Novanta Inc (NOVT) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to third quarter 2004 GSI Lumonics earnings conference call. My name is Will and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Charles Winston, President and CEO of GSI Lumonics. Please proceed.

Thank you, Will. Good evening and thank you for attending our third quarter conference call. This call is being broadcast live over the Internet in a listen only mode at www.firstcallevents.com on the specific URL detailed in our press release. Tom Swain, our VP and CFO, is joining me this evening. Before proceeding, I must mention that certain remarks made during the conference call may constitute forward-looking statements. These statements are based on management's beliefs, assumptions and current information and as such, are subject to risks, uncertainties and changes. Our Safe Harbor statement that can be found on any of our financial and press releases, also available on our website, applies to this call.

We are pleased to report the continued revenue improvement for this quarter. Compared to the same period last year, sales were up 102 percent at $90.7 million. Earnings per diluted share were 29 cents for the third quarter compared with one cent in the same period last year. Orders were $67.2 million, an increase of 34 percent over the same period last year. Backlog was $77.7 million, an increase of 63 percent from the same quarter last year. Sequentially, both revenues and profit improved from the last quarter. The strong revenue growth was based on both high backlog at the beginning of the quarter as well as demand during the quarter. Let's briefly review the order situation at this time with further comments in the respective segment discussions in a moment.

Gross orders were $73.4 million before corrections and adjustments. These included a correction for an error in the laser systems backlog of $2.4 million related to a prior period. And approximately $3.8 million in order cancellations, most of which were in the component segment. Net orders were $67.2 million for the quarter reflecting both these adjustments. For the second quarter, orders were $93.7 million, which included $8.5 million in backlog acquired with MicroE. Excluding the acquired MicroE backlog from the Q2 orders and adding back cancellations of $1.1 million during the second quarter provides a comparable level of second quarter gross quarter activity of $86.3 million. Now comparing this with third quarter gross orders of $73.4 million shows a decline of $12.9 million or roughly 15 percent in orders on a normalized run rate basis quarter to quarter.

On this adjusted basis, the decline in order volume was split approximately evenly between systems and component segments. I will comment in a moment on the individual business segments. However, overall we see the order activity adjusting to support the revenue levels experienced during the first half of the year. Laser systems, which makes semiconductor and electronic production tools, had sales of $40.9 million this quarter compared with $20 million in the same period of last year, an increase of 105 percent and up sequentially from the second quarter by $4.5 million. Gross margin for third quarter was 43.8 percent compared with 36.2 percent in the same period last year. The higher level of shipments was due to strong demand for equipment in the mixed signal sector combined with growth in memory repair system shipments and a steady sales for wafer marking equipment.

We did not experience any push outs during the quarter but we did have some pull ins. Now last quarterly conference call, we said that we expected our systems business revenues to plateau due to general conditions in the semiconductor industry. However, we did better than expected in Q3. Specifically, we experienced strong demand in the mixed signal sector during the past 4 quarters. In the most recent quarter, we experienced an expected and significant decrease in orders from this mixed signal sector due to capacity saturation at this time. We have not lost any business here. Meanwhile, it was a record in new orders for memory repair systems which we believe results from continued strength in the D-RAM sector and increase in market share. Orders of wafer mark equipment held steady paced by 300 millimeter wafer starts. At this time, we feel both the memory and wafer marking business will continue to be steady in the foreseeable future while the mixed signal business will be relatively quiet over the next several quarters. The net impact is that we expect shipments for systems to be in the range of the first half of this year during the next quarter. We believe that the semiconductor cycle will be less in amplitude and shorter in timeframe than prior cycles and we expect margins to hold as a result of the outsourcing and restructuring programs we completed in the year 2003.

Market drivers continue to be consumer based electronics such as MP3, digital cameras, cell phones, and flat panel televisions. These are creating demand for memory repair, wafer mark and the new chip scale die marking systems. In third quarter, the R&D product development was focused on the next generation of wafer trim for mixed signal devices, die marking, and memory repair products. R&D spending was consistent between second quarter and third quarter of 2004, while the year over year spending actually increased by $1 million in the quarter. Precision Motion Components generated $42.1 million of sales in the third quarter compared with $18 million during the same period last year. Westwind and MicroE, both acquired after the third quarter last year, generated all of the increase in revenues. Our traditional product revenues actually declined 7 percent from the prior year due to the end of life of a major contract which we had previously noted in earlier conference calls and operational problems that we experienced in one product area which are being actively addressed at this time.

