O2micro International Ltd (OIIM) 2007 Q2 法說會逐字稿

Good day and thank you for joining us to discuss O2 Micro's earnings for the second quarter of the fiscal year 2007. If you would like a copy of the press release, please call Pamela Campbell at 408-987-5920 ext.8095 and we will fax a copy of that immediately to you. It is also posted on O2 Micro's website at www.o2micro.com. There will be a replay available through August 9 by calling 1-888-203-1112 or 1-719-457-0820, pass code 8094090. Following the presentation by management, the conference call will be open for your questions and answers. Gentlemen, you may begin.

Thank you and good afternoon, and thanks for dialing into O2 Micro's second quarter 2007 financial results conference call for the period ending June 30, 2007. This is Mitch Benus, director of investor relations at O2. I would like to remind listeners that this discussion of business outlook for O2 Micro contains forward-looking statements. Statements made in this release that are not historical facts are forward-looking statements within the meaning of the Federal Securities laws. Actual results may differ materially due to numerous risk factors. Such risk factors are enumerated in the Form F1, the Form F3 and the 20F reports, and other documents filed with the SEC from time to time. Listeners are referred to the O2 Micro earnings press release and the documents filed with the SEC to understand these forward-looking statements and the associated risk factors. The statements made herein are dated information; the company assumes no responsibility to provide updates to this information.

With me today are Perry Kuo, CFO; our head of marketing and sales, and Director, Jim Keim; and Sterling Du, O2's founder, CEO and Chairman. Before we begin I'd like to make a statement about the early publication of our Q2 '07 earnings statement today. As you may know, O2 is a dual listed company on both NASDAQ and the stock exchange of Hong Kong. The stock exchange of Hong Kong recently switched from a newspaper based announcement system to an electronic based announcement system, similar to that used in the United States. As a result of this change, a glitch developed with our printing service in Hong Kong that caused the SEHK version of the press release to be published seven hours early. We have identified the problem and corrected it for future announcements. After the report, the floor will be open for questions as time permits. Perry Kuo, CFO of O2, will highlight operating results and projections, followed by Jim Keim, Director, Jim will give us market highlights and closing comments will be made by Sterling Du, CEO/Chairman of O2 Micro. Now I would like to introduce Perry Kuo, CFO of O2 Micro, for a discussion of the revenue, income and financial highlights of the second quarter of fiscal 2007, which ended June 30, 2007. Perry?

Thank you and good afternoon everyone. This is O2 Micro's earnings report announcement covering Q2 2007 ended June 30, 2007. If everyone has a copy of the earnings report press release I would be pleased to report the highlights of the (inaudible) for second quarter 2007. Revenue for Q2 was a record $38.2 million which represents an increase of 9% from the preceding quarter and an increase of 36.3% from the comparable quarter of the prior year. Net income for Q2 was $5.7 million compared to the preceding quarter of net income $99,000 and a net loss of $2.5 million for the comparable quarter of the prior year. If we exclude stock compensation the non-GAAP income will be $6.4 million. Earnings per ADS, fully diluted for Q2 ending June 30, 2007 were $0.15 per ADS compared to $0.00 ADS for the preceding quarter and a loss per ADS of $0.06 for the comparable quarter of the prior year.

Gross profit margin for Q2 was 56.7% compared to 54.6% for the preceding quarter and 55.3% for the comparable quarter of the prior year. R&D expense, including stock based compensation charges of $278,000 for Q2 was $7.9 million or 20.8% of revenue. SG&A expense, excluding stock based compensation charges of $354,000 ((highly accented language) of $2.7 million and litigation income of $3.4 million for Q2 was $8.3 million or 21.8% of revenue. The total SG&A expense, including patent litigation expense, litigation income and stock based compensation charge was $8.1 million or 21.1% of revenue.

Income tax for Q2 was $578,000, mainly due to the income tax expense approval for the second quarter. In Q2 2007 231,889 shares have been repurchased, which is .6% of shares outstanding. Revenue by end market as a percentage of total revenue for Q2 was; consumer market was in the mid 50% range, computer market was in the low 40% range, industrial and communications each was a small single digit percentage of revenue.

The balance sheet, O2 Micro has over $66 million in cash and short term investments, this represents cash and equivalents per ADS shares of $1.75. In addition, O2 Micro has no debt. Short term investments were money invested in corporate bonds of at least AA rating and government bonds of certain developed countries.

