Novanta Inc (NOVTU) 2006 Q4 法說會逐字稿

Good morning. My name is Luwana, and I will be your conference operator today. At this time I would like to welcome everyone to the GSI Group fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS). Mr. Ruddy, you may begin your conference.

Good morning everyone. Thank you for attending our fourth quarter 2006 conference call. The call is being broadcast live on the Internet in listen only mode at gsig.com. Dr. Sergio Edelstein, President and CEO, and Bob Bowen, Vice President and Chief Financial Officer, join us this morning.

Before I start, the following statements will include forward-looking statements within the meaning of the federal securities laws, including statements about the Company's expected sales performance, operating results, financial condition and business strategy. These statements are subject to a number of risks and uncertainties, including those detailed in the Company's press release issued yesterday, and in its 10-K and other filings with the Securities and Exchange Commission, that could cause actual results and outcomes to differ materially from those projected in the forward-looking statements, and assumptions may change over time.

Please remember that these statements speak only as of today's date, and you should not place undue reliance on them. You are encouraged to review the written risk factors set forth in GSI's SEC filings carefully before making any investment decisions.

In addition, please note that this call is being recorded by GSI, and it is copyrighted material. It cannot be rerecorded or rebroadcast without the Company's expressed permission, and your participation implies consent to our taping. GSI will not be updating the recording of this call.

First, let me begin by room quickly reviewing GSI's product positioning for any new listeners. Our Precision Technology segment, which generates approximately 60% of our revenue, sells equipment -- sells to equipment manufacturers in markets like electronics, medical, and industrial manufacturing. This segment is highly diversified. It is made up of six core product lines. And those are encoders, scanners, printed circuit board drills, lasers, medical printers and optics.

Our Semiconductor Systems segment, which generates about 40% of our revenue, manufactures end user capital equipment for production of memory and high-performance analog devices. This is comprised of three main product lines, WaferRepair, WaferTrim and WaferMark. With that, I would like to know turn the call over to our CEO, Dr. Sergio Edelstein.

We had a very good quarter. Revenue and earnings per share for the quarter were above the guided range. Total Company revenue was $79.5 million, up 19% from Q4 a year ago. Q4 earnings per share was $0.11 versus $0.10 in Q4 of last year. And bookings increased 26% sequentially to $81.7 million. During fiscal '06 we generated earnings per share of $0.51. And cash and investments increased by $42 million to $138 million, an increase of $1 per share.

Now on to fourth quarter execution. In the Precision Technology area we secured 12 new customer evaluations for Mercury encoders, and 10 new customer orders for Lightning scanners in Q4. As I mentioned before, these two key new products are in a strong position to drive future growth for us in this sector.

We expect to see continued qualifications of these two new product lines at OEMs during 2007. We have also begun beta testing our new digital scanner. I believe this product will give us a significant advantage in the most demanding high-speed applications, such as printed circuit board fabrication.

In the Semiconductor Systems sector our new M350 WaferTrim system was qualified by additional major customers in Q4. So now all three of our largest existing customers have qualified the M350 for production. And in addition, we also won a new customer in Q4.

In WaferRepair we continue to have success with our green-laser technology. We had strong bookings in Q4, driven both by strength in the DRAM market sector, and by new orders for our new M450 Series Green Laser System. In Q4 a customer in Taiwan qualified this product and gave us a letter of intent to purchase multiple Green Laser systems. We anticipate a strong outlook in this segment in Q1 and Q2.

In operations, we recently announced an expansion of our manufacturing facility in Suzhou, China. This facility currently makes components for two Precision Technology's productlines based in the United Kingdom. Along with this expansion we also announced the restructuring of our UK facilities. This transition will enable us to expand capacity for those products close to our growing customer base in Asia, and will also support our ongoing margin improvement initiatives.

Looking forward, we anticipate continued strong demand in two of key markets, electronics and semiconductors. In particular, we expect continued strength in the DRAM market, driven by demand for portable electronics and new applications, like Windows Vista now coming to the market.

