NVE Corp (NVEC) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NVE conference call on the second quarter results. At this time, all participants are in a listen only mode. Later we will have a question and answer session, and instructions will follow at that time.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Dan Baker. Sir, you may begin.

Thank you, and good afternoon. Welcome to our conference call for the quarter ended September 30, 2012 the second quarter of fiscal 2013. As always, I am joined by Curt Reynders, our Chief Financial Officer. This call is being webcast live and being recorded. A replay will be available through our website, NVE.com. After my opening comments, Curt will present a financial review of the quarter and fiscal year to date. I will cover business items and we will open the call to questions. We filed our press release with quarterly results plus our quarterly report on Form 10-Q with the SEC in the past hour, following the close of market. Both filings are available through our website.

The 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 profitability, uncertainties relating to future revenue and growth, risks related to developing marketable products, uncertainties relating to the revenue potential of new products, risks in the enforcement of our patents, litigation risks, 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 for the year ended March 31, 2012, as updated in our quarterly report on Form 10-Q for the quarter ended June 30, 2012. The Company undertakes no obligation to update forward-looking statements we may make.

We are pleased to report strong earnings for the quarter. Net income was $0.50 per diluted share despite a revenue decrease, primarily due to a decrease in contract R&D. Gross profit margin increased to 72% compared to 65% last year, and operating cash flow increased to $6.43 million for the first half of the fiscal year. Now, I will turn the call over to Curt for details of our financial results.

Thanks, Dan. Total revenue for the second quarter of fiscal 2013 decreased 12% to $5.82 million, due to a 43% decrease in contract research and development revenue and a 6% decrease in product sales. Contract R&D revenue decreased due to the completion of certain contracts and contract activities. It is continuing to be a challenging environment for government funding.

The decrease in product sales was due to decreased sales to certain medical device customers, and decreased sales into industrial markets. We believe sales were impacted by inventory adjustments by our distributors and end customers due to continued weak economic conditions and customer specific conditions. Gross profit margin increased to 72% of revenue for the second quarter of fiscal 2013 compared to 65% for the second quarter of fiscal 2012 due to a more favorable revenue mix, a more favorable product sales mix and improved manufacturing processes. Total expenses were roughly flat compared to the second quarter of fiscal 2012 as we controlled expenses in a challenging economy.

Interest income increased 4% due to an increase in interest-bearing marketable securities. Income before taxes for the quarter was $3.62 million, and pretax margin was 62% versus 56% in the prior-year quarter. The provision for income taxes was a higher percentage than the prior-year quarter, 32.5% of income before taxes compared to 30.9% last year because of higher effective tax rates. The higher tax rate accounted for about half of the decrease in net income from the prior-year quarter. Net income for the second quarter was $2.44 million, or $0.50 per diluted share compared to $0.52 last year, and net margin was 42% versus 39% in the prior-year quarter.

September 30 was the halfway point in our 2013 fiscal year. For the first half of the fiscal year, total revenue decreased 10%, primarily due to a 54% decrease in contract R&D. Gross profit margin increased to 74% of revenue for the first six months compared to 67% for the first six months of fiscal 2012 due to a more favorable revenue mix, a more favorable product sales mix and improved manufacturing processes. Net income was $5.82 million compared to $5.99 million for the prior-year period. The decrease was primarily due to decreased contract R&D revenue, decreased product sales and increased R&D expense, partially offset by increased gross margin as a percentage of revenue. Earnings per share was $1.19 for the first six months of this fiscal year compared to $1.22 for last year.

Operating cash flow was $6.43 million for the first half of the fiscal year, an increase of nearly $50,000 compared to last year. As of September 30, cash plus marketable securities was $79.9 million, an increase of $6.3 million in the first half of the fiscal year. In addition to solid cash flow from operations, our balance sheet has been further strengthened by a good year for our marketable securities with a $836,000 net increase in the market value of our marketable securities. The gain in marketable securities is reflected in our comprehensive income of $6.35 million for the fiscal year thus far. In accordance with new accounting standards, we have begun reporting comprehensive income on the income statement pages of our quarterly reports on Forms 10-Q. For us, comprehensive income consists of net income in the unrealized gain or loss from marketable securities, net of tax. Cash paid during the quarter for income taxes was $2.92 million. Cash paid for income taxes has been higher in the second fiscal quarter than other quarters, because there are two estimated tax payments due, one in July and one in September.