(Inaudible) expenditures in Q2 were $1.1 million, accounts receivable at the end of Q2 was $25.1 million for a DSO of 57 days. Inventory trends ratio for Q2 was 4.1 compared to 4.4 for the previous quarter, and 3.4 for the comparable quarter of the prior year. Cash in flow from operations for Q2 was $8.4 million.

Human resources; O2 Micro now has 1,047 employees, 58% of which are engineers. This positions us well for new product development, continuous introduction of new products, and more customer design wins in the future.

Guidance for Q3 2007; O2 Micro estimates Q3 revenue compared to Q2 to be an increase in the range of 12% to 18% compared to the comparable quarter of the prior year an increase in the range of 36% to 43%. Gross margin in Q3 will be in the 55% to 58% range, mainly based on the product mix. R&D expense, excluding stock compensation in Q3 will be 18.5% to 21% of revenue. SG&A expense, excluding stock based compensation charge, patent litigation expense, and litigation income for Q3 will be in the range of 17.5% to 20% of revenue. The total SG&A expense, including patent litigation expense, litigation income and stock based compensation charge for Q3 will be in the range of 14% to 16.5% of revenue.

We expect litigation income to exceed litigation expense for Q3 and we expect litigation income minus litigation expense to be in the range of $2 million. Stock based compensation, we expect a stock based compensation expense for Q3 to be in the range of $600,000 to $700,000. Tax rate of 8% to 10% of pro forma income. ((Highly accented language) is expected in the range of $2.5 million to $3.5 million.

In summary, Q2 was a good quarter in terms of revenue growth, improvement in gross margin and expense control. We ended the quarter with a strong balance sheet, sufficient cash for growing the business, (inaudible) and authorization to buy back additional stock. Our outlook for Q3 is very strong with balanced growth among all product lines in all sectors we are in. Revenue for Q3 could be up more than 35% over the prior year's September quarter.

Regarding operating expense, our outlook is for some expansion in SG&A dollars, spend tied to our new product lines and the additions of (inaudible), but SG&A should not expand as far as revenue, so some leverage. We also have started to see litigation income and are getting business opportunities from patent protection programs. R&D spending will increase mainly for some new (highly accented language) and some key engineering hiring, but the percentage of R&D will be the same as, or lower than Q2. It's important for momentum in revenue growth and (highly accented language). In both cases we are investing heavily in our business and we are beginning to leverage our operation model. I will now pass the call to Jim Keim, Director.

Thank you Perry. Q2 showed solid growth over Q1, with very significant expansion over the prior year. Our projected Q3 reflects ongoing core markets growth as well as expansion of revenue from new products. Let me address both markets and production expansion.

First the markets, and general growth of those markets; the ongoing growth of our core markets in 2007, coupled with accelerating new product introductions is creating an excellent opportunity for record growth for O2 Micro. The notebook market is now expanding after a noticeable seasonal slowdown in Q1. We believe that the notebook market will continue growing through the balance of the year, reaching an annualized growth rate of approximately 20%. More importantly, we continue to offer a broader product offering into the notebook market, enhancing our growth opportunity.

Following a flat Q1, the LCD monitor market grew steadily in Q2 and is expected to have an annualized growth of approximately 30%. We believe this will be an exciting market going forward, as smart monitor products are introduced into the market by major OEMs. We expect to be well positioned to take advantage of this market. After a minor decline in Q1, the LCD TV market is now expanding rapidly, and we expect yearly market growth exceeding 50%. We expect this market to be in this rapid growth for many years.

I will also comment briefly on our major product line. Intelligent Lighting continues to expand, with new product design wins in all key markets and an expanding customer base. The family of high efficiency LED controllers that are patent pending continue to enjoy new design wins, increasing revenue. And the rapid expansion of LED lighting is offering major new growth opportunities for O2 Micro.

Intelligent power; our DC/DC products continue to win new notebook designs with increasing market penetration. Processor and system DC/DC product line is being rapidly expanded and we expect ongoing revenue increases in 2007. As our product offering continues to broaden, we will focus on growing both our product business in notebooks and other growth markets.

Intelligent e-commerce continues to increase in revenue following design wins at a number of industry leading notebook OEMs. We continue to expand this product line with new and more cost effective products and we will also start focusing on other markets as we move forward.

Our intelligent battery product offering incorporates innovative intellectual property to more accurately control charging and discharging of batteries. This is essential in critical applications where safety and accuracy are required. We are now shipping production volumes into both notebook and industrial applications, utilizing our advanced technology. We see ourselves well positioned to see ongoing growth.