With that, let me turn the call over to Bob.

As noted in our press release, total Company bookings for the fourth quarter were $81.7 million. This was an increase of $16.6 million or 26% from the third quarter. This was primarily due to a 41% sequential increase in bookings from our semiconductor segment. Specifically, the increase came from WaferRepair and WaferMark. WaferRepair bookings for the quarter were the third-highest we have seen in four years, and WaferMark was at the highest levels in four years. Because of these trends and recent customer feedback, we expect the bookings level to remain robust for the first half of 2007.

The Precision Technology segment bookings increased 17% sequentially and 10% over Q4 2005. Some of the sequential increase is due to two multimillion dollar orders, which will begin shipping in Q1 2007.

As Sergio noted, we recorded fourth quarter revenues of $79.5 million, and diluted earnings per share of $0.11. These numbers were above our previously guided range. This was partly due to a few customers in Asia who accelerated equipment deliveries from 2007 into December 2006.

Fourth quarter revenues in the Semiconductor segment grew 4% sequentially to $34.3 million, and grew 39% from the fourth quarter of 2005. For the year Semiconductor revenue grew 45% to $127.6 million.

Fourth quarter revenues in the Precision Technology segment were 9% lower sequentially, but up 9% compared to the fourth quarter of last year. Revenues for the Precision Technology segment grew 10% for the full year.

Our total Company gross profit for the quarter was 41.1%, unchanged from Q3. Semiconductor improved 4.8 points to 42.9%. Precision Technology declined by 2.9 points to 37.7%. This was largely the result of two factors, product mix in the Precision Technology segment and the leftover effect of the UK manufacturing quality issues mentioned previously in our Q3 call, which have now been fixed.

In early February 2007 we announced an expansion in China that led to a restructuring in our UK-based Precision Technology business lines. We believe this action when completed will improve this segment's gross profit rates by approximately 300 to 400 basis points from the current yearly average of 39.6%.

Fourth quarter total Company operating expenses of $27.1 million grew 4% sequentially and 14% year-over-year. For the full year they grew 10% to $101.7 million. The increases were largely driven by higher R&D spending, and the Company's performance-based variable compensation plans. R&D approximates 10% of sales, and grew with some additional investment. Fourth quarter equity-based compensation expenses totaled $0.4 million and $1.0 million for the year. We are targeting flat operating expense levels in 2007, excluding restructuring charges.

Our balance sheet is strong. Net cash provided by operating activities totaled $35.3 million, and our cash and cash equivalents balance grew to $138.3 million. This is more than $3 per share, even after the repurchase in 2006 of 3,813,000 shares of GSI stock for $3.8 million.

We managed our working capital during the year. The year-end receivable balance of $54.5 million declined 1% on a 20% revenue increase. Accounts Receivable were 17% of total year revenue, compared to 21% of revenues in 2005.

Inventory levels grew 15% on a 20% revenue increase. They have remained fairly steady as a percentage of annualized sales during 2006 at approximately 23%.

During 2007 we plan to record restructuring charges related to our UK operations of $6.5 million to $7.5 million, associated with termination benefits, capital asset write-offs, the manufacturing transition to Suzhou, and impairment charges. We expect approximately $3 million of the total charges will be cash related.

Once completed, the plan is expected to generate annualized pretax benefits in the range of $5 million to $6 million, or approximately a $0.08 to $0.10 per share. In the first quarter we expect to record restructuring cost in the range of $2 million to 2.5 million, which we expect will be largely offset by the anticipated proceeds of a legal settlement.

Before I provide guidance, I wanted to note a trend in our business -- in our systems business and its effect on the timing of when revenue will be recorded. A larger than normal portion of the Semiconductor bookings in the fourth quarter of 2006, and we expect in the first quarter of 2007, are coming from new products or new customers. In both of these instances our policy is to differ revenue until acceptance. This is different from our policy for existing products or customers where we generally record revenue on shipment. We expect the timing of revenue from these new customer or new product bookings to fall somewhat later in the year than it otherwise might.