Purchases of fixed assets were $1.02 million for the first half of the fiscal year, primarily for production equipment and leasehold improvements. This is a historically high investment for us as we continue to expand and upgrade our production capabilities to support future growth. We made substantial progress on our clean room expansion in the past few months, which is a key element of our growth strategy. We have completed demolition of old walls, and the walls are up for a new clean room bay. We expect to complete structural work and infrastructure upgrades this quarter. We currently have two clean room bays with a total of about 3,400 square feet of clean room space. The expansion will add a third bay of approximately 1,400 square feet, about a 40% increase. Infrastructure upgrades will include clean air handling, process cooling water and larger electrical service. The additional space allows us to deploy new equipment, and we have several new pieces of equipment on order for delivery this quarter or next. The equipment will increase our capacity and decrease our production costs after it is deployed. Now, I will turn it over to Dan for his perspective on our business.

Thanks, Curt. I will cover product development, patents and governance. We have said before, we have a customer who is planning to use our custom spintronic biosensor in a new medical diagnostic instrument. We have received reports the program is behind schedule, but we have no indication of any showstopper problems. As we have reported, using our technology, our customer has demonstrated significantly increased sensitivity for in vitro diagnostics compared to conventional methods. We continue to believe this could be an important new market for us. As evidenced by our excellent gross margins, we are well-positioned to take on larger markets that might be more price sensitive markets, such as automotive and consumer electronics.

One example, is controller area networks, or CAN, which is a bus used for applications such as automotive system interconnects. Our second generation CAN transceivers were introduced in May and in the past quarter, we introduced a so-called wide-body version that offers superior high-voltage performance. We have large potential customers evaluating the parts now. This quarter or next, we expect first silicon of controller area network transceivers from our partner for a third generation of CAN transceivers, which will be targeted primarily at high-volume, hybrid electric vehicles. We will combine the transceivers, which use conventional semiconductors, with our spintronic coupler technology. We plan to sample these third generation parts next quarter as we begin automotive certification and qualification.

Our CAN partner is a large semiconductor company with significant automotive presence. It plans to sell our third-generation parts under its brand. This private label strategy will provide opportunities in the notoriously insular automotive industry, and it could significantly reduce our time to market. A key element of the marketing strategy for our catalog products is to make it easy for engineering prospects to see for themselves the unique features and benefits of our products. We have recently introduced several new product evaluation kits, including a controller area network, Node-in-a-Bag. A Node-in-a-Bag for RS-485 network, a tunneling magnetoresistence angle sensor demonstrator and evaluation boards for digital and passive input spintronic couplers. All of those are available through our website and some of our distributors have them, as well.

Turning to patents. In the past quarter, we received notice of allowance of a patent titled stress magnetoresistive tamper detection devices. A notice of allowance is a written notification that a patent application has been examined by the patent office and is nearing issuance. The invention relates to MRAM and pressure sensing to detect tampering. We are leaders in tamper detection technology, and it is a significant R&D focus. In the near term, this technology could be used to protect high-value assets such as defense systems and in the long-term, it could be used for everyday consumer devices. We have been notified that the patent will issue next Tuesday, October 23.

Turning to governance, our annual meeting was held last quarter. We had an excellent turnout for the meeting with shareholders coming from around the country. We appreciate the chance to meet some of you, and we are gratified to have so many shareholders who share our passion for NVE. We are pleased to be part of a select group of public companies with a perfect governance score from ISS Proxy Advisory Services for good corporate practice. Each of our directors has stood for election every year, and we submit our auditors for ratification. Shareholders overwhelmingly voted to reelect all five of our directors and ratified Ernst & Young as our auditors. We also hold annual say-on-pay votes in accordance with our Board's recommendation and the 2011 shareholder vote. Our executive officer compensation supports goals of profitable growth and improving long-term shareholder value without being excessive, and shareholders overwhelmingly voted to approve compensation. Details of the shareholder votes are contained in a report on Form 8-K, which we filed with the SEC after the meeting.

