managing receivables and inventory so that cash at the end of the quarter was $16.8 million, a $1.1 million increase from the previous quarter.

Expenses excluding management and employee incentives were essentially flat with the second quarter of last year.

Ending backlog was $1.4 million, up from $1.1 million at the end of the first quarter.

Earnings per share were $0.09.

Joel will give you more details on the financials in just a moment.

Orders from customers in Europe grew 146% from the second quarter of last year, reflecting the strength of the recovery in our largest region.

Asia nearly doubled with 86% growth.

Much of that growth was driven by the wide acceptance of our new FlashCORE III products.

We were also encouraged to see that nine out of our 13 sales channels in North America were over quota for the first half of 2010.

These new channel partners continue to add new customers for multiple industries.

Overall, the Americas orders were up 20% over the second quarter of last year.

The strength in global demand was spread across all customer segments with significant levels of activity in consumer, wireless, automotive and industrial accounts.

This strong growth was distributed across all of our product lines as well.

Orders for our automated products and associated software were up 108% from the second quarter of last year.

Orders for our manual programmers and associated software were up 72% and orders for our aftermarket adapters were up 49% reflecting much higher levels of utilization for our equipment.

We recently participated at the Surface Mount Assembly technology show in Nuremberg, Germany.

This was a successful show for us in driving business with new accounts.

Our team made good progress on building our software business by completing one installation and creating new opportunities in our sales funnel.

I'm particularly pleased with the way our employees maintained their poise during the downturn and remained focused on the Company's strategic goals.

Their high-level of collaboration and innovation has allowed us to introduce new products such as our FlashCORE III technology that has been a big success and to make progress on other exciting products to be introduced in the coming months.

Our new social media platform, Data I/O Connect, ties the team together across the globe to reinforce that collaboration.

Data I/O.com, the Company's website gets a fresh look next month.

The improvements will provide higher levels of functionality for our customers, suppliers, and investors.

Our major wireless and automotive customers continue to prosper and that should be good for us.

We have also seen a dramatic turnaround in companies' willingness to spend capital monies to support new projects and capacity expansion compared to this time one year ago.

We have opportunities to participate in considerable new business in Asia, where rising labor costs are making our automation solutions more attractive.

New durable goods orders for computers and electronics products as reported by the US Census Bureau were $27.6 billion in May, the most recent month for which data are available.

That compares with $24.4 billion in May of 2009 and $28.2 billion in May of 2008.

Those figures suggest that the electronics industry, while recovering, has a way to go before it fully recovers.

At this time, I will turn it over to Joel.

Joel?

Thank you, Fred.

Good day to everyone.

Revenue for the second quarter of 2010 were $6.6 million compared to $3.9 million in the second quarter of 2009, an increase of 69%, and $6.3 million in the first quarter of 2010.

International sales represented 88% of total sales for the quarter with revenue increases in Asia of 86%, Europe of 66%, and Americas of 60%.

Our FlashPAK sales benefited from the growth in demand from Asia and our PS family benefited from the growth in demand from Europe with each of these product lines increasing over 300%.

The variation in sales percentages versus order percentages as Fred discussed relates to the use of backlog and deferred revenues.

The backlog at the end of the quarter was $1.4 million.

The gross margin as a percentage of sales was 58.4% for the second quarter of 2010 and compares with 48.3% for the second quarter of 2009.

The primary causes for this percentage change were due to the effect of increased sales volume relative to fixed factory and service costs, the product mix especially from additional software revenues, and lower factory variances.

Partially offsetting this was the inclusion of additional development costs charged to operations associated with software contract revenues.

Operating expenses were $2.8 million in the second quarter of 2010 compared to $2.7 million in the second quarter of 2009.

The second quarter of 2010 had more commission expense due to sales volume and more incentive compensation due to the operating results.

In accordance with US generally accepted accounting principles, GAAP, net income of $859,000 or $0.09 per diluted share for the second quarter of 2010 compared with a net loss of $683,000 or $0.08 per share in the second quarter of 2009.

Earnings per share included the impact of equity compensation expense of $0.01 per share for both the second quarter of 2010 and 2009.

We had the income tax provision for the quarter due to the profits in foreign locations.