Our expectation for the first quarter 2007 is that revenue will be in the range of $71 million to $74 million, taking into consideration the expected deferral to later in 2007 of selected new product or new customer revenue in the Semiconductor business. Including anticipated first quarter restructuring charges in the range of $2 million to $2.5 million, as well as the anticipated proceeds of a legal settlement, we expect fully diluted earnings per share to be in the range of $0.06 to $0.08. I will now turn the call back to Ray.

Operator, we're now ready for questions and answer session.

(OPERATOR INSTRUCTIONS). Chuck Murphy, Sidoti & Co.

Just wondering, would you say that it is fair to say that Precision Technology maybe was a little bit lower than you were expecting, but that the semi side was a little bit better? Is that a correct assumption?

For Q4, yes, that is a correct assumption.

As far as you were talking but earlier with the Vista stuff, just kind of wondering what you're hearing from your customers, given that this launch has been a little bit less than originally anticipated. Are they adjusting their production at all? Is it going to affect you at all basically?

This is Sergio. We continue to see softness in the flash market. But to your question, we see a strong outlook for DRAM. Even though the factor for Vista that you mentioned is true, we expect that the impact of Vista to come in later in the year and especially in 2008. However, at least for the first half of '07, our customers are still telling us that they continue with their aggressive expansion and capacity plans, mostly driven by demand for portable and other devices in the short-term.

Bob, I think you mentioned something earlier about margins changing, something to that degree. I didn't catch the comment.

I think I was referring to the fourth quarter margin rate. I'm not sure which comment you might be referring to. I talked about the fourth quarter margin rates. But going on a go forward basis, I think is what you're talking about.

Yes.

The restructuring activities that we are currently engaged in in the UK are intended to improve our margins in the Precision Technology area 300 to 400 basis points. So 3 to 4 percentage points from what has been around a runrate of about 40%. So we expect --.

That is on the gross level, I'm assuming?

Gross margins, yes. Which we would pretty much naturally expect to fall through to operating profits.

My final question, can you give the backlog at the end of the quarter?

Yes. The backlog at the end of the quarter was $77 million.

Jim Ricchiuti, Needham & Company.

Congratulations on the quarter. The question -- I've got a couple of questions on the Semiconductor Systems portion of the business. The bookings activity that you saw in Q4, did that accelerate late in the quarter? It sounded like you had some pull in, Sergio, toward the end of the quarter. And maybe you can elaborate on what you think was driving that.

And the second question, just with respect to the WaferMark portion of the business, it sounds like you saw particularly good strength in that area as well. And I wonder if you can elaborate a little bit on that, and what you're seeing from your customers in that part of the business?

Yes, to the first question, we saw more of an acceleration in revenue, as Bob mentioned, toward the end of Q4. Some of the customers who were planning to accept some systems in Q1 decided to pull that in.

On the bookings front, we didn't see a particularly unusual trend in terms of linearity during the quarter as compared to other quarters. But we did have a very strong quarter, particularly the business -- that particular segment is very strong. And also I think we have good momentum in that segment. And we have the multiple system LOI that I mentioned that is going to drive the orders for that particular segment.

On the Trim and Mark -- on the WaferMark question that you asked, we have a pretty steady outlook for WaferTrim and WaferMark combined in general. And I think we mentioned that in the previous earnings call that we don't see any significant fluctuations one way or the other in that segment.

Looking at the Precision Technology portion of the business, is there seasonality in that business in Q1 or do you see things picking up off of Q4 levels?

I don't think there is a -- actually I think most of the seasonality, the fourth quarter tends to be, from a seasonal standpoint particularly on the Precision Motion side, a little bit light. And it begins to pick up in the first quarter. I think generally the second and third quarters in that segment have been, at least in '05, were the strongest for us.

Bob, in your press release you talked about a legal settlement. Can you maybe elaborate a little bit on that?