The VPN security products are growing, both in terms of capability and market recognition. We expect to see excellent revenue growth as we move forward in 2007.

To summarize, we see ongoing growth opportunities in all our key markets as we move through 2007 and beyond. Additionally, we expect new products to enable us to expand both our market focus and our customer base. I will now pass the call to Sterling Du, our CEO and Chairman.

Thank you Jim. Our second quarter 2007 finished with record high revenue of $38.2 million. This was an increase of 9% from Q1, and more importantly, Q2 revenue was up over 36% over the second quarter of 2006. Gross margin in Q2 was 56.7%, which was an increase of 210 basis points from Q1. Net income in Q2 was a record $5.7 million due to expanded sales, litigation income and higher gross margin. As Perry mentioned, last quarter we see relevant improvement in our gross margin and operating margin as our company reached several milestones, including the pay off of the (highly accented language) protection program, our channel based supply chain improvement, operation of our in house testing facility, and new product lines all showing significant growth.

Following Q1 (highly accented language) we saw growth from each product line. In the notebook market we shipped PC (highly accented language) chipsets, (highly accented language) DC/DC chargers and (highly accented language). And it grew us both market share gains and technology leadership.

Q2 the CCFL Family added a full new (inaudible). DC/DC family added three new products, while we added to new [assets] to support various (highly accented language). In the (inaudible) family, we added one new product.

Our (inaudible) notebook for the (inaudible) provides us in long-term strategy customer relationships and advantages. We also see significant growth opportunities in other markets. We see wide-screen LCD monitors, high definition LCD TV, digital picture (inaudible); personal navigation, portable DVD and consumer electronic (inaudible). We provide both, CCFL and Wireless (highly accented language) for the family for those segments.

We're happy to see our [Power Management unit] getting to Smart Phone with the first production, which allows us the potential to (highly accented language) an additional market place. Our battery Power Management product (highly accented language) continues to expand into industrial products, power tools, at (highly accented language) electrical vehicles, a market including the electrical bicycle segment.

We see multiple opportunities for our initial penetration, which establishes our customer and battery (highly accented language). Our BPM Firewall family is adding a unified (highly accented language) management, further (highly accented language) for (highly accented language) anti (highly accented language) [compact] filters (highly accented language) IDF and other protection needs. We established a partnerships with multiple top tier security companies, which have generated revenue.

The [Channel] business continues to expand (highly accented language). A (highly accented language) group of 289 in Q1, to 318, Q2, 2007. It included a group of 7,073 in Q1 to 7,630 in Q2, 2007.

With regard to (highly accented language) our China team grew to 682 people in Q2, 2007. Our worldwide (highly accented language) at 604 engineers. This does not (highly accented language) additional application engineering (highly accented language), which we have in the sales and marketing.

In closing, our channel strategy gives O2 Micro one of the largest (highly accented language) in China, making us (highly accented language) to local customers, where most production occurs. (Highly accented language) detection program has brought results in the growing satisfied customer base. Market share (highly accented language) and a leadership in technology.

Our new product (highly accented language) DC/DC, Power Tool and addition of securities applications as well gives us growth opportunity for the (highly accented language). Your (highly accented language) interest in support of O2 is appreciated. Thank you.

Thank you and we will now turn this over for questions.

(OPERATOR INSTRUCTIONS).

We'll have our first question from Tore Svanberg, Piper Jaffray.

Yes, good afternoon and congratulations on a very nice quarter. A couple of questions; first of all, you had a very nice improvement in gross margin. Could you elaborate a little bit on where that came from? And is this is really now the beginning of a new level going forward?

Yes, Tore, this is Perry. The gross margin in Q2 actually is an improvement, both (highly accented language). As Sterling mentioned, (highly accented language) our China-based operation and also for the (highly accented language) group, which we mentioned earlier in our conference call.

The second key point is, because of the product mix and how we ship more products (highly accented language) in our product. So, it's about a four to six ratio.

And how about the sustainability, going forward, on the gross margin?

We continue to see the improvement in the (highly accented language) improvement. And also, we will continue to see the (highly accented language) moving into the China area. This actually will enable (inaudible) our cost structure and also in turn, it will (highly accented language) better gross margin model. However, we think [that will make] our gross margin model based on the product mix in the area of the 55% to 60%.

