Richardson Electronics Ltd (RELL) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. We appreciate your patience today and good morning. Welcome to the Richardson Electronics Limited's first-quarter earnings release. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded for replay purposes, and we ask that you stay online at the conclusion of our call to receive that replay information.

Well, with that being said, let's get right to today's agenda. Here with our opening remarks is Richardson Electronics Chairman and Chief Executive Officer, Mr. Ed Richardson. Please go ahead, sir.

Good morning. I have Bruce Johnson with me, President, and Dario Sacomani, who is Chief Financial Officer, and Greg Peloquin is on with us as part of the conference call who is Executive Vice President of the RF and Wireless Group.

We released earnings last night, which if you missed are on our Web site, which is www.rell.com. It was really a good solid quarter. It was a record quarter in sales, 138.5 million. A record first quarter in sales was up 16 percent from the prior year. Good growth through all of the units. All four SBUs were up from the prior year, and it is the ninth consecutive quarter of year-over-year growth.

Net earnings were up to 8 cents versus 3 cents last year. And by strategic business unit, the RF and Wireless Group, the sales were up 29 percent to 64.4 million. Margin was up slightly at 22.8 versus 22.4 from the prior year. Passive and interconnect lead the growth. That was up 72 percent with sales at 15.1 million. Network access was up 32 percent with sales up to 24.7 million, and the infrastructure business was up 17 percent with sales at 17.5 million.

Geographically growth was led by the U.S., which was nice to see. We have seen the U.S. down substantially over the last few years and now turning around nicely. The U.S. was up 52 percent with sales at 22.4 million.

Most importantly after the close of the first quarter, we received our first major order for the wireless compensator, which we are really optimistic about for the future, and we will let Greg touch on the details of that order.

The Industrial Power Group sales were up 15 percent to 29.6 million. Margin was also up. IPG margin was up to 30.7 percent. They continue to be our most profitable business unit as a large component of the sales are still industrial tube.

The power semiconductor portion of the business, however, leads the growth. That portion of the business was up 46 percent with sales of 10.4 million in the quarter, but the tube business, although it is declining on a world basis, again was up 1 percent in the quarter at 19 million and the margin there was 32.2 percent.

Geographically for the Industrial Power Group Asia led the growth. Asia was up 48 percent with sales at 6.7 million. The security systems division was up 2 percent to 25.8 million in the quarter. Gross margin was just about flat with 25.2 versus 25.3 a year ago. Private-label sales that are sold as about one-third of the business, as sold in their own private-label, was up 6 percent, and Canada continued to lead the geographic growth. They were up 3.5 percent with sales at 13.4 million.

The Display Systems group was up 5.6 percent to 17 million. Margin was down slightly at 24.3. Macro monitors still nice growth, although the resale price of the medical monitors has been cut just about in half in the last six months or so. Even with that, the unit sales are up substantially and the sales of medical monitors were up 12 percent to 7.2 million in the quarter.

Pixelink is doing extremely well. As we have mentioned, we secured a very nice contract after working for over a year from the New York Stock Exchange. We shipped a portion of that which Bruce will touch on, but the Pixelink sales were up 8 percent, bookings were up substantially more than that in the quarter, and margins increased to 26.3 percent from 24.5 percent.

And speciality displays was up 125 percent in the quarter. Although small, they did 2.4 million, and most of that is in workstations for medical applications.

Geographically North America was up nicely, up 14 percent to 74.4 million. Margin was down slightly in North America from 26.8 last year to 25.6 this year. Most of that had to do with huge growth in RF and Wireless with the U.S. up 20 percent. Europe was up 16 percent to 29.5 million. Again, margin down slightly. They were at 28.6 from 29.1 a year ago. Within Europe, England was up 38 percent to 5 million with margin just about flat. Most of that had to do with RF and Wireless, which was up 60 percent in England.

And Israel has really shown a nice turnaround. Israel was up 60 percent in the quarter to 3.2 million, and their margin was up about 3 points, so they are doing well. Most of that was the RF and Wireless business in Israel that was up 54 percent.

In Asia-Pacific overall they still lead. That were up 29 percent in the quarter. Sales to 28.8 million in total. They increased gross margin a full point from 22.1 to 23.3. In Asia it was really led by China again. China was up 81 percent. Sales to 8.5 million, and the majority of the business in China is RFWC or the RF and Wireless group, which was up 88 percent in the quarter.