We really prefer -- this is a settlement related to an acquisition that had been done. I would prefer not to talk about it further until such time which we come to full closure, which we expect to occur in this quarter.

Susan Streeter, Sprott Securities.

I am just wondering if you can talk briefly about the approval process? You mentioned that the deferral in revenue is the result of new customers. Typically how long does it take from the time you ship a system to a customer and they actually approve it?

For existing systems to existing customers, the shipment to approval cycle is relatively short, two to four weeks from the time it arrives at the customer's door to the time it is installed and running in production and up and operating. It is a relatively perfunctory process. But for newer systems, we tend to just be more conservative around the revenue recognition requirements, because our ability to predict exactly what that installation and acceptance process will be is not really -- has not really been defined and validated for the new system.

I understand that. I am just trying to get you to quantify that timeline.

For the new systems?

For the new systems, yes. Would it typically be six months longer than your --?

I would say it would typically be -- the revenues would fall one to two quarters after they would have normally expected to have fallen.

I understand. Thank you. Just secondly, I wondered if you could touch on your operating expense lines? Both R&D and SG&A as a percentage of sales have tracked up in the fourth quarter. Is there something particular to Q4, or are those just higher runrates that we should anticipate going forward?

We expect our -- as I mentioned, we are targeting our operating expense, including R&D in '07 to be flat with '06.

So there should be a bit of a check back then potentially going into 2007?

I'm sorry?

There should be a bit of check back then going into 2007? Obviously not continuing at the Q4 rate.

That is correct.

Todd Coupland, CIBC.

I'm wondering if you can comment on a couple of P&L items? Firstly, on the gross margin, how long do you think it will take to pick up the 3 or 4 extra points in Precision Technology?

I think we will begin to see that probably the beginning of the fourth quarter of this year, maybe a little bit earlier. But we expect this -- most of the benefits are coming from the transfer of ore production to our Suzhou facility in China, and that facility will not be complete up and running from a transfer -- a production standpoint until the fourth quarter of this year.

Is anything been shifting around in terms of the profile of the systems' gross margin, or should not just continue to follow similar trends?

I would expect that generally to follow similar trends.

Then just back to the deferred revenue issue. How much revenue are you having to push out into the second half of the year?

And I guess my second question along those lines is once you have initially shipped systems would you expect follow on orders, so it is a new customer but they are not fully deployed so you should see -- should you see a steady ramp after these initial shipments or will there be a tail off? Maybe does talk a little bit about the profile.

As we see the numbers today the push out in revenues I would say is probably in around the $10 million range. In terms of follow on orders, we of course always hope to receive follow on orders, and these are new products that we have been in qualification stages with several of our customers, and the customer feedback is very, very positive. To the extent that, as you know, the ordering process on a customer by customer basis is lumpy, but we would expect there to be follow on business, both related to the new products that were -- that we have announced and are implementing, as well as follow on orders from these customers once we get through the initial orders here of these products.

Let me just ask the question a little bit differently then. This is, I guess, a new accounting policy for the Company, so should we anticipate that we're going to have some sort of deferred revenue profile on a go forward basis, or do you think it is just a first half of 2007 issue?

We are now starting to gain ground at new customers with new products. And so that is driving our increase in bookings. It is one of the major factors that drives our increase in bookings. Those initial systems, we will see a bit of a deferred revenue effect due to the fact that our new account customers handle our new systems. We are positive that some of these customers, which were beginning to gain ground, are a part of larger alliances in which -- that will give us follow on business opportunities elsewhere.

Once we are more established then the follow on orders would be repeat orders with the same systems to customers to which we are now already shipping. We, at that point we would expect the timing of revenue to fall back into the standard pattern for us.

I'm sorry, if I could just ask one follow on question on that. What is the thinking here in terms of the deferred revenue? Is there concern that the customers may not accept these products? And so you don't want to book the revenue until you are sure they're going to take them?