Now, I like to open the call for questions. Mary?

Certainly.

( Operator Instructions)

Steven Crowley, Craig Hallum.

Good afternoon, gentlemen. In terms of trying to better understand the revenue decline, both year-to-year and sequentially, it seems like you dropped some breadcrumbs for us as it related to both major sides of your business, both medical and industrial. Can you give us a flavor for where the biggest influence was in the period you just reported?

Well, Steve, one of the areas is the CRM business which can be pretty volatile for us because of factors, some of which are beyond our control such as regulatory issues, reimbursement policies and market share shifts between CRM manufacturers. These changes can be amplified by inventory adjustments as our customers adapt to their environment.

In terms of the competitive landscape, both for your products in that industry and with your major customers, has there been any change there?

This is Dan. We haven't detected any changes in the competitive environment. We believe that we have significant advantages and a strong benefit proposition in the medical device markets that we serve. So, what we have seen is some economic weakness and some factors, as Curt mentioned in the prepared remarks, some factors that are specific to certain customers. But in the long run, we are very optimistic. The demographics are favorable for CRM as the population ages, and things do seem to be improving. A lot of what affects us is not just the level of sales or volume, it's the expected change in those and whether those are incorporated into our customers' planning. So, to the extent that they have been incorporated into our customers' plans, we are actually pretty optimistic despite a pretty weak market expectation in some of our key markets.

Now, in terms of the medical area and your progress with new customers and/or new applications, can you give us at least a qualitative sense for what kind of progress you have been able to make on that front? And is that progress, if it's there, being masked by these larger forces?

We have been making progress in other areas of medical devices. We have talked about specifically neurostimulators, which is a fast-growing market and one where we have similar benefit propositions to what we have in CRM and in life support medical devices. So, that's an area where we are pleased with our progress, and we have several customers that we are working with in the early stages. But it's hard to predict on those, sometimes regulatory hurdles and things can take a while. But this is a business that we believe has excellent long-term potential, and we are investing in it with that in mind. That it can take a while to develop, but it can be an excellent revenue and business for us for many years to come.

That's probably a pretty good segue to my question on the biosensor opportunity and trying to understand, to the best that you can allow us to, what may be hanging up or slowing down the progress of your one major initiative that you've talked about with that customer who's a bit behind schedule. Can you give us a bit of a feel for why that's taking place and whether or not some of those regulators of your progress can lessen as we go forward over the relative near-term? Or is that even plausible?

Well, we are certainly hoping that that project can move along. Based on our customers' demonstrations and the information that we have provided, we believe they have made a lot of progress on the design, and we have no indication of showstopper problems. We believe the sensors are performing very well, and we don't have -- unfortunately, we don't have visibility into the regulatory or governmental status. But, we look at this as a long-term opportunity that can be an excellent business for years to come. We have proven advantages in terms of our sensitivities, speed and size. We have a partner that can make this happen. It's a large market.

We are providing a disposable element so that we are selling one device per test. We see this as an excellent business model where we have significant advantages, and we see it as a long-term opportunity. We are doing everything we can to move it along as quickly as possible. But we believe that the sensors are not the pacing factor.

Now, in terms of how this opportunity likely plays out with this customer, are you forced, or is the equation such that it's a geographic opportunity in terms of markets they tap that are in sequential order? In other words, you can't get to the second market before you get to the first market? Or is there stuff being done for this to be a more parallel opportunity where they have time to go after different markets, even if the first one has taken longer? I don't know if that was a particularly coherent question, but hopefully you got enough of it to throw an answer at us.

