NVE Corp (NVEC) 2008 Q2 法說會逐字稿

Good day and welcome, everyone, to the NVE conference call on second quarter results. Today's conference is being recorded. And at this time I'd like to turn the program over to the President and Chief Executive Officer, Mr. Daniel Baker. Please go ahead, sir.

Thank you, and good afternoon. This is Dan Baker. Welcome to our quarterly conference call. With me on the call as usual is Curt Reynders, our CFO. This call is being webcast live and being recorded. A replay will be able through NVE.com. Our press release with quarterly results and our quarterly report on Form 10-Q were both filed with the SEC in the past hour and are available through our website. As always, both filings contain unaudited financials. On our call this afternoon Curt will present a financial review of the quarter, I'll give a business review, and then we'll open the call to questions.

Comments we may make that relate to future plans, events, financial results, or performance are forward-looking statements that are subject to certain risks and uncertainties, including among others, such factors as: Risks and continued revenue growth and profitability; risks associated with our reliance on several major customers; uncertainties related to the renewal of agreements with large customers; uncertainties related to the awarding of future government contracts; risks related to MRAM commercialization; risks in the enforcement of our patents; as well as the risk factors listed from time to time in our filings with the SEC, including our annual report on Form 10-K and updated in our subsequent quarterly reports on Form 10-Q. The Company assumes no obligation to update the information in this conference call.

We're pleased with our results for the quarter. Record revenues of over $5 million, record earnings of $0.34 per diluted share including a non-cash reduction of $0.02 due to FAS 123(R), strong cash flow increased cash flow short, and long-term marketable securities to over $21 million, and we renewed agreements with two important customers, St. Jude Medical and Avago Technologies.

Now I'll turn the call over to Curt to discuss details of our financial results.

Thanks, Dan, and good afternoon. We report revenue in two categories; product sales, which is generally Spintronic devices we make and sell, and contract R&D revenue, which consists mostly of U.S. government contracts. Total revenue for the second quarter was just over $5 million, our first $5 million quarter. Product sales increased 14% over the prior-year quarter and contract R&D revenue increased 12%. Strong product sales in the industrial market more than offset a sequential decrease in medical sales, which we believe was attributable to inventory adjustments by our customers. This resulted in record product sales despite the challenging background. As we said on our previous call, these sorts of inventory adjustments are not uncommon in the medical business. The feedback we are getting about our products from your medical customers continues to be quite positive. As we discussed in the prior call, we expect to continue to see the effect of inventory adjustments in the December quarter. Over the years we have demonstrated that we are an extremely reliable supplier in demanding applications. That certainly bodes well for future growth, but in the near term, our customers may be confident enough in us to reduce their inventories of our parts. We currently expect the negative effects of inventory adjustments on product sales to ease in the March quarter.

Contract R&D revenue increased compared to the prior-year quarter for the first time since fiscal 2004. The increase was due to an increase in government contract revenue. We consider that a positive, but we expect contract research funding to be tight the remainder of our fiscal year, and therefore we do not think it is likely that year-over-year contract R&D revenue increases will continue. Government budgets appear to be particularly tight in the current government fiscal year, which began October 1st. We pursue contracts selectively and favor those that support our vision of a future of commercial products and licensing. An example of this type of contract we pursue is a contract for MRAM crypto key, which Dan will discuss. Gross margin in the quarter decreased to 63% of revenue from 67% in the prior-year quarter, due primarily to a product mix heavier in industrial rather than medical products. Margins increased to 66% in the first half of the fiscal year from 65% in the first half of last fiscal year.

Research and development expense decreased 45% compared to the second quarter of fiscal 2007. The decrease was due to the completion of certain R&D projects in the past year. Looking forward, as the level of contract R&D projects decreases, R&D expense tends to increase because some resources may move to Company-funded R&D from contract R&D. SG&A expense increased 8%, primarily due to an increase in the effect of FAS 123(R) All of the $151,000 FAS 123(R) expense in the quarter was related to automatic stock option grants to our non-employee directors on their reelection to our board. This had the effect of reducing after-tax earnings per share by $0.02. We believe options give our directors incentives to improve shareholder value and options rather than cash composition improve our cash flow. The number of shares granted to our directors has remained the same for a number of years, but the expense calculated using the Black-Scholes option pricing model was higher this year than last year, primarily because our stock price this year was considerably higher than last year.