No, that is not the way I would categorize this. This is not a new policy for us. This has always been our accounting policy in that when we introduce a new product to a new customer, we want to validate that the installation and acceptance process is as perfect perfunctory as we have already validated that it is with existing products. And it is just the conservative nature of our accounting policy that has always been in place.

What is new here is that we are -- we have more new product introductions in this segment, and we are winning orders at additional new customers. The pace and the effect of this accounting policy that has always been in place is causing the deferral of revenue to be higher than it otherwise would have been. We don't anticipate -- I guess to try and be a little bit clear here -- we do not anticipate problems related to installation or acceptance.

Jed Dorsheimer, Canaccord Adams.

Most of my questions have been answered already, but I do have a couple left. I guess as a follow-up to the last question, of the $10 million, Bob, how many are with new customers and how many are -- of that is new equipment, and how much is both?

Well, the $10 million is both, and I don't have the split available.

All right. Of that $10 million, is that largely in one geography? Is that mostly in Korea, or is it mostly in Taiwan, mostly in Japan, or is it mostly in Germany?

It is spread throughout Asia.

In Korea is any of the $10 million with a new customer, not an existing customer?

I think we would prefer not to get that specific.

[Nikolai Pashenko], Global Crown.

This is this is [Jeffrey Linn] in for Nikolai. Generally how are your customers going about orders in the longer term, that is, through the second half of 2007? Do you see them being conservative, waiting to see how demand plays out, or are they being pretty aggressive there?

Well, first of all thanks for the coverage. The visibility normally in our business out past six months is a lot lower than it is for the next three to six months. And so I think it is probably a little bit premature for us to talk about with any level of comfort about the second half of '07 at this point in the semi business. That is not to say that we think it is going to be either less or more. It is just a think more to say that it is generally you go out that far and it becomes very, very difficult from a predictability standpoint.

Well, in the near-term then, Verigy, we saw last week that they commented they are seeing over 90% [back in] utilization. And they also specifically stated that after the Chinese New Year's in those few days that they saw a pick up of activity. Have you guys seen the same thing?

I don't know if I can comment specifically on that point itself. What I can say is that our WaferMark business, which is actually at the front end, we have longer visibility to than we have ever had, I believe is fair to say. And so that in terms of the wafers that are going into the production process, where this equipment is used, has been very good for us for several quarters, and into the fourth quarter reached an all-time high, and we expect it to continue to be strong.

And we're getting very, very positive inputs from our customers vis-a-vis the back end of the business. And so we think the next three to six months is going to be strong from a bookings standpoint.

On the green technology, can you give us an idea of what percent of the systems you guys are shipping right now are using green versus infrared?

I just -- I don't know the answer to that.

We don't have a specific percentage, but certainly a lot of the new customers, especially those that are doing technology buys, we see an increasing percentage with green. These are the customers that have more of a reason -- they maybe using a competitor in production and they may be looking for the next generation of devices. And I think our technology is doing particularly well there, so we see more of an increased mix. But we don't have a specific number right now.

Are your systems mostly going for evaluation purposes or are they going into and actually being in for capacity, as it is like mass production?

We have both. As I'm sure you know, we reentered this segment, particularly in WaferRepair, several years ago, and we have been steadily gaining ground. But the last few quarters we had -- we have been in capacity buys and production at some of the customers with whom we started earlier on. And we already had evaluation units at every major customer. What we are starting to see now is that some of those earlier evaluations from 2, 3, 4 quarters ago are now starting to turn into capacity buys. And that was one of the factors that is driving our increased bookings.

Can you at least give us kind of a rough idea of what percent it is, is it one-quarter, one-half, one-tenth?

I just don't know the answer to the question. But it is more than it ever has been in the past, for certain. It is certainly a growing percentage. I just don't know the number.

I will move on then. And you guys are seeing better gross margins from the green systems, I would imagine, right?

Yes, but it is very customer specific. But on average that system provides better gross margins.

Richard Sung, Genuity Capital Markets.