Our net operating loss carryforwards in the United States are available to continue to offset our future US net income, and we will continue to analyze and manage taxes as the year progresses.

Data I/O's cash increased to $16.8 million at the end of the second quarter.

During the quarter, we improved collections with accounts receivable decreasing by $160,000 despite the increase in sales volume.

We were able to continue to reduce by $326,000 our inventories by carefully managing our purchasing during the quarter.

At this point, I will turn the discussion back to Fred.

Thank you, Joel.

Now we are happy to take your questions.

(Operator Instructions) Dennis van Zelfden, Brazos Research.

Good afternoon, gentlemen.

I am an ex-Wall Street analyst, but I was not a technology analyst, so please bear with me if I ask a stupid question.

The first one is from a housekeeping standpoint, what was depreciation in the quarter?

I actually have that right here in front of me.

It was not really any different than our last quarter, so you can pretty much look at our Q from last quarter and have that number.

Okay, and I know you said stock compensation was $0.01.

Do you have the dollar figure or was it the same as last quarter as well?

It was pretty close.

It was about $84,000 for the quarter.

All right, I would assume or can I assume that depreciation is contained in the SG&A line?

Depreciation is actually spread over the financial statements with a part of it showing up in cost of goods, some of it being in SG&A, and some of it being in our service categories for rental type equipment and the like.

So it's actually spread out there, but if you look in our 10-Q, there's a footnote with depreciation in it that says what the total amount was.

Okay, going to the sales line, can you tell me if your business is seasonal on a quarterly basis?

The business does tend to be somewhat seasonal on a quarterly basis with the first quarter generally being in the weaker quarter simply because so much of our equipment is used in production applications and in many cases for consumer products and things that tend to peak at the holiday season and then production slows down in the first quarter of the year.

So generally the first quarter of the year is seasonally a weaker quarter with most of the business back-end loaded toward the second half of the year.

Okay, now in the first quarter, you reported a sales growth of 43% and then second quarter a whopping 69%.

Would it be reasonable to expect those kind of gains in the second half of the year?

Well, you know, I think that the extreme magnitude of those comparisons reflect the very deep weakness in the electronics industry one year ago.

And those will moderate as we move forward by quarter.

We saw the recovery starting for us in the third quarter last year and so as a result, we won't see quite the magnitude of revenue increase n a comparative basis, I don't believe.

Okay, let's say that after we've lapped the so-called easy comparison, what kind of topline revenue growth do you strive for there?

You know, that's not a number that we really give, okay?

Okay.

I read the Q or the K and it really talked about some -- a lot of good things happening around the world, and you just described your sales breakdown and so on and so forth.

It appears -- correct me if I'm wrong -- that the growth that you're having is not expected to stop in the next couple or two or three quarters, and I say stop I mean go to zero.

Of course not.

You know, our focus as a company is to create new business, new products.

We have new initiatives all aimed at driving growth and increasing the value that we add to our existing customers and to new customers.

So we're very much focused on that.

It's just that we don't commit to a numeric number that we publish.

Okay, let's just go on a few other things.

On your slide show, you had indicated that at a $7 million quarterly revenue run rate, you expected to generate about a 15% operating margin, and in fact in this quarter, you only had $6.6 million in revenue and you had 15.4%.

I guess my question is can you give us some general guidelines as to the operating -- what the operating margin would be at say, an $8 million per quarter run rate and a $9 million?

Well, you know, it's -- we have a pretty simple model actually that you can use yourself to get pretty close and that is that our gross margin target is 60% and we have an operating expense level of around $2.7 million plus a little bit of increased sales commission as the business grows over about $6 million.

So then there's about 10% of sales commission on the increment.

So you can get a pretty good handle of what the model would look like for any particular revenue level.

We have a pretty flat expense base.

There's really not much in the way other than the incentives and the sales commission that I mentioned.

And even though the cost of goods will swing around a little bit from quarter to quarter depending on how much we ship through our direct channels, how much we ship through representatives and distributors, you know, the 60% margin target is a pretty good figure to use.

Okay, again not to press here, but when -- if you get to the $8 billion to $9 million per quarter in revenue, might that gross profit margin go up?

Yes.