Operating income increased 22% to $2.26 million in the quarter, and operating margin increased to 45% from 42%. Quarterly interest income increased 65% to $247,000, due to an increase in our portfolio of marketable, securities as we continue to generate significant cash from operations. Income before taxes increased to 50% of revenue and net income to 33% of revenue for the quarter. We paid significantly more cash for taxes in the past quarter than in the prior-year quarter because income in the quarter exhausted our tax credits and net operating loss deductions. Net income for the quarter increased 28% to a record $1.64 million or $0.34 per diluted share compared to $0.27 last year. September 30th was the halfway point in our fiscal year. For the first half of the fiscal year product sales increased 26% compared with the first half of fiscal 2007, and total revenue increased 21% to $9.71 million. We have no interest expense this fiscal year because we retired all of our debt in the first quarter of last fiscal year.

Diluted net income per share increased to $0.67 for the first six months of this fiscal year year from $0.45 for the same period last year. Net income for the first six months of this fiscal year exceeded earnings for the first nine months of last fiscal year. We continue to generate cash. Operating activities provided $3.2 million in net cash in the quarter. Cash plus short and long-term marketable securities increased to just over $21 million as of September 30th. Capital expenditures were $515,000 in the first half of fiscal 2008 compared to $230,000 in the same period last fiscal year, and $322,000 for all of fiscal 2007. The expenditures this fiscal year were primarily to increase our production capacity. We had said that we expected capital expenditures to increase in fiscal 2008 compared to fiscal 2007, as we increase our product manufacturing capacity and add capabilities to make smaller products.

Now I'll turn it back to Dan for a business review.

Thanks, Curt. Before I get to the business review, NVE received several awards in the past quarter. These and other awards are on our website under the heading, Awards and Accolades. Our recent financial results were recognized with us being featured as one of the top three companies in the Minneapolis-St. Paul Business Journal's performance report small 50 public list earlier this month. NVE's success in research, development and commercialization of high-tech products was recognized the past quarter with our second Tibbetts Award. The Tibbetts Award is a prestigious national award. Winners are selected based on the economic impact of the technological innovation, overall business achievement, effective collaborations, and demonstrated state and regional impact. NVE was one of 55 companies to receive this award, selected from over 4,000 companies that received contracts and grants under the government's small business innovation research program each year. The award was presented in a ceremony in Washington DC last week.

Another honor in the past quarter for our government contracts team, we received a certificate of appreciation from NASA. Our recent NASA contracts include magnetic logic circuits for extreme environments and configurable radiation hardened high-speed isolated interface application-specific integrated circuits. Our Spintronic devices are particularly rugged because electron spins are much harder to disrupt with radiation or other disturbances than conventional charge-based electronics. Finally, we were pleased to see the 2007 Noble Prize in physics awarded last week for Giant Magneto-resistant Spintronics. The noble committee stated that GMR can be considered one of the first real applications of the promising field of nano technology. Our mission at NVE has been to make GMR and Spintronics practical. Congratulations to Albert Fert and Peter Grunberg for the prize and recognition of their pioneering work in the field.

As Curt mentioned, we pursue government contracts selectively and favor projects that support our vision of commercial products and licensing. An example is a contract award to us in the past quarter by the National Science Foundation for a zero-remanence, tamper-responsive crypto key MRAM. The main research objectives for NSF the contract involve development for a fully-integrated 256 bit embedded tamper-resistant memory. In addition to government applications the technology could provide security chip and defenses against identify theft. It could also advance our MRAM technology portfolio. The contract is for approximately $500,000. In the past quarter, we were granted MRAM patent to bring our MRAM patent total to 25, and our total U.S. patents assigned to us to 45. The new patent is titled Magnetic Memory Layers Thermal Pulse Transitions, and covers inventions by our founder, Dr. Jim Daughton, and Professor, Art Pohm. The patent contains 23 claims -- patent claims to find the patent protection.

