MACOM Technology Solutions Holdings Inc (MTSI) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the M/A-COM Technology Solutions first fiscal quarter 2013 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at the time. (Operator Instructions). As a reminder this conference may be recorded. It is now my pleasure to turn the call over to Leanne Sievers of the Shelton Group, the investor relations agency for M/A-COM. Please go ahead.

Good afternoon, and welcome to M/A-COM Technology Solutions Holdings Inc first quarter of fiscal 2013 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, M/A-COM's investor relations firm. With us today are M/A-COM's President and Chief Executive Officer, John Croteau; and Chief Financial Officer, Conrad Gagnon.

Before I turn the call over to Mr. Croteau, I'd like to remind our listeners that management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions.

Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today, and therefore we refer you to a more detailed discussion of the risks and uncertainties that could result in those differences in the Company's filings with the Securities and Exchange Commission, including its form 8K filed today, and its annual report on form 10-K filed on November 28, 2012. In addition, any projections as to the Company's future performance represents managements estimates as of today, January 29, 2013. M/A-COM assumes no obligation to update these projections in the future, as market conditions may or may not change.

Additionally, the Company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. These financial measures, and the reconciliation of GAAP to non-GAAP results, are provided in the Company's press release and related current report on form 8K, which was filed with the Securities and Exchange Commission today, and can be found at the investor relations section of M/A-COM's website at www.macomtech.com. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 30 days in the investor relations section of M/A-COM's website.

And now I'll turn the call over to M/A-COM's President and CEO, John Croteau, Mr. Croteau, please go ahead.

Thank you, Leanne. Welcome, everyone, and thank you for joining us today.

I'd like to begin today's call with an overview of our first quarter results, and then review our end markets and the progress we continue to make towards executing our growth strategy. Once completed, I'll turn the call over to Conrad Gagnon, our CFO, who will review our financial performance in further detail. I will then conclude today's prepared comments by providing our guidance for the second fiscal quarter, before opening the call for questions. Revenue for the first quarter was $75 million representing a 1% increase over the prior quarter, and a 3% increase year-over-year.

Non-GAAP gross margin was 44%, and non-GAAP net income was $9.7 million or $0.20 per diluted share. We finished the quarter with $92.6 million in cash equivalents and investments, no debt, and an untapped credit line of $150 million. Overall, our revenue and earnings per share results were within our previously announced range of expectations.

During the quarter, our Automotive sales continued to out perform. As a result of this success, and as our relationship with Ford begins to mature, it has led us to the decision to report Automotive as our fourth end market moving forward. Automotive sales have proven to be a strong growth contributor, and are accretive to our Corporate operating margins, and we will continue to manage it as such. We believe we have effectively realized full market penetration with our key customer, Ford, and we expect any further growth to be only a reflection of market share gains by Ford. Moving forward, we expect the Ford relationship will remain a stable and rewarding one for years to come.

Taking a closer look at our revenue by market, 23% of our first quarter revenue was from Networks, 28% from Aerospace & Defense, 21% for Multimarket, and 28% from Automotive, of which 26% was Ford. Now, I would like to share with you some refinements to our strategy, which I believe will help us stay laser focused on our long-term goals of generating growth, driving margin expansion and improving our operational efficiency.

Going forward you will hear us talk about our standard catalog products as a standout six plus decade leader within the high performance RF and microwave market. In some cases, we lead the market in specific product categories. For instance, we believe we hold majority share in the RF microwave diode market by a factor of two over our nearest competitor. We are also number one in pulse power transistors. We believe this renewed focus on our historical core strengths will allow us to better maximize near-term results from off-the-shelf products.

The rest of our RF product lines experienced what we believe was the bottom of the cycle during Q1, which is consistent with guidance from our peers and industry experts. Specifically, Networks and A&D were done from last quarter, due to what we believe was our customer's year-end inventory management, especially in Asia. We finished the quarter with a non-GAAP gross margin of 34% (sic -see press release 43%), which is at the lower end of our guidance, due to the previously mentioned strength in Automotive sales relative to our other markets. However, we believe we have seen the bottom of the trough, as we saw growth in our flagship diode product line, which has traditionally served as a leading indicator of overall market demand.