Very good and it seems like the legal income you had this quarter is actually not just a one-time. It looks like you have some more events in subsequent quarters. Can you elaborate a little bit more on how many payments and, over a certain time period, you'll get them?

We have publicly announced, Tore, some settlement agreements. We, unfortunately, do not have all the details (inaudible).

Okay. I mean, I guess, can you comment on, do you expect these legal incomes to continue in Q3 and Q4? Because, I think you're guiding for legal income to offset legal expense in Q3.

Right, yes that's (inaudible). (Highly accented language) in Q3, we will have [litigation] income.

Okay and, just an idea, beyond Q3, will there be more? Do you expect to still continue to offset the expense line?

It's too early still, Tore, to tell. But actually we expect to have [some].

Okay; very good. And, maybe moving on to some other products, you had mentioned the penetration into the Smart Phone market. Sterling, can you elaborate a little bit on what that entails?

We're in production with one of the Asia-based Smart Phones, although it's not top tier, worldwide Smart Phone maker. But that does present us with an opportunity to get into other Asia-based Smart Phone manufacturers.

This (highly accented language) providing all kinds of DC/DC (highly accented language) single-cell battery-related functionality. So, we are very happy with that because this is the first production in this segment.

Very good and moving on to battery management, it seems like you're already in full production and in the industrial market. What can we expect beyond power tools in this area?

For professional power tools, a U.S. based manufacturer is producing, and, we believe it's already available in the market. And, secondarily, we (highly accented language) power tool manufacturers are Asia-based. And right now, we do (highly accented language) initial production with them.

And, potentially, the power tool, based on the recent precious metal price is going up, which is the nickel (highly accented language) battery is also going up, the pricing. We do see opportunity for even the other segments' budget, a certain consumer power tool area. We also have an opportunity to get into this in the future.

Great and just lastly, I know you don't disclose backlog or bookings but could you just give us, qualitatively, how you feel about your visibility going into the September quarter?

At this point, due to the strength of the market, the visibility is very (inaudible), at least very strong quarter.

Great, thanks again and congratulations on the results.

We'll go next to Vernon Essi, Needham & Company.

Thank you, nice quarter. I wanted to dive into - well, first of all, just to go off that last line of questioning, Sterling, I missed the litigation breakout for your guidance, on expense vs. gains for the next quarter.

Yes, this is Perry. As we have different activities closely related to (highly accented language). So, in the guidance for Q3, we will only guide the difference between litigation income and the litigation spending.

Okay, so it's - you said it's approximately $2 million? Was that the right number?

Yes. We expect it to be $2 million or more.

Okay and then, what was the gross margin guidance? I think I heard two different sets of figures there. What is your formal gross margin guidance?

I'll advise you that our model is 55% to 60%. And the guidance for Q3 quarter, we narrowed it down to a 55% to 58%.

Okay. I just wanted to dive into sort of the revenue segmentation a little bit here. On your notebook side, it looks like that was somewhat of a flattish revenue trend and you're indicating that the growth there, at least the demand, was pretty strong.

Obviously, one of your competitors had some good gains on the inverter side of that market. I'm wondering if there's any change in what's happening in the marketplace with them entering the mix again. And I'm wondering if you would kind of share with us how you see that going forward? Because it seemed like somewhat of a flattish number, sequentially.

I don't think we specifically discussed notebook other than indicating that we see very good revenue growth going forward, in notebook. And basically, we see that across all the product lines, which we participate in notebooks.

So, we see the notebook market being good growth and we see ourselves growing with that market, actually. Percentage-wise, from a revenue point of view, (inaudible) that growth.

I'm sorry; you were breaking up a little bit there. Your phone's going in and out. The last part of that, you say you see good revenue growth across all product lines. What was the last point there?

Yes, we actually see our revenue growth exceeding the general growth of the market. We see the notebook growth being about 20%, year-over-year. We see our revenue growth opportunity, in notebook, exceeding that.

Okay and just, going - if you care to dissect that a little bit more, do you expect more of the growth, at least for the next six months, to be inverter-related? Or, DC/DC, or somewhat of a split between? I mean, what do you think is going to be the more powerful driver?

Actually, we're seeing good revenue growth across the board in all product lines.

Okay. And then, I'm just wondering if you could give us an update on the cost downside? Obviously, that impacted your gross margin. And I think you had said about [moving] cuts in-house. What about the fabrication side of the equation? Can you give us an update there?