Magneto thermal technology may have the potential to increase the density and reduce the power of both conventional and spin-momentum MRAM. Spin-momentum MRAM uses a spin-polarized electrical current rather than a magnetic field to change the spin of storage electrons. This method has the potential to significantly reduce MRAM [write] currents, especially with lithographic features less than 100 nanometers. NVE has a number of patented inventions relating to spin-momentum transfer MRAM. This past June we were granted a patent relating to both magneto thermal and spin-momentum transfer MRAM. Increased density and reduced power are keys to enabling broader MRAM use in the future. Links to the new patent, our other U.S.-issued patent, and our publicized patent application are in the about NVE section of our website.

Turning to our products, our Spintronic sensors and couplers can provide the eyes and nerves of electronic systems. Sensors provide the eyes and couplers provide the nerves. Our core product market has been industrial, scientific and medical, known as the ISM market. Our growth strategy has been to expand our product line, broaden our distribution, and longer term to expand into larger markets, such as consumer or automotive electronics. Miniaturization is one of the core benefits of our products. Smaller packages allow electronic systems in less circuit board space, or for medical devices in less body space. As I mentioned in answer to a question in our July call, we recently introduced a line of the smallest isolated RS-422 and RS-485 transceivers, called the ISOLOOP® 3000-3 series. RS-422 and RS-485 are industrial standards for popular serial network protocols used for a variety of applications, and our transceivers combine Spintronic coupling with network protocol functions in a single package. The dash-3 series in a unique 0.15-inch wide package, half the size of our existing products, and the smallest devices of their type. High-speed versions are now available in either RS-422, and RS-485, and we're planning additional dash-3 series version.

One validation of the value of our technology is that we supply parts to a number of industry leaders, and in the past quarter we renewed agreements with two important customers, St. Jude Medical and Avago Technologies. We were pleased to renew our St. Jude supplier partnering agreement in the past quarter. The amendment extends our agreement to supply giant Magneto resistive sensors through the end of 2009. We have been providing sensors to St. Jude since 2001, and our agreement would have expired at the end of this year. We see medical devices as an excellent market for our technology. We summarize our advantages in the medical market with four B's: Boxes or miniaturization; bits or precision; bullet proof, meaning inherent reliability; and batteries for low-power consumption.

We sell certain of our couplers under the Avago brand through their distribution. As some of you are aware, the 2001 purchase agreement between us and Agilent expired in June. The agreement had been assigned to Avago. After the expiration we'd been supplying to Avago on a purchase order to purchase order bases. We were pleased to sign an amendment to the 2001 agreement in the past quarter. The amendment provides for a cash payment of $250,000 to us, extends the term of the agreement through June 2010, and eliminates a number of provisions of the original agreement. Provisions of the original agreement that were eliminated by the amendment included eliminating Agilent's right to manufacture products under our intellectual property, eliminating certain exclusivity provisions, and eliminating a first right of refusal in the event of an offer to acquire NVE. We believe these amendments make the agreement more favorable for NVE.

Avago has an excellent reputation in the high-performance coupler market, good distribution and expert customer support. Agilent and Avago have been important to NVE customers for a long time. Despite their history in optoelectronics dating back to Hewlett-Packard in the 1950s, they had the foresight to see the value of NVE's competing nonoptical Spintronic technology. Both the St. Jude and Avago agreements were filed with the SEC and are available through our website. In accordance with SEC rules for the confidential treatment, sensitive portions of the agreement were redacted. The risks that those two agreements might not be renewed was covered in our annual report on Form 10-K filed in May, so we updated that risk factor in the 10-Q filed today.