Quarter-on-quarter diode sales grew across all markets and applications, and order backlog has grown to support growth in to Q2. Networks, as expected, was down last quarter. We believe this was largely due to year-end inventory management. We have not yet seen a lift in the wireless backhaul demand, and do not anticipate recovery in fiscal Q2. However, we believe substantial bookings from our new optoelectronics products will be a key growth driver in fiscal Q2, with continued momentum moving into the second half of the year.

Gross margin from these new optoelectronic products is well above Corporate average. In the Aerospace & Defense market, we experienced a slight decline in revenue in fiscal Q1, once again mainly due to inventory management, this time an Asian radar programs. Our outlook in A&D is flat moving into fiscal Q2. While the prospect of potential sequestration in 2013 is a sobering one for anyone supplying the US defense market, we believe that the diversity of the US defense-related business, limits the risk to only a few percent of our total sales. We are optimistic we will see growth in Q3 as new satellite communications products, as well as new customers ramp into production. Consistent with our previously announced strategy, we continue to build out our innovative product portfolio, releasing 28 new products this quarter, specifically 13 in Networks, 12 in Aerospace & Defense, and 3 in Multimarket.

In summary, the overall business environment remains very challenging, however, we believe our strong execution and renewed focus on core strengths will deliver growth next quarter consistent with our strategic plan.

With that, I will now turn the call over to Conrad to discuss the financial results for the first quarter of 2013.

Thank you, John, and good afternoon, everyone.

During the course of my comments, as well as those made by John, with the exception of revenue, all income statement amounts and percentages will be discussed on a non-GAAP basis. Unless otherwise indicated, each reference will be to an amount or percentage that excludes stock-based and other non-cash compensation, intangible asset amortization, restructuring costs, optimized litigation costs, fair value adjustments, amortized financing costs recorded as interest expense, as well as certain income tax items. In addition, cash flow from operations for the first quarter is discussed on a non-GAAP basis. These non-GAAP measures are provided to enhance understanding of our core operating performance.

With this in mind, let me now begin with a review of our financials for the first quarter of fiscal 2013. Revenue for the first quarter of fiscal 2013 was $75 million compared to $74.6 million in the fourth quarter of 2012, and an increase of 3% compared to $73 million in the first quarter of 2012. Revenue in the quarter was driven by strength in sales for our Automotive products, but largely offset by softness in the Network, and Aerospace & Defense markets.

As John mentioned, beginning this quarter we are breaking out Automotive as a separate end market. As such, the revenue split among our four primary end markets in the first quarter was -- Networks, 23%; Aerospace & Defense, 28%; Automotive, 28%; and Multimarket, 21%. By way of comparison, the prior quarter revenue split among these four primary end markets was Networks, 28%; Aerospace & Defense, 30%; Automotive, 21%; and Multimarket, 21%. Gross profit in the first quarter was $33 million, or 44% of revenue, compared to $32.7 million, or 43.9% of revenue, in the prior quarter, and $31.8 million, or 43.6%, in the prior year quarter.

Our gross margins expanded over the prior quarter, and prior year quarter, despite the mix shift with lower gross margin Automotive products. Our long-term focus continues to be on improving gross margin through increased sales of higher margin new products, market growth and channel efficiencies, as well as further cost reductions. In terms of our operating expenses for the first fiscal quarter, total operating expenses were $19.2 million, compared to $17.4 million last quarter, and $20.4 million in the prior year quarter. Looking specifically at investments in new products, our research and development expense for the first quarter was $9.5 million, compared to $7.6 million in the prior quarter, which was lower than typical due to $900,000 of favorable foreign research credits in the prior quarter. And compared to $9.8 million in the first quarter of 2012.

R&D, as a percentage of revenue, represented 12.7% in the first quarter, compared to 10.2% in the previous quarter and 13.4% in the prior year quarter. We plan to continue investing in R&D at similar rates to further the advancements of our new product development efforts. Selling, general and administrative expenses were $9.7 million, compared to $9.8 million in the fourth quarter of 2012, and $10.6 million in the prior year quarter. As a percentage of revenue, SG&A represented 12.9% in the first quarter, compared to 13.2% in the previous quarter, and 14.6% in the prior year quarter. We plan to continue managing SG&A to get our OpEx to the 25% target.

Income from operations was $13.8 million or 18.4% of revenue. This compares to $15.3 million or 20.5% of revenue in the prior quarter, and $11.4 million or 15.6% of revenue in the prior year quarter. We expect operating margins will lift over time as we maintain our 25% OpEx model, and gross margin expands through the growth of new high-margin product, and the introduction of operational efficiencies.