Gross margins improved to 37.3 percent compared with 35.5 percent in the same quarter last year. While the third quarter is normally slower for the component segment, it is not clear at this time how much was seasonal. There was some softening in the electronic markets for printed circuit board spindles which, along with the recent operational issue I just mentioned, lead us to expect revenues to decline approximately 15 percent in the fourth quarter compared with third quarter for the components segment. Laser segment sales were $11.7 million in this quarter compared with $8.5 million in the same period last year, an increase of 38 percent. Gross margins decreased to 31.6 percent compared to $36.9 percent during the same period last year mostly due to currency exchange issues which Tom will address shortly.

Price increases, cost reduction programs, and product redesigns are all in progress to improve gross margins in this segment over the next several quarters. Sales were strong in Europe and Japan and order rates were recovering in the U.S. during the third quarter. With some uncertainty regarding the seasonality impact I mentioned, we are being cautious and anticipating a slight revenue decline of approximately 5 percent for the fourth quarter from third quarter in this segment.

In summary, we are pleased with our overall strong third quarter performance and looking ahead to the next quarter, we anticipate that revenue will decline from third quarter which was the highest revenues we have seen in 4 years in a quarter to approximately levels that we experienced overall during the first half of this year. Our backlog position continues to support revenue confidence on a quarter to quarter basis going forward. Now Tom will provide some details.

Thank you. This is the fifth consecutive quarter of increasing profitability which continues to demonstrate the results of our successful acquisition strategy and focus on operations improvement. Effective working capital management is reflected in our continual strength in cash flow with $8.2 million generated from operations in the quarter for a total of $27.3 million year to date. Supporting this cash flow has been sustained inventory turns of 3.6 and days sales outstanding in receivables of 63 days. Our cash and marketable securities position of $80.1 million has increased from the $72.1 million in the prior quarter and is an important element supporting our acquisition strategy.

Our gross margins increased to 41 percent this quarter from 37 percent during the same period last year. This increase was led primarily by improvements in the laser systems segment and the first full quarter of the MicroE acquisition. Sequentially, our margins declined slightly, attributed mostly to weaker performance from our traditional components business. Our business model target for gross margins remains at 45 percent. This target should be viewed as a longer term projection over approximately 4 quarters and not necessarily achieved on a steady sequential basis. It is also based on operating with revenue levels consistent with the first half of 2004.

Looking at gross margins on a business segment basis, laser systems improvement over the same quarter last year from 36 percent to 44 percent, is attributed primarily to higher product volumes, mix and cost reductions. At this time, we are expecting these margin levels to gradually improve in line with our overall business model target. The gross margin from the laser segment is 32 percent for the quarter as compared to 37 percent in the same period last year. The primary factor for this decline is the effect of the currency fluctuations between the British pound and the U.S. Dollar with a large portion of their business selling in U.S. currency. The expected margin impact from price increases implemented to offset this exchange rate movement, will not be fully realized until the fourth quarter of 2004.

Margin recovery will also be supported by new product introductions with cost reduced designs that will start to ship in 2005. Gross margins for the components business is 37 percent compared to 36 percent in the same quarter last year. The significant factors for this improvement includes more favorable margins from MicroE products that were offset both lower margins from Westwind products and the margin decline in the traditional component products. Sequentially, there has been a margin decline of 2 percent in the components segment that is driven by short term cost issues in the traditional component business mainly related to a revenue volume decline and some unusual costs of sales incurred in the quarter. Severance costs related to a reduction in force contributed one half million dollars to cost of sales and operating expenses for the quarter for this segment. The quarterly cost savings from this reduction in force will be approximately 4/10 of a million dollars per quarter in the component segment operating costs.

On a consolidated basis, research and development expenses have increased to $6.6 million, which is 7.2 percent of sales compared to $3.1 million or 7 percent of sales during this same period last year. MicroE and Westwind added $1.7 million while the laser systems segment R&D spending increased by one million over the same period last year. Selling, general and administrative expenses increased by $15.6 million or 17.2 percent of revenues compared to $11.2 million or 24.9 percent in the same quarter last year. Most of the increase of $4.4 million is attributed to the Westwind and MicroE acquisitions and was partially offset by lower spending, particularly in corporate SG&A this year as compared to last. Amortization for the quarter of $1.6 million includes the first full quarter effect of 8/10 of a million in amortization charges for Micro E.