We also reported the results of last month's annual shareholders meeting in our 10-Q. We strive to meet high standards for corporate governance. For good corporate practice each of our directors stand for election every year. Also for good corporate practice, we submitted our auditors for ratification this year. At our annual meeting our shareholders reelected our board of directors and ratified Ernst & Young as our auditors. Details are in the 10-Q. NASDAQ standards call for a majority of directors to be independent, and four of our five directors -- all but me -- are independent. NASDAQ government standards also call for at least one member of the audit committee to be a financial expert, and all three members of our audit committee have been determined to be experts. We had a chance to meet some of you at the annual meeting, and we appreciate that we had shareholders from across the country attending. As a result of our governance practices, our corporate governance quotient according to institutional shareholder services was above the 97% percentile in the ISS universe of companies as of October 1st.

Summing up, we had a strong quarter driven by record revenue, we have products in demand, and we renewed two agreements with important customers. We continue to be optimistic about our prospects and we look forward to a bright future for Spintronics and for NVE. Now we'd like to open the call for questions. Melissa?

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from Avinash Kant, Broadpoint Capital. Please go ahead. Please go ahead.

Good afternoon, Dan and Curt.

Good afternoon, Avinash.

Quick question. You just talked about the renewal of the contract from Avago and that involved some cash payment. Was it in the current quarter's revenue that you reported?

We actually received that cash payment on October 1st, so the -- the cash was not included in our -- in our balance sheet for the September quarter.

Okay, so that will be in the next quarter, the December quarter?

Right. The cash will show up in the December quarter. We did recognize a portion of the revenue, though, in the -- in the September quarter.

And how much was that?

Basically it was -- we took the $250,000 and -- and we're amortizing it over the term of the agreement.

So until 2010, basically?

Correct.

And --

Right, that's in accordance with FAS 101.

Right. Right. And of course your contract R&D revenues went up in the current quarter. Should we expect it to come back at the previous quarter's level or should it stay at this level for the rest of the year?

Our contract R&D revenue can be pretty sporadic. What -- what I had said was that it did increase compared to the prior-year quarter, but we do not expect year-over-year contract R&D revenue increases to continue.

For the rest of the year?

I'm sorry?

For the rest of the year, you mean? Calendar year or fiscal year?

For the rest of our fiscal year we do not expect year-over-year increases in contract R&D revenue.

I see. But you still continue to talk about some inventory at the medical device customers?

Right. We -- we do expect to continue to see some inventory adjustments in our current quarter, the December quarter, but we believe that those inventory adjustments will ease in the March quarter.

Okay. I'll let other people ask questions and get back in line again. Thank you.

Thank you, And our next question will come from Steven Crowley, Craig-Hallum Capital Group. Please go ahead, sir.

Good afternoon, gentlemen. Very nice performance this quarter.

Thank you, Steve.

Couple of questions, maybe one just to follow up on the prior question. It seems like what you said about the timeline on this inventory correction seems quite consist went what you laid out last quarter. I guess that would be the first question for confirmation.

That is correct.

Now typically, you've experienced -- maybe not something as formal as this inventory correction, but some tendency of medical device customers in this December quarter to skinny down inventory since -- for maybe several reasons, but one of them is probably that we have some fiscal year ends in December and folks managing inventory like to get lean for bonus time. So I'm wondering as a normal course of business whether or not you've seen this in the past, because we've seen some sequential product decline from September to December? That's been my general expectation this quarter. It sounds like that would be the consistent way to think about it. Is that correct?

Yes, Steve, that's been -- that's been the history is that the fourth calendar quarter, our third fiscal quarter, has traditionally shown -- in recent years has shown a sequential decline, and what you cited, managing inventory might be one of the reasons. The other tends to be plant shut downs and holidays concentrated at the end of the -- at the end of the calendar year. So we never know for sure, but that certainly has been the pattern.

And that's usually been a 10% to 15% sequential decline in revenue for you guys from Q2 to Q3. Is there some distortion because of this inventory correction at -- at some of your medical device customers that are likely to make it more pronounced? Or the fact that it started early might it be even less pronounced this year? I'm wondering which way the distortion cuts because of the earlier start to the inventory correction or whether it has any impact?