Turning to income taxes, our effective income tax rate during the first quarter was 30%. The expected extension of the US R&D tax credit beyond December 31, 2011, was not signed into law until January, 2013. And, therefore, the effective tax rate for the first quarter of 2013 does not reflect any benefit from these credits. Our anticipated effective tax rate for 2013 is 29%.

Our first quarter net income was $9.7 million, or $0.20 per diluted share, compared to fourth quarter net income of $10.4 million, or $0.22 per diluted share, and net income of $7.7 million, or $0.19 per diluted share in the prior year quarter. The share count used to compute EPS was 47.6 million shares for the first quarter, 47.4 million shares for the fourth quarter, and 41.5 million shares in the prior year period.

Turning to the balance sheet, as of December 28, 2012, our cash and cash equivalents were $92.6 million, which represents an increase of $8 million for the quarter. During the quarter, we made a final earnout payment of $6 million to [Kavum] related to the acquisition of the business in 2009. Cash flow from operations for the first fiscal quarter was $14.4 million, compared to $9.1 million in the previous quarter, and $8.3 million for the prior year quarter. We have zero debt, and a revolving credit facility of $150 million for additional liquidity.

Accounts receivable of $52.1 million represent 63 days sales outstanding, which compares to $54.2 million, and 66 days sales outstanding at the end of the prior quarter. Inventory was $58.6 million, a $1.2 million increase from $57.5 million in the prior quarter. Inventory turns were 2.9 in both quarters. Capital expenditures in the first quarter were $1.6 million, or 2.1% of revenue, compared to 2.9% of revenue in the prior quarter. We believe capital expenditure for the fiscal year will be within the range of 3% to 4% of revenue. Depreciation expense on property and equipment for the fiscal first quarter was $2.6 million.

I will now turn the call back over to John who will provide our Business outlook for the second quarter of fiscal 2013.

Thanks, Conrad. In the second quarter ending March 29, 2013, we currently expect revenue to be in the range of $75 million to $80 million, non-GAAP gross margin between 44% and 45%, and non-GAAP earnings per diluted share between $0.20 and $0.24 based on an expected 48 million shares outstanding. As of today, we have already shipped or are presently firm (inaudible) for 87% of the midpoint of our revenue range. Operator, we can now open the call to questions.

(Operator Instructions)

Blayne Curtis with Barclays.

Hi, good afternoon guys and congrats on the good results and guides. Maybe to start with, John, if you could just talk about, you are actually seeing growth in the Q1, if you could just talk about which segments you are seeing the uptick in? Is it broad-based or is it some specific segment?

Sure. How are you doing, Blayne?

Good.

So, the way I would describe it is, first of all, we had a positive book to bill, slightly over one in the first quarter. So there's relative strength, firm backlog across much of our business. The specific growth is coming from our Network segment, specifically in Auto. We have backlog that covers pretty much the entire growth, quarter on quarter. I will emphasize the fact that we are, in that Network segment, we are assuming no recovery in point-to-point wireless infrastructure. So if that were to happen, that would be only upside and push us towards the top end of our guidance.

Thanks. And then you mentioned the Ford business was, you said, fully penetrated and Ford gain share would grow, so in that expectation do you see it staying in this range, at least in a near-term?

Yes. We would expect minor fluctuations quarter to quarter. Any further growth would really be a reflection on share gains by Ford. It is our belief that we are pretty much shipping across all the Ford models that will ultimately ship the sync system.

Great. And then you mentioned your strong diode position. Maybe you can just elaborate on where you see opportunities now that you've been in the seat for a while, to grow the core business. I think most people know the new product story, but if you could just elaborate on where you see opportunities in the existing business?

Sure. So, I've been pleasantly surprised. I've gone through two rounds of what I call deep dive reviews, full-day reviews with each of our businesses. And pretty much in the diode space we have opportunities to take share in every one of our segments. In fact, in the last rounds, there's even talk of new applications that are emerging that could drive substantial growth for technologies like our [H-make], the heterolithic microwave IT technologies. So I think, personally, that getting back focused on our core business where we are strong already in the market across all the segments, can really yield dividends. Although it is still early yet in my tenure to claim short-term results.

Got you. Thanks, and congrats again.

Tore Svanberg with Stifel Nicolaus.