In Q3 we adjusted our expected 2004 annual income tax rate to 10.9 percent resulting in a Q3 rate of 12.3 percent of pretax income. We expect a return to a normal rate of approximately 35 percent in fiscal 2005. At this time, we have not determined the impact of the new tax act on U.S. rates and any related adjustment to deferred tax assets. We are updating our business model which represents our most current target for approximately the next 4 quarters. Despite an expected loss in volume to the levels experienced in the first half of 2004, we do expect gradual margin improvement to the 45 percent level. Reductions in volume will be offset by cost reductions and product mix changes. We are projecting SG&A expenses to run at 17 percent of revenues. Engineering costs are projected at 9 percent of revenues reflecting both increased project spending and lower revenue levels from Q3. Amortization will continue at 2 percent with the result being a 17 percent operating profit goal.

In summary, our overall profitability and cash flow have maintained a steady course of improvement as we continue to focus on operations, particularly in the laser and component segments. And now I turn the comments over to Charles.

Thanks, Tom. Summing up, we see the third quarter as an unexpectedly high level of quarterly revenues for the year, due to the strong temporary demand and anticipate revenues for the fourth quarter to be approximately in line with the first half of this year and our focus continues to remain on improving the margins. At this time, Tom and I are available to answer your questions. Operator?

(Operator instructions). Our first question comes from Jed Dorsheimer of Adams Harkness. Please proceed.

Thanks. Hi, guys. Congratulations on the quarter. I guess to start - - one, just the beginning comments with respect to the book to bill ratios, do you typically give a proforma book to bill? And what happened? I guess when I looked at last quarter I thought the book to bill was 1.11 and I thought that's what you reported. So why is that changing at this point?

I guess, Jed, I'm not sure of the question. One thing we're trying to make clear with the comments that Chuck made was that when you look strictly at the bookings that were recorded for last quarter, we have to adjust them for the amount of backlog that we acquired from MicroE. And at the same time, when we look at the bookings for this quarter, we had some unusual adjustments. We had discovered an error in our backlog that was coming from one of our Far Eastern operations and also we had some cancellations that were mostly in the components group. The point is, when we try to normalize these so we can give you a read on where we're going, when we look at the decline in orders that occurred, it's coming in around the 15 percent range when you compare the 2 quarters. Our book to bill ratio you should use - - because we wanted to get a normalized run rate, I think for comparative purposes I would use that adjusted number going against our actual revenues. And of course, that's going to come out at less than one. The other factor in the quarter is there may be some unevenness because of seasonality that's difficult to pin down. The key point that we want to make is that when you look at the semiconductor business, we were hardly affected with any cancellations at all and in fact it was really the opposite. We had a lot of pull ins.

Great Thank you for that clarification. Moving over to the guidance of 5 percent, or excuse me, 15 percent sequential decline in components, in order to get to your overall guidance, you're actually expecting the systems business to grow in fourth quarter, correct?

No. No, the systems business would be going down. Overall, we're expecting about a 12 percent decline. That's our guidance at this point and that will be broken down and some of these will vary among the different groups. We gave - - the amounts given were estimates in the different groups, but overall we expect to come in around 12 percent.

Overall is down 12 percent. What was - - just help me, what was down 5 percent? What did you guide for that?

That was the laser segment. And that's an estimate and that may be to the high side. We don't know. But basically we're thinking up to 5 percent at this point. And what we've put together, when we put it all together we come up with a number of about a 12 percent drop.

Great. And then when you look at your current bookings into next quarter in the systems business, when things get turned off, what does - - does that usually drop sort of 12 percent as you enter into a downturn or is that typically more or less? And then I guess as a follow up, what give you the confidence in the guidance as you look out?

Well, I don't think it's apropos at this point to look back to prior cycles because I think we're into a different world, a different structure within the semiconductor world. And what we did see was - - when I made comments in the second quarter conference call, Jed, that I thought business in the systems group was going to be plateauing, I was referring to the levels we were running at in the first half of the year which was $35, $35 million run. And we had unexpectedly strong demand in the third quarter, but I believe based on everything we see, the mixed signal people are going - - they've got about as much equipment as they need right now and we know that they are going to take a pause before they buy anymore for probably a couple of quarters. We're seeing good strength in the D-RAM business from all of our customers and we seem to be getting more business. We've booked a record amount of orders in D-RAM equipment this quarter and that seems to be from what the customers are telling us, ongoing into the next several quarters. And again, our wafer marking equipment is getting good business from the changeover form 200 millimeter to 300 millimeter. So we have a number of products that are doing well there that will, we believe, run at the first half of the year run rates on a quarterly basis without the mixed signal business that really was driving us above what we thought we would be.