I think we understand what you are getting at. It's just the level of granularity that we'd -- that we'd rather not -- rather not get in to, because you're -- we're starting to parse changes from a sequential -- sequentially from the -- from the prior quarter. It -- it has been pattern of -- that the third fiscal quarter has declined compared to the second fiscal quarter, and I think we see overlayed on that an inventory adjustment or correction by certain of our medical customers that we see as a two quarter -- a two quarter issue.

Well that -- that's helpful, and again I think the benefit is that it's quite consistent with what we started talking about a quarter ago and I think that's largely baked in to people's thinking. Now in terms of one bookkeeping question for Curt, you made the point that you started paying cash taxes this past quarter. Was essentially your cash tax rate the same as your book tax rate?

Our book tax rate was -- we were about 34.5%, and we do have some NOL carryovers and some credits coming into the -- into this fiscal year, so we wouldn't necessarily pay the same amount in cash taxes that -- that we would recognize for book purposes.

Okay, so there's not quite the burden that's reflected in the book number?

Right.

One final question, and then I'll hop back in to queue. You did a really nice job, obviously, on the SG&A front, especially in light of the uptick in stock-compensation expense year over year. Was there anything anomalous about the baseline SG&A performance that you delivered in the quarter or are those likely to stay pretty muted over the relative near term here?

Some of the -- in the first quarter, we -- we cited that we had some higher expenses due to expenses associated with Sarbanes-Oxley 404, which did not carry over into the second quarter. Other things that would affect the SG&A is timing of legal expenses, which we -- we really don't have any control over.

Okay. Well, I'll hop back in queue and come back with some more questions. Thanks.

Our next question, gentlemen, will come from Nick Tishchenko, Global Crown Capital.

Gentlemen, I have a few questions, and I would like to start with the [fleet] of revenues by segment; industrial, medical, scientific. Dan, is there any way you can quantify this [fleet] or make any qualitative explanations about how it behaved during last couple of quarters, and what you expect for the next quarter?

Well, good afternoon, Nick. This is Dan. As you know, we don't -- we don't provide that level of granularity by market segment. We did say that sequentially we saw a decline in medical product sales, so sequentially it would be from the first fiscal quarter to the second fiscal quarter, the most recent fiscal quarter, and we heard attributed to that to the inventory -- the negative effects of inventory adjustments in the medical industry. We do expect those adjustments to ease in the fourth fiscal quarter, the March quarter, and what -- what we believe is that these sorts of inventory adjustments are not uncommon in the medical industry. The feedback that we're getting from customers is quite positive in our medical and our industrial markets, so right now we're expecting that this was a -- a specific -- a specific incident or set of events that wouldn't effect our long-term growth prospects.

Dan, talking about inventory correction, can you qualitatively characterize the correction side of scale in, let's say, September quarter, June quarter, and December quarter? Either increasing with time, when it would be passing through a [pick]? Is it already decreasing?

I guess that's really something we really haven't gotten into. I think you mentioned the June quarter. The June quarter, we didn't see the inventory adjustments. We're only seeing effects of inventory adjustments in the September and -- and December quarter. But as far as specifics on that, we really -- I don't think we can get in to that.

I have one last question about new targets for your applications out (inaudible) consumer. What are these applications? Can you provide some details? And how far you are from commercialization.

This is Dan. As we said before, we do see future growth markets in automotive and consumer electronics, and there are a number of applications. In automotive we make a very precise sensor that's very small, and in particular we make some extraordinary rotational sensors. So as you can imagine there are a number of potential rotary sensors in cars, and the number of sensors has been increasing significantly and is expected to increase as fuel efficiency, safety, and performance continue to -- we continue to try to improve those, and all using -- all using less fuel.

We are in some automotive and consumer applications and we've been targeting specific applications in those markets. It probably wouldn't be constructive for me to talk about specifics, because it's a future area, and we tend to assume that our competition is listening to these calls and we'd rather not -- we'd rather not provide a road map until we have products in place, and until we're in a position -- a better position to talk about it. But what we see -- or some of the advantages that we're seeing in the industrial, scientific, and medical market are applicable in larger markets, and our vision is to move towards those larger and larger markets now that we've established a presence and a reputation for very high quality products in those markets that we're serving. So the advantages that we have are size, smaller size, precision, reliability, and power consumption, and you can imagine a number of applications in consumer electronics where those would come to play.