No, I think I understand what you were getting at, Steve. We believe that our customer is working to get it approved in a -- in one market first. Typically, that's not the US market because regulatory approvals often take longer here than they do in other countries.

What companies often do is if they run into delays in one market, sometimes they look at other markets and, as you say, try to work that in parallel. And I'm -- as I say, though, we don't have an awful lot of visibility into that. But we have a partner that knows what they're doing and can make this happen, and we trust them to make those judgments. And we know they want to get it to market, of course, just as we do.

Now, in terms of that paralleled opportunity development, you preserved your right to not be exclusive with this partner. I trust the thought process was that they would be rolling before you got into the thick of things with other potential partners. But have you been able to develop some of those other interested parties in this technology? Or is that also kind of a sequential operation once you prove yourself in this opportunity with this customer, you will be going after other customers?

We can go after other customers, both contractually and strategically, and that's been what we've been pursuing. There's nobody as far along as what we've been able to describe for this customer where they've been buying preproduction units from us and they have done demonstrations that show the advantages over conventional technology. But we are continuing to pursue parallel opportunities and we have a fair amount of data based on some of the government research that we have done relating to this technology where it's always helpful to have a customer and a design and a product in the market to get additional customers. But, it's not essential, and we are continuing to pursue other opportunities for slightly different applications of the in vitro technology that we have developed or different markets.

I'm going to hop back in the queue and give somebody else a chance. But you will probably hear from me again this call. Thanks.

(Operator Instructions)

William Driscoll, RMB Capital.

Just some questions on the capacity expansion in light of the product sales levels that we're seeing. Is this -- could you just explain to us how this is not more speculative build versus you have something that you are actually thinking about? Because this is probably one of the most disappointing product sales levels I have seen as I go back even several years. So, if you could just explain the thinking behind the capacity expansion. Thanks.

Thanks, Bill. Well, it's part of a growth plan. We have a number of markets that we are pursuing that will open up large potential product sales, and part of our plan is to have the capacity to build them. And that's important for prospective customers, to see that we have that capacity because they are going to be relying on us to deliver products to them on time.

And the other areas that it will help us with are to provide redundancy, and that's important to some of our customers who are in critical applications where they want to know that we have the capability to keep manufacturing, despite possible equipment problems or shutdowns. And then we believe that we will reduce our costs with more efficient equipment. So, there are a number of reasons for this. But the main reason is to support our growth strategy. And we have talked about some of those areas that we have, which are -- in past calls we've talked about private label products, automotive is one that we have talked about, compassing and biosensors. So, we believe we are going to need this capacity.

Is the capacity, is that a first step when you start dancing with these larger players? Or is it something that they have requested of you as they started to talk to you more?

It varies, but we believe that having capacity is important for existing customers for near-term customers and then for some prospective customers who want to be sure that if they rely on us that we have adequate capacity, adequate, what we sometimes call spring capacity, which is that if they need a lot of parts in a hurry, that we can provide that. So, this is part of the service that we provide to our customers, part of our unique and distinctive confidence. So, we think it's important for future growth, in addition to just the straight capacity that we believe we are going to need.

And, as far as on the CRM side, is there anything -- [Shutes] had some problems with some of their products. Nothing with their problems has been -- has to do with your products, does it? Is it a different part of what's going on with their CRM devices?

Right. That's correct. We have never had reports that any of regulatory issues or any other issues were related to our parts. As you might be referring to, they talked in their conference call, which was this morning, about a possible Form 483, which is a warning letter. We -- that has nothing to do with us.

And is there anything else you could tell us maybe about like the calendar, as far as the Everspin litigation goes?

Well, we have studied a number of documents. We remain very confident of our position. We have asked for reasonable royalty, triple damages for wilful infringement. The court hasn't ruled and is probably a ways from ruling on any of that, but we certainly feel very confident of our position and our leadership in the MRAM market.

Is there anything you could tell us about the amount of sales that Everspin has been able to do? It's -- obviously it's a private company. There's not a lot out there that we can see. But I was just wondering if you have -- if you could give me a sense of what the sales level is there, as far as MRAM that they are putting out.