Yes, thank you. A few question, and maybe a follow-up to the last question on diodes. John, you said that it tends to be a precursor to broad-based demand improving, can you just elaborate a little bit on that please?

Sure. I had made the comment during last quarter's call that we saw a healthy quarter pattern developing, and that really led to not insignificant growth quarter on quarter of this base core business. It is really spread across every one of our segments and across many customers. And those sorts of businesses, like we said, tend to be early indicators of overall demand patterns. That order pattern continues. Our book-to-bill ratio was slightly above one, so I'm confident that we will continue to show firm demand through the second fiscal quarter.

Very good. And on your Opto business being up this quarter, this current quarter, is that driven by your new products for 100g or is there something else going on there?

No, it is all about new products in Opto. We were growing from a negligible revenue run rate to not insignificant. And, in fact, our orders are strong beyond the second fiscal quarter with high-quality OEMs, first year OEMs behind that demand. So, I'm very confident and very comfortable to say that the second quarter outlook for Opto is not going to be a one-time event. I think it is going, in fact, very confident it will show continued momentum into the second half of the year.

Very good. You mentioned you're not expecting the wireless point-to-point business to come back anytime soon. What are some of the comments you are getting from your customers there? Is there any hope at all for later on this year? Or is it just going to stay soft -- stay soft?

There's no question. The customers for the past year have been predicting recovery in the next quarter. The real question is whether we want to bank on that recovery, so the guidance we provide assumes worst-case scenario, there is no recovery in the second quarter, our fiscal second quarter. I think it is inevitable that the industry will recover, and thought, I would guess that it would be the third quarter. But frankly, I mean I've been waiting for this recovery for the past year. So we will believe it when they backlog builds with deliveries within the next quarter.

That's very fair. Last question for Conrad. Conrad, you mentioned the 29% tax rate doesn't assume any extension of the R&D tax credit. Is there a chance maybe that 29% can come down as we move throughout the year?

Oh, what I intended, if it didn't come across that way, the 29% does include the effective, and the effective tax rate does include the credit for the fiscal year. It's simply that in Q1, because our quarter ended December 28, it was prior to the renewal of the tax credit law. And, so that was a 30% rate for that single quarter. So, we do have it at 29% this year, and that is inclusive of the R&D tax credit, sorry.

Very good. Nice quarter, guys. Thank you.

Okay, thank you.

Quinn Bolton with Needham & Company.

Hey, John, wanted to come back to the growth drivers. It sounds like Networks, you'll see growth in Opto, and then the Aerospace & Defense, and Auto businesses are roughly flat. Can you make any comments about the Multimarkets business? Is that flat or are you seeing positive trends in the Multimarkets segment?

So our Multimarket business is comprised entirely of that standard catalog products. And it is in that area that we see slightly above one book-to-bill ratio. So what I would expect is steady progress, steady growth, steady recovery. I don't know, on the order of 3% to 5% year-over-year. But nothing that's really going to move the needle in a big way, but certainly not dropping.

Okay. So it sounds like Opto is the real growth driver in that second -- fiscal second quarter?

Yes, Opto is the real deal. We have the backlog to cover exactly what we are guiding to, and I don't anticipate any scenario where that would evaporate. So I think that's going to be the big mover for the second quarter, like I said, we could see upside elsewhere. We are firm booked at 87%, you can always see push outs, or soft turns, but I think things are trending flat to up.

Great. And, then just a follow-up on Tore's question, is that mostly 100 gig where you are seeing the activity? Or have you guys been able to backfill and seen good demand in both 40 and 100 gig in the Opto business?

Its 40 and 100 in terms of the backlog. I would say that, in the past, we've made comments that, in certain parts of the world, the world seems to be moving quicker to 100 and skipping 40, but our backlog specifically is for both.

Great, and can you remind us where were you, this point with backlog coverage entering the December quarter? Is 87% roughly in line with last quarter?

87% is in line with the past two quarters for the exact same point in time. Our earnings call last quarter was, I think, a week or two weeks --

Two weeks later.

It was two weeks later and we are at 92%.

Correct, right.

So 87% is exactly the number that we look to for midpoint guidance.

Great. And then, I know you made the comments about the point-to-point radio, that business not, you're not expecting it to come back in the March quarter. But I think you guys have recently extended the SmartSet down to the 8 to 23 GHz range so you've got a broader product line. Can you talk about design wins for the lower frequency SmartSet solutions, and how that might contribute to growth out in the second half of the calendar year or perhaps into calendar '14?