Now, Dan, when I can go to the dealer and buy the car with sensors from NVE?

I wish I could tell you, Nick, but we'll -- we'll try -- we'll try to provide updates as it's appropriate. I think we take pride in that our parts are in a number of hearing aids and implantable medical devices, thousands, and when we talked on some of these calls a few years ago, that was just a goal and a vision.

Then my last question. Talking about your supply agreement with St. Jude and with Avago. Was there any words about the size of (inaudible) supply? And if there was did it change from the previous agreement?

In the St. Jude agreement, part of the agreement is that they provide us with forecasts. The forecasts, though, are non-binding, so we do not count that type of forecast or even the orders as backlog, because it doesn't meet the definition -- the accounting definition of a firm backlog. So we certainly look forward to a constructive relationship with St. Jude. We have been working with them for -- well, since 2001. We've established a superb track record as the supplier, and we are certainly pleased that they saw fit to extend the partnering agreement for another two years. But it probably wouldn't -- wouldn't be appropriate to get in to the quantities or forecasts, because, as I say, they're non-binding and also they're sensitive.

As far as the Avago agreement, that agreement, again, calls for -- for forecast, and we don't count that in our reported backlog at the end of the fiscal year. And again, those orders are cancelable. As Curt mentioned, we did receive -- in an answer to a prior question, we received an advance payment or payment associated with the renewal of the contract for $250,000. That's amortized over the term of the agreement, which is three years, so that revenue is virtually guaranteed. And as far as how many they will sell, I believe they have a very positive view of our parts, and I think we've -- we view the partnership that it's gone very well over the years, but it's just hard to predict the future.

Thank you very much.

Thanks, Nick.

Our next question will come from Ryan Randall, Randall Capital.

Hi, thanks for taking my question. I just had a couple of quick things. First of all, I was curious on the product sales. Now, you have seen some inventory adjustments in the September quarter, and it sounds like that is going to continue into the December quarter as well. So it seems as if product sales are probably going to be flat in that December quarter year over year. Is that a fair way to look at it?

I guess we don't get in to specific guidance as far as revenue goes. I guess what we said was we -- we do expect the inventory adjustments from -- to continue in the December quarter, but then ease up in the March quarter.

Okay. So it sounds like a third of it was done in the September quarter, and then two-thirds are going to hit in the December quarter?

Well what we said in the prior call was that we expected this to be a two-quarter issue. That would be the third and the fourth -- I'm sorry, the second and the third fiscal quarters.

Okay. And then secondly, I was just -- I'm trying to understand the magnitude of the decline in gross margin. The prepared remarks talked about the fact that it was a shift away from medical to industrial. So I guess by seeing the loss of inventory -- or the loss of sales to the overstock customer, saw that hit the margin, that it -- it was impressive to see how quickly the margin fell. I guess impress is the wrong word. But do you expect that to show further sequential and year-over-year declines into December quarter?

I guess we really don't get into what our margins may be quarter to quarter. I think if you look back, we have had six consecutive quarters now with margins in the over 60% range.

Okay. With that --

Yes, we're -- I think we feel fairly fortunate that -- that we have the kind of value in our products and the kind of pricing power to deliver margins that have been consistently in the -- in the 60s.

Right, since the beginning of the '07 fiscal year. Did you guys take any charges this quarter for any inventory that would affect the gross margin?

We did not.

Okay. Okay. That's all. Thank you.

And we will take a follow-up question from Avinash Kant, Broadpoint Capital. Please go ahead.

Follow up on -- if you could comment anything about the relationship with Freescale and then where are you in terms of if at all renewing a license or what kind of conversation you're having with them?