As you say, they are a private company, and that's something where we just aren't in a position to talk about that. I guess, what I could say is that what we look at is -- what we look at with any investment that we make with our shareholders dollars is when we spend those dollars, is there enough potential return to make it worthwhile? And so that's what we consider when we make any kind of decision. Obviously, how much is being sold would enter into that.

And as far as the cash balance, is there a number or a cushion number that you feel is -- okay, that's adequate to cover litigation and to make sure that they know that we're real. But if potentially the stock is weak, would you guys ever step up and start buying your stock? Do you have to have an emergency Board meeting or anything like that to get that going?

We wouldn't need further Board approval. Our Board has approved a buyback program. It has certain caveats, and so we can't predict when or under what circumstances we would buy back stock. But, we do have a program in place that, with those caveats, allows us to do that. And we don't have an exact number or a bright line number of what -- how much we want on our balance sheet or need on our balance sheet. We believe that one of the reasons to have a strong balance sheet is to protect our intellectual property portfolio. That has not been a significant expense. It wasn't in this quarter, this most recent quarter. So, we believe that we have a strong enough balance sheet for a variety of options.

And has headcount stayed pretty steady? Have you laid off anyone during the quarter, or -- I was just looking at the R&D line. That popped up as the contract research sales declined and the government stepped away and you brought some of that more on to your own income statement. But now it's in decline again, and we haven't really seen much -- we've seen a pretty good pop, but not a huge pop in the overall contract research line.

Right, and mostly what we have done in R&D is to redeploy the talented folks that we have there onto internal R&D programs that we believe will pay off in the long term. So, there are always adjustments, particularly in the production area, relating to revenue levels and expense levels. But, we certainly haven't impacted our R&D capability, and we actually have quite a bit more R&D going on, Company-sponsored R&D. And we do that because we believe we have programs and are going to pay off in the future, and we have mentioned some of them.

All right. Thanks, Dan.

Jon Jung, Trailhead Asset Management.

Thank you. Hello, Dan. I wonder if you could perhaps give us a little more color on what you are doing with regard to sales and marketing? You've got a very strong gross margin. You've got a tremendous amount of cash on the balance sheet and flat revenues. I wonder if you might be able to describe for us what your sales and marketing organization looks like, how many people do you have and what kinds of things are you doing to get sales moving again?

Sure. So, in sales and marketing, we are primarily through distribution, and that gives us an opportunity to leverage a lot of feet on the street and a lot of eyes on desktops through websites through our distributors such as Digi-Key and Newark here in the US which have a very high share of the eyes and ears of the engineers who design in our products. So, we are working with those folks and our other distributors, we have face-to-face distributors in some territories, such is Asia. We are working to increase our exposure to get the benefits out. I mentioned some of those evaluation kits. Those are very important to engineers, they want to see how our products work, and those have been an effective tool in augmenting sales. That's one thrust.

We mentioned private label which gets us into markets that we can't get into otherwise because of our size and our brand. So, we are working with, I mentioned the specifics of a large semiconductor company that has presence in a number of markets, including automotive. And then finally, we are looking at, in addition to the assets that you mentioned, we have excellent gross margins. So, we are looking at business that might be lower margin, but has high volume potential. And we see a number of opportunities there that we probably could not have pursued before because we didn't have the capacity or we didn't have the margins to do it. We see excellent opportunities in our core markets to grow sales, which is I think is what you were referring to. In addition to the new products in the developments that open up potentially very large new markets in different areas to different markets than that we serve now.

Thank you. Do you have any sales people that are going out and training the distributors sales people? Any effective outreach in terms of training, education and why the NVEC products are superior to the alternatives? Because it's a different technology.

Yes. Absolutely. In fact, Tim Hazelton, who is our Vice President of Distributor Sales, is heading on the road shortly, and he does a lot of that. He's very good at it, particular with our face-to-face distributors.