Update on --?

The foundry relationships?

The foundry relationships?

Yes.

We think we would move to China-based (highly accented language) several elements over there. One is that initially, we probably would have to (highly accented language) for the better (highly accented language). Some (inaudible) we (highly accented language) we'd get (highly accented language) right now. And the new product would move to China and then we are (highly accented language) with those.

And for the product that's already mature (highly accented language) in China, we do see that the impact on the gross margin means good improvement. And, secondarily, we will also try to move some casting and assembly to China as we have (highly accented language) [15%] in China. And that is fully running right now. And that would help us to the point, probably a half point, at this moment.

And the assembly, the third one, we would move to China. And right now, it depends on the product line, state by state, we [qualified] our China assembly and doubt we'll see another (highly accented language) we can improve our gross margin.

And, I think that's our strategy and we believe, maybe, in the near future that we probably would have pretty good cost structures (highly accented language) income, (highly accented language) in any area.

Okay, just to clarify that then, so you're qualified in China with test assembly side, but are you already running a lot of production through that on test assembly? Or, where are you at in that (inaudible)?

We are both.

Okay. And what - I'm sorry to get more specific here, but are you sort of like halfway there, or close to fully utilized over there? Where are we at in that transition?

Yes we are. We re close to fully utilized.

Okay. All right; thank you.

We'll have our next question from Bill Lu, Morgan Stanley.

Yes, hi congrats on a very nice quarter. I've got a few questions for you. One is that previously management has said that all the new products could add up to about $10 million or $15 million for this year.

Given the strength that you're seeing across the board, can you give us an update on that?

Bill, yes, two quarters ago, I answered one of the questions that our potential for new products will be in 2007 and the people asking me about 10% to 15% and I said yes. And we would feel very comfortable. And, as we're sitting today, an (highly accented language) of the Q3 and it would be that we could achieve the goal of this in 2007 for the new product.

$1 million of new product, including [DBM] firewall, DC/DC and the battery [power] management, these three products.

Okay but is the range still kind of between 10% and 15%? Or can you narrow it or give us new guidance?

Yes, I think we feel comfortable, still, with our original guidance. And we cannot - (highly accented language) disclosed and we will not disclose; we did break up with (highly accented language) a particular (highly accented language).

But as [Jim] and myself, we mentioned in today's conference call, we do see very good growth in all product lines, including our new products. An in notebook growth you have heard that mentioned by Jim, that 20%, very nice growth. So when you look at that we believe our new product line will grow probably at a higher rate because of this smaller pace.

Great, thank you. The second question is on Ocean One, can you just talk about what percentage of the total output that represents right now?

It's actually close to -- it's about more than 50% of the newly testing Ocean One.

So it's more than 50% of your total output right now?

Yes.

Okay and how about in terms of foundry output from China? What percentage of total is that right now?

Maybe we can give you wide range; we're probably looking at 30% or 45%.

Okay. The next question is, given the strength that you're seeing in your business I'm wondering if visibility toward the end of the year is any better, and if so, can you talk a little bit about the fourth quarter?

We're really not prepared to talk about the fourth quarter, however certainly we do see the markets continuing to move forward. We have good design wins and obviously good momentum through Q3 and in the market. So as long as there's not any significant issue as far as the overall economy is concerned, we'd expect to see good revenues in Q4. But we're not prepared to give projections at this time.

Okay well I had to try. So I guess my last question is, given the strength that you're seeing in the third quarter, is your guidance really supply constraint or is that reflecting the true demand?

We've been very careful as we've discussed in past calls, to be actually spending a lot of money developing our back end capability as well as expanding our wafer fab capability. So at this point we have no limitations in wafer fab, nor do we have limitations as far as back end activity is concerned. So we are not capacity constrained at this point, nor do we expect to be in the future.

Okay great, thank you very much.

We'll go next to Andrew Huang, American Technology Research.

Hi, can you hear me okay?

Yes.

So I apologize, I jumped on the call a little bit late, but I just wanted to check a few things. First, did you guide September quarter revenues up 12% to 18% sequential?

Yes.

So it seems like that is pretty healthy, maybe healthier than your end market demands. Is there anything kind of driving your performance better than the market demand? Like for example, are you gaining share maybe, at the expense of your competitors? Or are you kind of just ramping new programs?

It's actually both. We think that in many key areas we're gaining market share and we're also bringing out new products that enable us to take better advantage of the markets we're already in, and also beginning to expand into new markets as well.