Just a couple of easy questions to begin with. In terms of next quarter, the R&D spending last quarter was $8.2 million. How do you see that trending next quarter?

I think we would expect it to be about the same level as Q4.

That's helpful. Have you broken out the backlog in terms of on a segmented basis?

We have the backlog on a segment basis, but we don't -- we only talk about the backlog in total.

Can you give us some feeling as to how that backlog trended on a segmented basis, just generally?

The backlog on a -- in general the Precision Technology backlog increased more than the Semiconductor backlog.

That's useful. In terms of as you are rolling out more and more products over the coming years, how is that going to impact the gross margin specifically on the operating margin as the mix of new products increases?

We think our new products have better margins than the products that they are replacing. So I would expect as the new products increase their overall percentage of sales, particularly in the Semiconductor segment, the margin rates will tend to move up.

Does the OpEx in supporting those efforts, does that increase as well?

No.

And just one final question, in terms of the mixed signal market, do you have any comments in terms of how that market is progressing for you?

We had a very good 2006 in the WaferTrim mixed signal market. We don't expect 2007 to be as strong as it was in 2006. But we do expect it to be a reasonably good performer for us. The way I think about is we think our WaferTrim and WaferMark segments product lines together will be at or above where they were in 2006. And so the real change is going to come from what happens in WaferRepair, which we think in the first half is looking very good.

[Arnaj Natcarney], Chip Investor Group.

Congratulations on a very good quarter. It appears that the analog and mixed signal business has begun to recover, based on comments from analog devices and other companies. So given that, what do you expect for demand for your WaferTrim machines? And also can you give some color on acceptance of the new M350s?

I think, as I mentioned, as you know this is -- the WaferTrim side of the business is the most cyclical piece of the business that we have. And we had a very good 2006. It is a difficult piece of the business to predict. What I tend to believe is that our WaferMark and and WaferTrim product lines together will be at, or possibly somewhat above, where they were in '06. That statement is made with a view that WaferTrim is going to be down in '07 versus '06. If the comments by analog and others drive their purchase decisions higher than where we think they might be now, and we don't have great visibility there, then that will be an upside for us.

Are you shipping your new M350s?

Yes, we are, as we mentioned earlier in the call, we are starting to ramp the M350. That product went out last year and started to go into evaluations. The evaluations went unusually fast. And we have a strong position in that market. And I'm confident that that product is going well enough that it will solidify our lead in that segment.

You mentioned your WaferRepair business is strong. Is that just more demand for advanced DRAM capacity, or do you think you are also gaining market share?

I think it is a combination of both. I think the DRAM market right now is very strong. Some of the major -- our major customers have aggressive investment plans. We believe we're also settling steadily gaining ground. We have been, and I think we made good progress in Q4. Many of these buys, as I mentioned before, are technology buys. And our Green Laser technology is being very well received. And the evaluations for that technology are very positive. I think all those factors are contributing to our increased bookings.

Very good. Can you tell us a little more about what traction you are seeing with your new products, Mercury II and MPower?

Yes, those products have a different ramp cycle than the systems business, because they are OEM products that get designed into the systems that our customers will then ramp. So we are in the early to mid stages of driving those products into design-ins at our OEM customers. And I'm pleased with the progress. I think these are two products that in which we had very good technology. We released two products that are clearly differentiated. We have market share to gain in those markets. So I think these two product lines can drive growth for us in the future.

Of course, we first need to be adopted in the new designs. And so that adoption cycle will continue to proceed during 2007. And I expect that we will start to see the effects in our revenue later in the year, and particularly next year. But I think we made good progress on the adoption in Q4 as well for those two products.

Theodore O'Neill, Nollenberger Capital Partners.

I'm just a little bit confused. When we're talking about the deferred revenue and the accounting policies at GSI Group, you're talking about SAB 101 policy which applies to every semiconductor capital equipment company. There isn't something unique about this, is there?

No, nothing unique.

This is just the standard stuff that happens when any company introduces new products or it has new customers.

Yes, I believe that is correct.