Yes. Well, we are very pleased with the quality of customers and qualities of design wins. We are broadly engaged. One of my personal agendas, coming into the Company, I have observed that I believe we can drive shared [wallet] at our major customers where expanding the, not just across their portfolio of needs, but I think from a supply chain standpoint, these customers tend to operate very strategically, managing their suppliers. So I think, step one is to get the design wins and the products technically qualified. Step two is to go drive the share. And I think the way I would describe it right now is, we are well positioned, with the portfolio that we need and the technical qualifications. The next step is, like I said, getting the -- securing the commitments we share, and then frankly, at some point, the markets have to begin cooperating.

Right.

That's the real gate from my perspective.

Great. And then just lastly for Conrad. Any guidance specifically on OpEx into the March quarter, are there step up in FICA or any kind of beginning of the calendar year expenses, or do expect that to run about 25% of sales?

Closer to 26% because of FICA. Good point, and we've factored that into the estimate.

Great. Thank you very much.

Mark Delaney with Goldman Sachs.

Great, thanks very much for taking the question, and congratulations on the good quarter.

Thanks, Mark.

I was hoping you could talk a little bit more on the Opto business, and I just want to make sure I understand when you say that the growth for the March quarter is coming from Optoelectronics, do you mean toward the midpoint of the range? So roughly $2.5 million is your base case for how much Opto drives this quarter?

That is correct.

Okay. Could you elaborate a little bit more on some of the new product introductions and some of the share gain that you were talking about in the Aerospace & Defense program? I think you alluded to a little bit of that in your prepared remarks. And help us understand the timing of when that comes in?

Sure, the near-term growth in the Aerospace & Defense market is not in things like defense radar systems, those are obviously long lead time programs. The near-term growth in that segment really comes from Satcom, satellite communications, which has both commercial as well as defense application. And that is specifically the area that has continued to perform for us over the past year, where other segments tended to struggle, and we continue to expect performance through the rest of this year.

That makes sense. In terms of your inventory, I saw that the deferred revenue was relatively flat quarter on quarter, and I know that's down something close to 40% from peak levels. So when you are talking with your distribution partner, can you give us some sense on where you think inventory levels could go as you move through the year?

I'm not sure we have any guidance about whether -- what direction they are going to move. I can tell you that the word from our distribution partner, and partners, is, the way I describe it, is cautiously optimistic. We've seen positive book-to-bill ratios since -- through our first fiscal quarter. And they are predicting slow, steady monotonic recovery. Again that's where I came with the 3% to 5% growth year on year.

Understood. And, then, just my final question. If one were to strip out the sales to your largest customer, by my math, it looks like your gross margins are actually up quarter on quarter despite what would have been lower revenue excluding foreign. So can you help us understand, is that just a mix thing or is this some of the new products starting to kick in already in the fourth quarter calendar?

Well, its new products and our diode products tended to outperform, and those have very nice gross margin structures. They tend to use internal capacity so they have very nice [drop throat], so you are right. We had, looking under the hood, the gross margin mix is actually quite favorable considering the mix issue we had.

Great. Good luck, guys. Thank you.

(Operator Instructions)

Harsh Kumar with Stephens.

Hi, guys. First of all, I'm not sure if you guys gave this, but how much is the diode product line as a percentage of revenues?

Yes, sorry, Harsh, we don't break out and report revenues by product line. I can tell you our standard product --

That's fair.

Our standard products across the board, across all segments, is approximately 0.5 of our total revenues.

Okay, that's helpful. I'm sorry, go ahead.

No, that was it on my side.

Okay. And then, John, I'm wondering now that your maxed out, sounds like at Ford, what is the potential with respect to M/A-COM's ability to get in with some of the other automakers? I'm wondering if you could [trot] out for us how long it takes, have you, are you in conversations already? Any kind of color would be great.

Sure. I mean we continue to talk to the other major automotive manufacturers, specifically domestic as well as international. There's a lot of forward looking applications, forward looking applications, I shouldn't say Ford, forward looking applications for this kind of technology. But the way to describe it is, this module that we sell is deeply embedded in the architecture of the vehicle, and so it ends up a very strategic decision, and not one that automotive manufacturers make either quickly or on any kind of short-term timeline. So it is the reason why we really don't talk about growth in that business, even if we were to secure new business, it would be out in a timeframe that wouldn't be particularly meaningful.