There certainly is additional leverage over our fixed overhead expenses, yes.

Okay, what kind of CapEx are you looking for in this year and next year?

Yes, we are pretty much more on a replacement scheme of capital expenses and don't have any significant plans.

We don't generally announce any specific target for a going forward piece.

Okay, in other words can I just look --

You can look backwards and we would be pretty similar.

I'm sorry, say that again.

You can look backwards and we would be pretty similar.

Okay, that's good enough.

I've got more, but I'll let someone else ask.

Thank you.

David Kanen, First Midwest.

Good evening.

Congratulations.

Great quarter.

A couple questions.

What was the other expense below operating income?

Well, the biggest component of that was actually foreign currency exchange related losses that came out primarily as a result of the fluctuation of the dollar against the euro.

I see, okay.

It's something that the Greek piece hit us a little harder than we had anticipated and we've taken measures to -- in this particular case because we have the cash to make the subsidiaries pay their bills instantly so we don't end up having the exposure on some of those receivables -- euro receivables.

Okay, so EBITDA essentially was close to almost $1.4 million for the quarter, correct?

If I add back stock-based comp, depreciation and amortization, EBITDA was just under $1.4 million.

Is that right, Joel?

I haven't actually measured that, but that does sound about correct.

Okay, what's -- this was probably your best second quarter in many, many years as far as I can remember.

What were some of the drivers there?

What were some of the areas where you saw considerable strength?

Well, Dave, I think the strength -- I guess the issue that I would have to say is it was the breadth of the strength, the fact that the strength was across all of our geographies, that it was across all of our products.

It was across our -- with the exception of some of the very old legacy products.

It was across our software offerings.

It was just the fact that the recovery was pretty widespread throughout the world and that the automotive industry had recovered significantly in Europe, that the wireless companies are doing well, the wireless handset manufacturers.

The industrial accounts were doing well.

We had programming centers resume buying.

EMS companies, it was just -- it was the breadth of the strength, David, that was really spread across all of our business areas.

I would add probably two things to that and the other two would be the amount of software that's showing up into our overall product mix.

And then the other second is just the fact that we've been able to really keep the expense level relatively fixed relative to how far we brought it down during the downturn and have been able to reap good profitability as a result of that as well.

When you say software, are you talking software as a stand-alone or are you talking about software, meaning bundled with products such as FlashCORE III or add-ons to automated systems?

The answer is actually both.

Okay, and what were adapter revenues for the quarter?

About $1.6 million.

Okay, and what was deferred revenue at the end of the quarter?

Just one second here.

Deferred revenues were $1.4 million.

Okay, and what were orders for the quarter?

$6.4 million.

I'm sorry, that's wrong.

That's $6.5 million.

Okay, and then a question follow-up for Fred.

Can you speak generally about your pipeline?

And are there new products and markets opening up for your products at this time?

In the past you were traditionally a play on wireless.

Are there now more products that need programming solutions?

Can you comment on that a little bit?

Well, David, I think that as I mentioned earlier, we see a lot of opportunities emerging in the Asia region where a lot of the electronics manufacturing is taking place.

And related to things like tablet PCs and iPad types of products as well as the smart phone business, so that's continuing to provide good opportunities for us.

It was a strong sector for us in the second quarter and we see good opportunities there going forward.

At the same time, we are branching out.

We are reaching more industrial customers.

We did that in the second quarter.

We saw some good automotive -- pardon me, automated systems activity in the Americas that was strong related to things like 3-D television.

So the answer is yes, there is a lot of things that are creating a favorable environment for us.

And so when we look at the pipeline or the funnel, we see a lot of companies that have requirements, have new projects on the horizon in development where they are going to be needing a programming solutions and we have the opportunity there.

I think the only caution I would put is that it's companies need to confidence, long-range confidence in the business environment before they sometimes are willing to spend capital, money for capital equipment.

And so that's the only caveat that I would say that would affect us moving forward.

Okay, that's fair.

Let's see, there was another follow-up that I had.

Yes, Fred, you say your OpEx is around $2.7 million, $2.8 million a quarter with a variable component related to sales commissions or which is your revenue.

Can you guys scale to $8 million, $10 million a quarter?