Our revenue recognition policy is in compliance of course with SAB 101, and it hasn't changed. There's nothing unusual here. What is unusual is the fact that we have a particularly high number of bookings coming from new customers and/or new products, because we're introducing new products and we're gaining market share. So relative to the usual trends, during this early adoption of the new products and by the new customers, we will see a bit of a delay in the revenue recognition. But that is driven by that fact and not by any changes in policy. Our revenue recognition policy are pretty standard for the semiconductor equipment industry.

This is all a good thing.

We think so, yes.

We think it is a very good thing, yes.

Also, you have used the word, push out, along with this deferred revenue interchangeably. I believe push out refers to customers that have purposely pushed out their business into the future, not related to the deferred revenue according to SAB 101 policy.

No, we are not -- these are not push outs. This is simply the timing of when revenue gets recorded. It is just moving from being recorded at shipment to moving to being recorded at acceptance in order to validate that the -- what we believe is a perfunctory installation and acceptance process is consistent -- is simply validated, as we have done on all other products that we have sold and installed at the point in time they were new. This is business as usual. And the real difference here is that we've got new customers and new products.

Joel Jackson, BMO Capital Markets.

This is Joel Jackson for Brian Piccioni. So your tax rate has been hard to predict. What guidance can you give to your tax rate for 2007?

I think our tax rate for '07, and we have done quite a bit of preliminary work. I can't say that is final yet, but I believe our tax rate for '07 is going to tick up. For planning purposes right now, I am using a rate of 32 to 33%.

I would say, however, that we believe based on some work we're doing, we're likely to have one favorable discrete item in the first quarter that is not in our current guidance. Because we haven't completed the work, and so we can't reliably estimate what the benefit might be. But to the extent that the project does result in a benefit, it is related to the extraterritorial income tax deduction, which is essentially a replacement for the old Frisk tax rules. But to the extent that we do have a favorable benefit in Q1, that would impact the year and reduce the annual rate from that 32 to 33% range.

Chuck Murphy, Sidoti & Co.

Just a quick follow-up. Can you give an update on possible uses of cash, and some thoughts on the share repurchase program please?

We do have an authorized share repurchase program that was announced at the end of '05. I think, as you know, it was active in the second quarter of '06. And when Sergio joined we decided to put the program on hold until he had a chance of getting a lay of the land and getting himself oriented to the Company.

But the program is still authorized. And we don't give future guidance around when it may or may not be activated or in placed. But we certainly believe that our evaluations is quite attractive at these levels. Other uses of cash, we have got about other uses of cash -- I think largely our view is that it will be directed toward acquisition activity.

Jim Ricchiuti, Needham & Company.

Just going back to the question on deferred revenue, I may have missed it, but did you say how many customers this involves?

No, we did not. It is -- I think it is a handful -- it is a handful of customers, I want to say off the top of my head. My range might not be exact. 4 to 6 customers.

Bob, just with respect to operating expense in '07, so you see that basically flat with '06. You're starting off a little stronger I think than maybe I had expected R&D-wise in Q1. Do you see the R&D beginning to drop-off a little bit as you go through the year? And is that more a function of getting a lot of the program work done on the system side of the business, or do you see R&D up?

I expect our R&D expenses to be relatively flat throughout the year. I don't expect substantial quarterly fluctuations in R&D in '07.

You are suggesting you're going to be able to bring down your SG&A?

I think our R&D expenses in total for -- maybe they will trend down some, but I think our R&D expenses in total for '07 are expected to be relatively flat with where they were in '06.

Overall OpEx you expect to be flat with '06?

That's right.

At this time there are no further questions. Mr. Ruddy, are there any closing remarks?

Yes, just a closing remark for the analysts and investors. We are tentatively planning an analyst day for June 5. If any of the analysts think that will be a conflicting date, please let me know. Other than that, we hope to see you on our Q1 earnings call. Thank you very much for your attention.

Thank you. This concludes today's conference call. You may now disconnect.