Now when we look at the components business, we mentioned that we have an operational problem that we're fixing which caused us to lose some shipments in one of our product areas in components. We're also anticipating somewhat of a slow down, not a huge one, but some slow down in the printed circuit board manufacturing sector of the world, which uses Westwind spindles for drilling holes. So we've been running very, very high rates there of sales, the highest ever in the history of that business. And we're just anticipating that that has to have some digestion period here where the manufacturers of the equipment will probably show some slow down soon and we're just thinking that should happen in the fourth quarter.

Gotcha. So what you're finding is this - - you're finding that the orders are due to your sort of 200 versus the mix of 300 millimeter wafers orders in the systems business are sticking a little bit more?

That's correct.

All right. And then, last question. Inter segment sales dropped quarter to quarter but it seems as if you have more synergistic products now after MicroE. What's going on there and how should we look at that going forward?

Well, we used to - - what we're seeing now is some of it's change in our internal process. It gets down to the value added among the different groups. In particular where we're seeing some change is between the components group and the systems business. And in fact the systems business has taken on some of the work that was done by the components group to do it themselves and this involves purchase of sub assemblies and this type of activity that they can probably do just as well. And that's causing a reduction in the inter company activity, shall we say, and it's expected to run at a much lower level as we go forward. It also reflects some fallout, particularly in the wafer trim business, where there was heavy component work done by the components division that was supplied to systems.

Yeah, I'm going to follow up on that question, Tom. The component sector, was on an intercom any transfer basis, supplying a portion of the laser system being used for mixed signal device production. And as that business is coming to a sharp slow down, the intercom any transfer piece will slow down sharply as well. And that's not all bad because we're expecting external sales to pick up in the component area.

Great. I'll pass it on. Thank you.

And our next question comes from the line of Deepak Chopra of National Bank Financial. Please proceed.

Good evening, guys. I'm wondering if you could maybe talk a little bit about the business model. I'm a little confused because I thought, Tom, maybe you talked about generating a 17 percent operating income in 2005. Did I misconstrue those comments?

That's our target and it's one we're building towards. Then we expect as we look out 4 quarters, by the fourth quarter, that's where we would expect to be.

Okay, so it's not for a full year average, it's sort of an exit target?

Not the average for the year, no. It's where we will get to. We're targeted to get there by the end of the year.

And is it fair to assume that op ex more or less will hold flat over the coming quarters given the slow down in top line?

Yes.

Okay. And maybe, Charles, you could just comment on what you're seeing out there beyond maybe semiconductors. Are you seeing a slow down across the board independent of industry at this point that everyone is just being a little cautious into '05? Or are there pockets of strength? Maybe just add some color in terms of what you're seeing out there?

It's a good question, Deepak, and aside from the semiconductor systems businesses you commented, we're sensing - -and again, we don't have a lot of hard information at this point, but we're sensing that there is a certain degree of nervousness in the world. And we just want to be prepared so we're preparing ourselves to operate at a somewhat lower level on revenues more like the first two quarters of the year on an overall basis. And I think that conservatism will pay off in terms of not overextending ourselves in any way and really our focus is on the operating margins to improve gross margin and operating margin, and that's where we're focusing our attention and not trying to force sales revenues to go higher until people feel more comfortable. I can't put my finger quite on what people are concerned about but I think you probably see the same thing in your industry.

Fair enough. And do you - - what's your sense on utilization out there? Are you feeling access utilization for the most part or are things still running fairly tight?

I think in some sectors they're running fairly tight. I think in other sectors they're building for some future needs, some future capacity needs and there are some sectors right now where they do have over capacity and particularly in the mixed signal area, that's one area where they have to now digest what they bought.

Okay. I think that's most of my questions, thank you.

Again ladies and gentlemen, to ask a question that's star one. And our next question comes from David Hodgson of Orion Securities. Please proceed.