With some of our more catalog Internet oriented distributors, those are distributors such as Digi-Key and Newark here in the US, we do some of that where we do face-to-face training. But a lot of it is providing training collaterals which are videos, which are evaluation kits, which are clear, concise collaterals with the advantages that engineers can see. And if you are interested in some of those, you can find them on our website. And our folks do a really very good job of taking all of this exotic technology, reducing it to a level of what's important to our customers based on customer feedback, making it succinct and crisp and powerful. So, we have been -- and we have been doing more of that.

There are additional videos available through our own website, through Digi-Key, and there are other types of collaterals that is out there. And we do a fair amount of phone communication with customers and prospective customers. We make ourselves very accessible. We make sure that we get back to our customers very quickly with questions, and we feed those questions back into these materials. And that allows us to get a great deal of reach. And that's the way engineers do a lot of their purchasing and evaluation and design decisions. It's through the Internet.

How many people do you have in the sales and marketing organization at NVE?

We don't -- I don't think we break it down that way. It's probably around, maybe 10% of our Company. And then we -- for example, I will take a turn on isolator support or something. Some of our other folks will too because first of all, it brings us closer to the customer. And second of all, it gives us an opportunity to make sure that our customers are extremely will supported. But we don't try to compete with number of people. We can't compete with a large semiconductor company by having more people in sales. We rely on our distributors, and that's proven to be a very effective business model.

It has some disadvantages in terms of the tendency for inventory adjustments that can magnify changes in sales, but we believe it's an excellent business model and it gives us hundreds of feet on the street and probably hundreds of thousands of desktops where people, engineers can see our products. Quickly see the advantages. And so it's not about the brute force of trying to have more people than conventional semiconductor companies.

Well, I guess you are hearing the frustration from Washington that sales flatten out here and a big cash balance. We are wondering if you should be spending more money in sales and marketing? That's obviously why you are the CEO, but the question comes up because we don't understand what your opportunities are.

Well, I understand what you are saying, and I can assure you that we are working to grow our business and we will spend when it's appropriate to spend. We have been and will be doing more of that. I think probably the best opportunity that we have is to look at high volume, lower margin businesses. And so we have cautioned in the past that we don't use gross margins as a primary metric. We are looking to say, how do we maximizer our contribution margin? How do we maximize our profits, if you will. And that means looking at large markets with perhaps smaller gross margins, but we think that's a -- that's an opportunity for growth.

We agree with that. So, I hope that works out for you. Thanks.

We are going to do our best. Thanks.

Follow-up from Steven Crowley, Craig Hallum.

Thank you, yes. Dan, on the topic of industrial distributors and their activity in the quarter and since the quarter and maybe even their mindset that underlies their activity. What can you tell us about how that played out in the September quarter and maybe subsequently? Were they thinning out inventories in the beginning part of the quarter and then started to return to normal? Was at the opposite of that? What has happened since? If you could give us some color there, I think we would all appreciate it.

Sure, Steve, maybe I can take that. Our business is susceptible to inventory corrections. We are sensitive to not just the rate of our customer sales, but the direction and whether their sales are more or less than they expected. If sales are less than expected, they may reduce orders significantly to return their inventories closer to targets. This magnifies changes and can make our sales volatile. In the long run, though, inventories will even out, and we are very optimistic about future growth of the Company.

That is kind of the backdrop for the question. I appreciate you explaining the mechanics. I guess I am wondering if you feel like you experienced most of that inventory correction either early in the quarter, during the quarter, partially in the quarter and whether or not you are seeing or have seen a return to more normalcy where the order rates might better reflect end-user demand.

This is Dan. We actually think that -- we are optimistic about the future because it appears that, at least with some of our key customers, that that might be behind us. Even though the outlook in some of our key markets has been kind of sluggish. The semiconductor industry as a whole is relatively sluggish and forecasts have been, as you probably know, forecasts have been reduced. And what tends to happen, as Curt was alluding to, is then when those prospects get reduced, there is a -- the distributors and other customers, other end-user customers tend to reduce their inventories to try to adjust them to the condition. That magnifies the effect. It varies, the timing varies with customers and markets, but we believe that at least in some cases, it's behind us. We have indications from some customers that there might be some sluggishness for perhaps another quarter and there are forecast that the CRM market might start to recover roughly mid-calendar year. But those forecasts, we presume, have already been incorporated into the inventory levels that we saw in the past quarter. So, that gives us some optimism that the adjustments are at least partially behind us and that the future is brighter because it will return to the growth mode, the normal growth mode.