Can you get that kind of throughput with the fixed cost structure that you have currently or would you need to add incremental OpEx exclusive of variable?

Right, I think the key word there is need.

David, I think the answer is we would have no need to create or to suspend additional monies apart from the more variable elements like the sales commission.

Because we have the capability in our structure both in operations and our operations here in Redmond, our operations in China, our sales operations and support operations in Germany and in the US.

Now, at some point you need to add some expense as you get more installations in the field and you have more -- more equipment just being installed generally you need to add a service person or two or there may be a particular initiative that we need to provide some additional engineering resource to fund.

But those are really more elective decisions than they are anything that just the sheer volume of business demands.

Okay, I will let somebody ask some questions.

Thank you.

[Tom Maguire], private investor.

Good afternoon.

I am new to the Data I/O story and also I am not a tech analyst, so bear with me with my questions also.

In the slide presentation that is on your website, there's a slide towards the end that talks about the size of the industry being a $2 billion or $2.5 billion industry and that you are the largest independent and you are much bigger than your next largest competitor and much, much bigger than the second competitor.

My question is are there many trends or do you see -- foresee trends where companies could outsource programming that they are doing in-house or through captive programmers and that you could pick up business that way also?

Tom, that's a good question.

There's a lot to your question, so let me take a moment to deal with it.

So there are approximately 15 billion programmable devices shipped each year into the world market.

Flash memories primarily and microcontrollers, and interestingly enough about it, and even number of each.

And they get shipped to different places.

Half of the flash memory goes into Asia and more than a third of the microcontrollers goes into Europe primarily for automotive electronics production.

But in the broadest picture, its 15 billion parts.

Now, these parts can be programmed a number of ways.

Companies can outsource the programming of these parts to programming centers.

They can program them after placement.

They can put the programmable parts on their circuit boards, solder the parts down to the circuit boards, and then program them in a serial fashion in line after the circuit boards have been assembled.

That doesn't require typically the same amount of equipment that it does to program before placement the way that our equipment operates.

But it does have some impact on the speed of the production line and so forth.

So there are alternatives that customers can choose from depending on what fits their production methodology and scheme the most.

Now of course we think that our solution has a lot of advantages compared to the other solutions.

But it's our real -- our big competitors are really not other companies that do what we do.

Our big competitors are companies that are outsourcing programming to programming centers or companies that are doing it themselves after placement, either by using their own automatic test equipment or doing it at the end of the production line with some kind of personal computer and USB interface cables and that sort of thing.

So for us, the market we estimate we are touching about 20% of the parts out there that get programmed with our equipment, with our solutions.

And so for all practical purposes, our marketplace really isn't limited.

It really is strictly depending on us and our ability to think up clever ways to convince customers that our solutions are more economically viable for them, that they are better -- provide better quality, provide better data tracking, traceability, all of the other things that our software and her overall solutions provide.

So that's where our product development gets directed is to really making us more and more attractive compared to the alternatives that are out there.

Is that helpful?

Yes, it is.

Thank you very much, Fred.

So if you do make yourself more attractive and you are able to win more and more business, how much capacity do you have or would you have to increase capacity yourself?

Well, first of all, we don't do any of our own low-level assembly.

We basically have all of our low-level work outsourced to a number of suppliers and we have typically more than one of those suppliers that we draw from.

We only do final assembly and test.

And then in the case of our consumable products, our basically our adapters, which is the major part of the recurring revenue, we really source that from our operations in China.

And there we have virtually no capacity constraints.

So we've really actually improved our customer deliveries by taking advantage of our much greater capacity that we have in our operations in Shanghai.

So the answer is we don't really have big barriers that we have to overcome to increase capacity.

It may be adding another technician or another test engineer in our factory, but it's really not much in the way of additional capital equipment or facilities.

Okay, great, thank you very much.

A couple more questions.

You mentioned about perhaps adding another technician, etc.

What is hiring trends now?

What are -- in terms -- are you thinking about adding more engineers, more salespeople, etc.?

What is going on in terms of hiring?

Well, you know, frankly we don't -- let's see, I think that there are certain specific skills, Tom, that we need to fill at times.

You know, an engineer will leave and we have to replace an engineer or we see a need for a particular skill set.