Good afternoon, gentlemen, actually Max for David. Just in terms of the bookings and so forth, can you provide some sort of insight into linearity? Did you see a sharp drop off in September? And October what does it look like compared to September?

We don't comment on October activity at this point certainly. I don't think there was any particular trend over the months. One of the problems is orders don't come in necessarily evenly. That's particularly true in the components business where we sometimes will get orders for 6 months to a year. And in the systems business, our visibility has been pretty much quarter to quarter. What we did see is a fall off in orders for the mixed signal type of markets. But at the same time, we also had a fair amount of shipments in that area also which is what helped push us up for the quarter. But the ongoing demand there has fallen off and that's really the only area we've seen any strong signal from the market. The rest of it seems to be fairly consistent.

Yeah, there wasn't any particular pattern that we could detect in terms of month to month order rate. Of course, August skews things because it's a summer shutdown for a lot of our customers, especially in the components business. So it's kind of an odd quarter to look at. So, Max, I just wouldn't draw any conclusions on what happened in July, August, September.

And since it's such a dramatic change from last year, you can't make an effective comparison there, either.

Understood. The other question is in terms of the component division. Can you provide any more clarity on the situation you're correcting at this point?

Yeah. We had some bad practices creep in really leading back to some management decisions that were made along the way in the past two years which finally manifested itself in producing some poor quality product. We've recalled the product. We're doing what's the responsible thing with some of the customers that received some bad product and we're changing manufacturing processes. It resulted in really the termination of a number of people which is why we took the severance charges. And we've reorganized the group so that there's different management in charge of it and different procedures have now been instituted and are being implemented in the manufacturing and engineering groups for one particular segment which I really don't want to name at this point. But it did cost us some shipments. It did cost us some revenues and it did hurt some relationships with customers which we will have to rebuild.

And so we're being cautious looking forward to say that we're not going to recover that revenue in the near future and we'll operate at a lower level of revenues, but we'll work on getting the margins back up through not having defective product, mot having warranty, and not shipping bad product to start with. Shipping good product in a more efficient manner. And of course we've reduced our fixed costs through these terminations and the terminations really were involved a number of the people who were involved in this situation at a fairly high level.

So I don't mean to harp on it, but in terms of those people, you haven't replaced them, you've actually shrunk the entire organization then?

That's correct because the revenues are lower and we've also figured out how to operate the business more efficiently without these folks. Because when someone creates a problem you have to wonder if you're better off not having that particular function. So we looked at having a couple of functions removed from it and consolidating some product groups so that they can operate more efficiently. And I think we're doing the right thing. In fact, pretty much what we're doing, I'm almost embarrassed to say, it is a return to prior practices that we had several years back that we probably should have maintained.

Understood. And finally, do you have any update on enter into China and your operations there?

Yeah. We're actively pursuing expansion in China both on the manufacturing side of it as well as on the distribution side. So we're actively engaged right now in looking for larger space to operate in. We're currently in about a 10,000 foot space. We're looking to go to something in the neighborhood of 40,000 or 50,000 square feet that will serve our needs over the next several years. But it's certainly a good place to be. Their economy is very robust. A number of products we make, especially on the component level, there is demand for it in China, so making it and selling it there makes sense.

Thanks very much.

Our next question comes from Susan Streeter of Sprott Securities. Please proceed.

Thanks very much. Just a couple of questions. I just wanted to follow on in the components to be sure that I understand with respect to guidance. Do you anticipate given the operating margin target of 17 percent - - I'm assuming you're expecting an improvement in the components margin as quickly as the fourth quarter?

Not the fourth quarter of this year. We're looking for the improvements to get to 17 percent -- that target is out for the fourth quarter of next year, approximately a year from now, Susan.

Okay. So would you expect to see some recovery in the operating margins in components in the fourth quarter of this year?

Yes. We definitely expect to see some improvement there. And we expect to see a steady improvement over the next 4 quarters, especially in that sector.

Okay. And it was this manufacturing issue that was the primary cause of the margin impact?

It's one cause. Tom, do you want to - -?

Yeah, it was some unusual costs in the materials area was one part of it. There were some warranty issues in others. The severance pay was in there for a little bit of it, too. So it's kind of a combination of factors. We'll get a fair degree of improvement in that in I'll call our traditional components market in the next quarter, but we still have some offsetting factors because we have lower margins on the Westwind side and we have higher margins on the MicroE side and it's kind of how all that melts together. But what we expect to see is just a steady gradual improvement in the margins from that segmental And it's the same process with the laser segment. I think if there is good news in this, there's opportunity for improvement and that's certainly what we're focusing on. In our laser systems group, they've done a very good job of margin improvement and we hope to replicate that action in these other areas.