Okay, got it. Now just from a historical seasonal basis, would you say that the trend has been that Q3 is your strongest quarter on a sequential basis? And then there's a little bit of a pull back in Q4?

Historically that's difficult to say. Sometimes you enter Q4 very strong and then there's some pull back later as you go on through Q4. So I think it's a little bit difficult to say. Last year we certainly had a very strong Q4. So I think we have to see how the general economic situation goes along and whether or not there's any pull back in the December timeframe.

Okay, great. And then kind of shifting gears a little bit toward the litigation expense side is it fair to say that if kind of Sony and Samsung, and maybe even Bitech now out of the way, that just generally speaking that your litigation expense, just the expense portion, should be much smaller than it has been in the past?

Yes I think it's the right trend for our litigation expenses.

And then your commentary suggested that the net litigation expense would be a positive contribution for the September quarter. But I just want to confirm that in the September quarter there will still be litigation expense, but because of the benefit you're getting the net effect will be positive.

Yes.

Okay, great. And then one more question on litigation. I guess based on your kind of settlement with Samsung, my question is, is there a fixed or a one time payment component to that settlement? And also is there any kind of maybe incremental revenue opportunity that's opened up? Maybe you can just add a little bit of color.

We cannot comment on specific aspects of the settlement other than what has been published in press releases. So that's really all we can say as far as any settlement is concerned. I think generally what you can say, from a market point of view, is we do have strong intellectual property in this area, and we do believe that will be beneficial to us as the TV market moves forward.

Can I ask the question another way maybe? Would you expect Samsung to be a major customer of yours going forward, in terms of the TV market?

Well we'll simply comment that Samsung is a customer, we will not comment beyond that.

Okay. Then a last question and I apologize if this was addressed in the prepared remarks; but did you talk a little bit about the market for LED drivers, and in particular for the notebooks and how that's kind of happening at the marketplace?

From our point of view and our strategy we provide a LED driver together with the CCFL (highly accented language). So the first space we are targeting is our existing customer in portable DVD (inaudible) to LCD monitors, notebook computers and TV. Whoever is using O2 Micro's CCFL driver, (highly accented language) we provide an option for them. So we saw that strategy pay out so there's no way to really tell how much is LED notebook market versus CCFL. But some major OEMs (highly accented language) you can find our O2 Micro products inside. So it's essentially true for portable DVDs and personal navigators and LCD monitors, and also some of the LCD TVs.

Thank you very much.

(OPERATOR INSTRUCTIONS)

We'll go next to Vijay Rakesh, Oppenheimer.

Hi guys, good quarter. Just going back on this legal income that you're now forecasting for Q3 which is a change from the expense we've seen before. Should that go up again - should that go up kind of to the $3 million kind of range in Q4? Because you have some legal expense in Q3 but it comes down again in Q4, so should that number go up in Q4?

We cannot comment on that.

Okay. The Ocean One, what percentage of the output is from Ocean One presently today, in the June quarter? Where do you see that in additional quarters?

Ocean One, in the September quarter, it will be close to the fully utilization, as Sterling just commented. And also we expect some improving in our gross margin, in our cost structure in September.

And how much of the output for the company as a whole comes from the Ocean One facility today?

It's more than 50%.

And as you look at out into next, let's say June of next year, where would you see, now that legal has come down and gross margins are starting to improve, you have Ocean One coming on line, where do you see your operating margins and gross margins for next year, and the tax rate also?

We don't give out a timeline beyond Q3.

Okay but do you see operating margins kind of, you have mentioned some numbers before, do you see it going to kind of the teens range?

We will continue to improve our financial model and by the end of the cycle of this year we are moving into our financial model. I'm still very confident.

Can you repeat the financial model once more?

Our operation model for the gross margin is 55% to 60% and our R&D, excluding stock based compensation, which is 18% to 23%, our SG&A, excluding litigation and stock compensation, which is 13% to 18%.

Okay, thanks a lot guys. Good job.

At this time we have no further questions in the queue. I'll turn the conference back over to management for any additional or closing remarks.

We would like to thank everyone for their continued support and we'd be glad to answer any questions in the future, please contact us directly. Thank you again.

That does conclude today's conference. A replay is available through August 9 by calling 1-888-203-1112 or 1-719-457-0820. Please use the pass code 8094091. You may disconnect at this time. We do appreciate your participation.