Yes, this Dan. Our goal, as you know, is to license our MRAM technology, and we feel we have very powerful intellectual property in the MRAM space that was just strengthened in the past quarter with that patent that I mentioned in our prepared remarks. And it probably wouldn't be constructive for me to comment on a particular potential licensees or the status, but what I can say is that I believe Freescale shares our goal of expanding MRAM commercialization. It's amazing technology, and gaining additional licensees is a key part of our business strategy.

Okay, Dan. And as I'm talking about new products, of course, if you were to see meaningful adoption of your technology into new products, I know you've been talking about automotive being newer markets, but are you also working with other customers in the medical device side where you could see some meaningful opportunity?

Yes, we certainly are. And as we've said before, we see that as a market where we have an excellent benefit proposition. We've established credibility with customers that we can -- that we can name, such as St. Jude Medical, and Starkey Laboratories, and we have advantages of size and precision reliability, power consumption, which are very important, and I think we're seeing more and more the importance of reliability in a medical device -- medical devices. We've seen the down side of that with -- with recalls and reliability is just -- is just so important, particularly in life-sustaining medical devices. So we offer products that have no moving parts, that are inherently stable, that can withstand all sorts of terrible, terrible things that we hope never happen, and so we think we've got an excellent benefit proposition in medical. The reason we've talked about other markets is we also want to address larger markets. And the medical market, while we have great products and we believe there's a greet need there, it's relatively small compared to consumer markets or automotive markets.

In the medical side -- device side, what -- it is better to think that you would grow your number of products you have with existing customers, or you will sign up newer customers?

Well, we would hope to do both. We would hope to -- to find new customers. We would hope to broaden in to other medical markets than we currently serve, and we -- we would like to both add customers and see our existing customers growth, both -- organically grow through the success of their products and also to grow where -- where possible, where we can provide them more products into different devices.

And on the automotive side, in terms of the competition that you face out there, what's the differentiation? I understand that the technology is clearly that you have no moving parts and higher reliability, but in terms of price are you competing with people with similar technology or are you competing with people with traditional technology and of course going in to the higher-end applications?

Well, in general we compete with convention technology and particularly with conventional sensor technology. So the major advantages we would have in automotive would be size, in that our devices tend to be smaller, which means that they can be used in tighter spots, and you can imagine that in engines and other sorts of systems that that's important. Their precision, which can lead to better feedback for things like rotational sensors for wheels or suspension systems. The reliability, where they can withstand the harsh automotive environment of extreme heat or around here we get extreme cold in the winter. And then power consumption, because there's always a power budget. So we believe that we have advantages in all of those areas. Obviously there's lots of people who are trying to get into the automotive market or expand their presence in the automotive market. We think we have unique benefits and we're targeting particular applications where those -- those benefits are going to shine.

One final question, if I may. You did talk about margins, and of course you did say that in the current quarter the margins came down because of higher mix of industrial. Now if you were to compare the margins of industrial, medical, and scientific, where would margins from the scientific business stand? Would they be in between the medical and industrial or where do they stand?

That's an interesting question. I don't -- I don't know that we could give you reliable information on that. Medical refers to two broad categories. One would be medical instrumentation, which tends to be similar to scientific instrumentation. Those would be, say, desktop boxes or devices that monitor -- monitor patients or that type of thing. And then medical devices, which would be the types of things that St. Jude Medical, Starkey Labs would provide, and those implantable medical devices tend to command higher margins because they have to be so rigorously manufactured and reliability -- the reliability is so critical on them. So I think we've -- we've drawn that distinction that margins do tend to be higher in medical device -- in the medical device business than in some of the other markets that we serve, and I think that was -- that was one of the reasons that we gave for the sequential margin decline, as you point out.

Thank you so much, Dan and Curt.

Thank you.

And that will conclude our question-and-answer session. At this time I'd like to turn the program back to Mr. Baker for any closing remarks.

Well, thank you all for attending our call. So sum up, we had a strong quarter with record revenue and earnings and we look forward to our next call. Thank you.

Thank you everyone for your participation on today's call. And you may disconnect at this time.