That's helpful. Now, in terms of the private label partner that you gave us some color on, I am wondering what you can tell us in terms of the pace of the progress, that the programs with that customer are making. Whether we are talking about the product and it being ready for sale, but also the follow-through of that private label partner to bring those products to market and to get them showing up on your revenue line. What can you tell us about that?

Well, we have been very pleased with how that partnership has gone overall. And we're -- so as I mentioned in the prepared remarks, we are looking for a next generation of CAN transceiver this quarter or next. And that will be a product that will be sold under our brand, as well as their brand. In the meantime, we have products that I also referred to, CAN transceivers that are being sold under our brand, and they have been very helpful in referring us to large customers of theirs that need isolated CAN transceivers. These are products that they can't currently provide. So, even though they have some interest in selling the transceivers, but they are not selling the products per se, the products themselves. So, they have been very helpful in, first of all, developing these next generation products and also in helping facilitate sales of our own branded products in the relative near term.

Have those sales materialized, or did the -- were they at all reflected in your Q2 results? Might we see some in those Q3 results? That seems plausible given the commentary, but I don't want to misread you.

Right. Well, some of -- they vary. It wasn't a significant factor in the most recent quarter. I think we mentioned that we had several large customers evaluating these parts, these second-generation transceivers. So, some of them could be relatively quick. Some of them are longer-term developments. But the advantage of products under our brand is they are available right now. We are not waiting for the next generation, the third generation, and we are not waiting for a private label partner to qualify and begin marketing their own parts. We are proceeding with our own branded parts as quickly as possible in order to get into those markets, primarily industrial markets, as opposed to automotive markets.

And then last question for me. Post the capacity expansion that you put in place year-to-date and kind of diagrammed or laid out today as being in motion near term, what kind of volume or revenue capacity have you put in place relative to the roughly $6 million that you ran out on average on product manufacturing or product revenues in the first half of the year, $6 million per quarter. Is it double? Is it three times? What is the order of magnitude that we are talking about?

Well, it's a lot more than the 40%, which is the sort of square footage increase that Curt referred to. Because as you can imagine, there are various processes, some of which we have plenty of capacity in now and some of which could become limiting. Our goal was to have a very significant capacity increase to do it with a minimum of risk and a minimum of expenditure. But we are not doing this for some kind of incremental capacity increase. This is to dramatically increase our capacity. It's hard to -- it depends on the mix and it depends on the type of product. But it's -- it would be significantly more than the revenue run rate that we're -- that you were referring to.

So, thinking you've at least doubled your revenue capacity with this capacity addition that's in motion isn't out in left field.

No, I certainly wouldn't think so. There would obviously have to be a lot of caveats and asterisks around that. It depends on the type of business and the ASPs and the number of steps that they take and so forth, so it's hard to reduce it to a number. But we wouldn't have taken on this kind of project, which is a relatively large project and as someone else pointed out, a significant expenditure, if it wasn't going to very significantly give us the potential to move the needle.

Thanks for taking my questions.

Thank you, Steve.

Gene Friedlander, private investor.

I appreciate it, but all the questions I had have been answered. Thank you very much.

Thanks, Gene.

Thank you. I show no further questions in the queue and would like to turn the conference back to Mr. Dan Baker for closing remarks.

Well, thank you everyone for participating. We reported solid earnings margins and cash flow in a challenging quarter and as we've talked about, we continue to see a bright future for new products. We look forward to speaking with you again in January to report our third-quarter results. Thank you, again, for participating in the call.

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program, and you all may disconnect at this time.