Okay. And with respect - - actually just touching that was my second question on the systems side of the business. Even in the lower revenue run rate, would you expect to be able to sustain hat sort of 29 percent operating margin at this point?

Well, that might - -that's going to suffer some. I think the key point is the margins will not suffer and we will have some drop in the operating level certainly.

Okay, and just last, some drop in the operating margin as a whole or in the systems margin?

No, the gross margins should hold and actually they'll improve slightly and they'll get up to our business target. The operating expense level will probably stay the same and as we see the margins drop, you'll have an impact on the operating profit.

Okay. Just last question then is on the tax rate. What we can expect. You mentioned certainly a return to the statutory rate in fiscal '05. What do you expect now for the fourth quarter?

Fourth quarter I think we're going to hit at this average rate we projected for the year, the 10.9 percent, The problem is, this is an amalgamation of international tax rates, certainly a large portion of our business in the U.S. But we also have a lot of business in the U.K. which is at a lower rate than the U.S., then we have Canada. And then we have some higher tax jurisdictions like Japan and it just depends on how this melts together. It can vary by a few percentage points, but I would expect it to be pretty close to where we're at at 10.9 percent for the year.

Okay, and for all of fiscal '05 you expect to return to the statutory rate, right?

Yes. The only exception to that - - we don't know how we'll come out with all the deferred taxes and we've got - - the Tax Act in the United States is going to have some favorable impact on our U.S. tax rate which in turn causes us to probably adjust our deferred tax assets. And we haven't had time to look at the impact on all of that.

Okay, thanks very much. That's everything.

5 percent for now is pretty good guess on where we're going to be at.

Okay, terrific. Thank you.

Our next question comes from Luigi Dippidi from EMO Ned Burns. Please proceed.

Hi, good afternoon. Any 10 percent customers in the quarter?

No.

Second question. Is Analog Devices one of your customers for your mixed signal trim equipment?

They are.

They are. And last question. Can you comment about trying to move outside of the cyclical businesses of PCBs, semiconductors and electronics? I know you talked about moving your technology outside those businesses. Any success there?

Well, we're getting the early signs of some acceptances in certain areas. We're getting test prototype equipment and pre-production equipment in different sectors that will be less cyclical. So we're working on it. But on the components business, of course, as we mentioned before, there's anywhere from a 6 month to an 18 month lead time to get acceptance and to get designed in before some of these products that you do get designed into, actually go into production So yeah, we're focused on it, we're actively pursing it. We have several good opportunities that we're working on, but it may be a little bit before we actually see pay dirt on that one.

Okay, thank you. :

Your next question comes from Maynard Arif from Merrimen. Please proceed.

Good evening, gentlemen. A couple of questions. Looking at your overall gross margin target of 45 percent, is it fair to assume that when you hit that target your laser system gross margin could hit 50 percent or more?

I wouldn't push it that high. I think they will probably be above 45, but I'm not sure - - a lot of this depends on timing and what happens in the markets and new product introductions and those things. The target is an average across the board the expectation is that laser systems have some opportunity that they may be able to get above the 45.

Got it. And is it just because of material sourcing or better cycle times? Maybe you can help us kind of understand what's kind of - - how you're going to drive the gross margin higher there?

Well, we've expanded our engineering investment and it comes a couple of ways. One is, some of our outsourcing programs can be of help. Cost reduction programs and redesigns.

We're doing a fair amount of engineering redesign on certain key cost items within the product so that will be part of it. We also have an aggressive purchasing program going on to either get vendors that we deal with today to give us some better pricing because our volumes have been relatively higher than we originally thought they would be when we negotiated contracts with them. And it they won't give us the prices, then we'll look elsewhere. So we're finding good ways to do it. We've moved some production suppliers that we hade, for example, for some stuff I the U.S. and in Japan that we're now sourcing in Taiwan.

Okay. Also, Chuck, did I correctly - - did I hear you say that you had record bookings for your D-RAM business?

We did. We had the highest bookings for our D-RAM systems that we've ever had and it was in this quarter.