And those are very selective.

We've worked real hard to get our breakeven point down and we intend to keep it down, so there's a lot of caution.

That said, there are things sometimes that you just have to do.

For example, you may have a salesperson, a sales manager that's nearing retirement age and you have to make a concrete decision, okay, you've got to get another sales manager in place, get them trained and up to speed before the other person retires.

So there are those kinds of things that we do on a selective basis.

And for example, we are in the process of replacing a general manager for our operations in China.

So we have a new person coming on board here in a couple of weeks and you will see a press release on that.

We are extremely excited about this new person coming on board to join the organization, what brings a tremendous amount of depth and skills and knowledge of the market in China.

So -- but it's very selective.

Okay, thank you.

In terms of software, you mentioned earlier as sales increase you will have some leverage in the gross margin, so that could increase too.

I presume as software increases that that could also help the gross margin.

But how do you price your software?

How do you sell it?

Is it -- I know you bundle some and you sell it outright.

Is that license or a subscription renewal model?

How do you do that?

Well, we have both, so for a lot of our products in the field, we offer software maintenance agreements and in some cases we include hardware maintenance into that contract.

But most of that revenue comes from software and that's a subscription arrangement 12 months and we book it, we essentially put it in deferred revenue and we recognize it over a 12-month period.

And so that's one model.

Then we have additional software which can be sold along with our equipment.

It's a licensed model.

We have site licenses.

We have seat licenses.

We have enterprise-wide licenses.

It depends really on the account.

Some of this software really is used by a company to gain control over their distributed manufacturing network around the world to maintain -- to protect their intellectual property and to make sure that their manufacturing processes in the remote locations are under good process control.

And that's very much license model.

The revenue that we get is a function of the size of the enterprise, the number of sites and the amount of programming equipment they have at each site.

Okay, one last question then and I thank you for your answers.

They are very detailed.

We are coming to a crossroads or we are there now of communication, entertainment, computing all-in-one device.

And you mentioned earlier about the smart devices like the iPad that will be coming out and how you could benefit there.

My question is could that -- could devices like the iPad, could they become as big a part of your business as smartphones are now?

Could that be like a third driver that could keep the cycle going for longer than you would think?

Well, Tom, I think the answer to that is yes.

We have these categories that we think of today.

We think of the iPad as one category and we think of the smartphone as a different category.

But what really distinguishes these two, well, the iPad doesn't have a camera and a smartphone does.

And the iPhone 4 has a forward-looking camera as well as a backward looking camera.

So there are things like that that deal with the feature set and so forth.

But when you strip that away and look down inside from the perspective of Data I/O and what we do, which is to provide the solutions for the customers that allow them to take the software that they have been developing, that they want to run down inside of this product, whether it's something like an iPad or something like a smartphone, that task is exactly the same.

And I think that those of us that live in the United States have a view that the Internet connection has traditionally been through a computer, a desktop computer or a laptop computer.

But when we look outside of the United States, we see people in other countries going through the transition from having no Internet access, not being connected at all to this web-based world, going completely through those intermediate stages and going to something like a smartphone or the next thing beyond a smartphone as the first time that they will really be part of that connected world.

And so I think it suggests that there's almost unlimited potential for growth in these new devices, whatever we ultimately start calling them.

One comment that I would make is the software content in these converged devices is just demanding more memory, more capacity of programming due to just the sheer number of bits that are getting programmed into them.

Right.

Good.

Thank you very much and really good quarter, guys.

I appreciate you bearing with me and my questions.

Dennis Van Zelfden.

Thanks, just following up with a topic that Tom brought up regarding the competition.

Of the business that you are getting, is it more chips that need to be programmed, say, from existing customers, just an increase in business in general, or have you been able to capture business from some of these in-house shops or the shops that do it in-house?

Well, you know, I would have to say that we have been blessed to have a good customer group and we continue to get more business from existing customers.

That said, Dennis, we've been very successful in the last year particularly -- and I think it's increasing quarter by quarter -- in capturing very clearly the economic benefits of our solutions compared to the alternatives.

We developed a tool last year that we called the site seller and it's something that a salesperson can take to a customer and they walk the customer through the customers programming strategies.