Got it, John. And now that you're -- in terms of your management now it seems like you are spending a little bit of time there in the top slot what (technical difficulties) for calendar 2013 as you -- from where you are sitting?

I apologize, Harsh, you broke up for a second. Is your question about --

I'm sorry, I'm in a hotel. (technical difficulties) for calendar 2013?

Okay. I understand your question to be what my priorities are for 2013, is that accurate?

Yes.

Okay. So the way I describe it is like this, the previous leadership did an absolutely fabulous job in terms of these market-driven penetration strategies, with application-specific solutions whether it be for point-to-point, CATV, broadband, Satcom, Milcom, radar and so on. And that is all going to be wonderful growth drivers. You are starting to see that strategy pay off in the second fiscal quarter. In addition to that, not instead of that, what I found is there is a gold mine in a six decade heritage that this Company has in things like the diode business. Technologies like the H-make technology, and the [LGas] technologies that have lots of legs left.

We are the market leader, and what I've really focused on as a top priority, is to get structural lines of accountability and focus to maximize those near-term results. I mean these are products that are on the shelf. We don't have to talk about new product cycles. We don't have to talk about long lead time design-ins. This is driving short-term results, and I think we can demonstrate that we can outperform our peers in the short term with that. The second priority I have is, in those application specific areas, the focus on maximizing our shared wallet. I think there's lots of room, and there a lot of cases you move from a product selection to a vendor selection process, and I think we have the opportunity to grow our share just by focusing on relationship building with those major customers. Those, I would say are the two premiere priorities that I have coming in.

Great, John. Thank you so much.

You're welcome.

Jeff Myers with Wachovia Capital.

Great, thanks, guys. So most of my questions have been answered but just on the Opto business, so is the strength you are seeing is that across all the products in that pipeline? Or are there specific products that have been stronger than others?

Well, I think always, when you get this kind of initial business, it is not a widespread part of the portfolio. But it is not a single product or two. The other way I would describe it is, reasonable coverage of our portfolio driven by, I think, it is about three or four customers over in Asia Pacific. So it is reasonably diverse, but it is not, certainly not in a condition that I would call a mature business with a lot of diversity across the portfolio.

Got it. When you look at the potential growth for those products, is it just a question of your customers ramping new products that contain your products in them, or is there something else that will, be a gated factor to your growth there?

Well, I think we hit the market perfectly in terms of the end market health in this particular segment, makes up for the wireless infrastructure to be honest. So I don't think -- this market is indeed cooperating. The first gate is typically getting the product qualification. And then there's a vendor qualification process to go through your quality systems and so on. We've passed all those gates with these major customers, and now, it is indeed, as you said, it is ramping the customer products into volume.

Got it. And are these usually sole sourced programs or are they dual sourced?

Yes, so the nature of our business, I would say the dominant majority is sole sourced. It is not a product-to-product direct second source. Even a device which is pin to pin compatible has different electrical characteristics. So when you talk about the concept of multiple sources, it is not on a product basis, it is customers who manage their supply chain with relative shares.

Got it. Okay, thanks, guys.

Elizabeth Howell with Raymond James.

Hi, great, thanks. I just have a quick one on OpEx. Just what are you thinking in terms of the puts and takes as we go throughout the year? And then did that 26% level you referred to earlier include the negative impact of options or was that GAAP?

Okay, this is non-GAAP reporting, and that 26% was this current quarter, and we are aimed at reducing it to our target of 25% over the course. Which would be typically 13% spend is the target for R&D, and 12% for SG&A. And currently it is the other way around, about 12% in R&D and 13% in SG&A, 13% to 14%.

Okay. And how do you get to the target levels?

The target, a couple of ways by increasing revenue on the top line, that changes the percentage, and holding our costs, as well as becoming more efficient in how we spend our SG&A in particular.

Great, thank you.

Thank you. And Presenters, it appears there are no additional questioners in the queue. I'd like to turn the program back over to John Croteau for any additional or closing remarks.

Very good. I want to thank everyone again for joining us on today's call, and I look forward to reporting our continued progress next quarter. One last comment, Conrad and I will be attending the Stifel Nicolaus conference on February 5, and the Goldman Sachs conference on February 12, both of which are in San Francisco. I would welcome the opportunity to meet with any of our investors that plan to attend. Operator, you may now disconnect the call.

Understood, sir. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.