And maybe you can help me understand, what's key driver? Is it increasing wafer starts or is it some - - we also hear some D-RAM manufacturers having some problems there with the yield and that they may need more of your equipment going forward. Maybe you can help understand there.

Well, I'm not familiar with any of our customers having problems with the D-RAMs that our equipment is being used for. But I do know that there's been a nice steady increase for a couple of reasons. Number one, we have gained some market share. We have several new customers that we hadn't sold to before that we picked up during the year. They're buying from us now so we've improved our opportunities. Second, the customers that we are shipping to have been very steady in their purchases because the unit volumes on D-RAM are going, continuing to grow. A lot of the D-RAMS that our customers are producing are going into mobile phones such as MP3's and iPODS and things like cell phones, digital cameras, so demands in those particular consumer goods in the low price range seem to be increasing very nicely in volumes. And also flat panel TVs, even though there were stories going around which I assumer were true that there were excess inventories, they resulted in large price decreases. Well, then prices go down, usually the volumes go up and people are anticipating that there will be continued price erosion in the flat panel screen market for home TVs and drive more volumes and so a number of the D-RAM manufacturers who we are doing business with now are anticipating that and building capacity for supplying D-RAMs to flat panel TV makers.

Yeah, I guess I'm just hearing that some of the D-RAM makers are actually having yield problems when they kind of move down to smaller geometry. So I was wondering if that was another reason why they want to buy more of D-RAM repair equipment.

Well, I haven't heard that as a reason, Luigi.

All right. Keep up the good work. Thanks.

Again, ladies and gentlemen, as a reminder, to ask a question please press star one. And you do have a follow up question from Jed Dorsheimer. Please proceed.

Thanks. Hey, Chuck, just on this problem in the components business - - is that in either the MicroE or the Westwind divisions?

No, fortunately it's in neither of those divisions. It actually is in one of our oldest component products in traditional in the company and we - - unfortunately a group of people took it on themselves to change some procedures that were strictly followed for many years and we got ourselves in apposition where we were shipping product that really wasn't fully tested to the standards we operate to.

Sure, but it sounds like you have it under control. Where did the margins on that business fall?

The margins were in the mid 40s and dropped into the mid 30s and we need to recover that. Actually they dropped below mid 30s, Tom's informing me, so they were in the low 30s and we will recover those. We will recover those because of the actions that have been taken during the third quarter and are staring to show improvement signs already.

Gotcha. And is MicroE going to grow into next quarter?

I'm not going to comment on the individual segments within components. We have you an overall for the components. We're being somewhat cautions. As I said, we're seeing, we're getting a feeling, and although we haven't seen the hard evidence yet, we're getting the feeling that there is some softness happening in the order cycle for the printed circuit board spindles at Westwind and they've been running at very, very high levels. So we expect that at some point in time there would be some slow down there. So I think that coming into the end of the year, a lot of the equipment in printed circuit board manufacturing gets purchased during the first three quarters of the year and goes into production because obviously a lot of the printed circuit boards are going into the equipment I just mentioned, consumer electronics and cell phones because Christmas season is their big season. So they'll tend to slow down in the purchase of the capital equipment in the fourth quarter typically and that's what we're anticipating that Westwind should see some slow down in spindles sales. The other part of it, as we mentioned, was the unfortunate operational issues we found. So those two factors say that we should expect about a 15 percent decline in quarter to quarter revenues for the components business and then we covered the other two segments as well. We're trying to be a little bit on the cautious side now given all the situations going on in the world.

Sure. I guess what I was getting at is just getting to your margin assumptions, You know, if your MicroE business is growing and that's got say 50 to 60 percent margin business and you've got a one to two quarter short of issue that you're trying to take care of to get some business back. And if MicroE is declining and that's your lowest margin business, at what rate can we get back to sort of the growth or expansion of margins in that components business?

Actually I think you meant to say Westwind was the lowest margin business which it is, and so a fall off in some volume there won't hurt the margins as much. In other words, a shortfall in revenues there will not hurt margins as much as if we had had a fall off in MicroE which we're not anticipating any significant change there. Of course, our big opportunity is to pick up the margins that we lost in our traditional business.

Gotcha. Thanks.

Gentlemen, we have no further questions at this time.

Well, thank you very much for participating in the call. Tom and I always look forward to meeting with you personally and chatting with you about the business. There's no further remarks from either of us, so we'll say good night and thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.