And the first decision the customer has to make is are they going to program inside the company or are they going to outsource programming?

And it takes the customer through the economic argument and the advantages and disadvantages in a pretty unbiased, very straightforward way.

So the customer doesn't feel like the customer is being sold, that this is a realistic representation of the advantages and the disadvantages and the economic consequences in both cases.

And then hopefully depending on whether or not the customer fits the criteria, the mold, and it demonstrates that programming inside is the way to do it, then it takes the customer through the alternatives that they have got if they decide to do it themselves.

Do they do it with off-line equipment before placement?

Do they do it with something like our RoadRunner, which is a just-in-time solution that fits directly on the line?

Or do they do it after placement with automatic test equipment, or do they do it at the end of the line?

And I think our sales team has become very now adept at dealing with these real business questions and raising the whole level of the sale away from well is your equipment better than X company's equipment to a much higher level of what's the right programming strategy for this particular account?

And really position us as the credible supplier that has the wherewithal, the reach, to sustain them and support them as they grow with their business.

And so we have been successful with this and it's creating a number of new accounts for us and we saw some last quarter and we have more that we are working on this quarter.

So we are pretty pleased with the way this is going.

After they see this whole process or you walk them through it, is it a no-brainer that they go with you?

Like I said, I don't know really all the details.

No, Dennis, it's not a no-brainer because it depends on a number of factors.

It depends on what their volume is.

If they are only programming a thousand parts a year, they don't need our equipment.

So it depends on their volume.

It depends on the peaks and valleys in their volume because they need capacity to be able to sustain the peak volumes.

For example, a wireless handset might manufacture -- might get orders from service providers that say we need you to produce 600,000 of these handsets and we need them in one month.

That's a whole different problem than saying we needed 600,000 handsets delivered over three months, right?

And so there are lots of things that go into this economic decision of what makes sense for a customer.

So it's not a slam dunk anyway, but I think what we have now is we have sales channels out there in the field that are going to spend a lot less time turning over rocks that are not going to get anywhere and focusing on turning over the ones that are the ones that really provide the promise for us.

You know, and that's typically where they have a high volumes of devices.

They have large data files and particularly when the devices are complex, like NAND flash devices, those are things where Data I/O is just clearly the far superior solution.

Are there large in-house clients -- potential clients out there now that are evaluating -- that are in this process that could come your way?

If so, what's the order of magnitude?

You have -- you are working on 20 of them and it could represent X millions or whatever?

Can you put it in perspective I guess what I'm asking?

Well, I could put in perspective this way, Dennis.

I could say that the world's largest handset manufacturer uses an in-house solution for all of their low-end wireless handsets.

But when they were developing a new design that required a high-density NAND flash device, that was a requirement, a complexity that didn't fit their homegrown solution.

And so they turned to us for our equipment and our solution for that product.

And so every time a company goes through this development of a new product and launching that new product into their production line, that creates an opportunity for us to get the customer to rethink their programming strategy.

So it's very fluid, very dynamic, and really competent salespeople that really understand and are trained, they can do a really good job of helping customers understand it with new designs that they are moving into production.

They just don't want to take a risk.

They should go to the company that has the experience and the expertise and the ability to support an extended supply chain anywhere in the world.

Say you went to a customer that could use your stuff, i.e.

they were big enough, and they didn't.

Why wouldn't they?

In history, why haven't they?

Well, because if they can develop their own in-house solution and they don't require capital equipment, they don't require our consumables item, they can get by cheaper.

And if you are building 200 million of things, if you can save $0.10, you will try to do it.

And so in some cases, that will work and if you are the world's largest handset manufacturer, you have a ready supply of engineers and you've got a lot of capability.

And if a problem comes up, you've got people that you can throw at it.

But other companies take a different approach and they say we are growing too fast.

We can't worry about that.

We have to let the experts that understand it best deal with that because they are equipped to support us.

So it's very much moving the discussion to a business level as opposed to a discussion about is this piece of equipment better than that piece of equipment?

Okay, thanks for the explanation.

Good luck to you.

(Operator Instructions) I have no more questions in queue.

Thank it very much.

Thank you for joining us today and we look forward to talking to you at the end of the third quarter.

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