Japan also did nicely. They were up 69 percent. Sales at 4.6 million and very high margins at 33 percent gross margin. Most of the growth in Japan unlike China was in the Industrial Power Group, which was up 122 percent in Japan.

Still having difficulties in Latin America. Latin America was down again. They were down 4.7 percent to about $4.9 million. They did increase gross margin substantially. Gross margin in Latin America went up from 23.2 to 26.6. Within that the growth was led by Columbia, which was up 43 percent but still a small amount. They are about 900,000 in the quarter. And the area that was down most substantially was Mexico. That was down 23 percent due to a declines in the broadcast business.

So that covers most of the specific numbers. I will turn this over to Bruce and let him cover the highlights of the quarter for you.

Thank you, Ed. Well, I am happy to say that the bookings performance remains strong and mirror the billing numbers that Ed just covered with you.

What I will do is I will give an overview of the bookings relative to prior year, then give you some of the highlights individually by each one of the SBUs. The company overall had a strong bookings quarter. 25.9 percent ahead of the prior year. Led a little bit by wireless at 37 percent over the prior year and within wireless, Maycom, which is a major vendor of theirs, previously had appointed us as their exclusive European distributor, and they have now subsequently extended that agreement to also cover all of Asia, which represents a real coup for both Maycom as well as Richardson. And Maycom sales as you may expect remain very strong, and the quarter came in 29 percent over the prior year.

Wireless also signed an exclusive global agreement with Aeroflex, which represents a world leader in connectors, cables and passive RF components. And at the recently completed International Broadcast Conference, six major broadcast providers of digital broadcast systems displayed systems that contained one of our amplifiers that was designed and produced at our Engineered Solutions European broadcast facility in Italy. And the attendees were people like Eddystone, Pilat, Techotelecom, Steamtel, Sagem and Teracom.

As Ed mentioned, one of the major highlights for wireless is that we received our first production order for a line of (inaudible) vehicle wireless enhanced products, and Greg will give you more details on that later on in the call.

Industrial products, strong quarter, 28.2 percent over the prior year in bookings. And within IPG, our LaFox manufacturing group booked a $1.1 million annual renewal order from Siemens Medical for an oncology systems subassembly kit. And the total backlog for Siemens has now grown to over $1.9 million, and they recently awarded us their top plus supplier status which enables us to use them as a customer reference in all of our marketing literature.

We also have a new franchised agreement with Mitsubishi Electric in Europe to distribute their line of IGBTs, the IGBT modules and their IBM products. It has already generated over 53 design registrations totaling over $4 million.

In security, security came in at 7.6 percent in bookings over the prior year. And they are currently focused on implementing a global audio strategy with a product line called Audiotrak, which is our private-label product line, and we have expanded that line now into the USA and the plan is to clone the tremendous success we have achieved in Canada in the USA as well. That is also a very high margin product line to contribute positively not only to sales, but also to the gross margin of the SBU.

And in a major cross-selling formal initiative representing a first, the SSD and BSG SBUs are working together to target current BSG display customers for proactive SSD security product sales penetration.

In Display Systems, they are basically on fire right now. Came in 37.7 percent over the prior year. And in the USA the Western region booked over $2 million alone just in the month of August representing their second-largest booking month ever. However, the most significant achievement in the quarter that I had touched on was further development of our large touchscreen order with the New York Stock Exchange. During the quarter, we shipped about 400 units totaling about $856,000, and the substantial follow-on orders pending.

Turning to geography, North America came in 21.1 percent over the prior year, and bookings Europe, 27.6 percent. And also in Europe we opened a new branch office in the baltic states in Talinn, Estonia. Asia-Pacific came in strong, 33.9 percent. Bookings there grew to over $31 million in the quarter, and in Latin America, in spite of the lower billing figure, bookings have rebounded nicely to 28.5 percent over the prior year.

I will turn this over to Dario.

Thanks, Bruce. I would like to discuss the sales at 138.5 million. That is up 16 percent from the prior year, and gross margins at 24.3 are basically flat from the prior year, and he took you through all those.

With respect to SG&A for the quarter at 21.1 percent versus last year at 21.7, so we did dilute as a percent of sales. And as we discussed in the last quarter's call, we did have incremental expenses associated with the entity restructuring, the PeopleSoft implementation and the Sarbanes-Oxley compliance program. Those totaled about 500,000.

The entity restructuring costs are not going to repeat in Q2, but the growing costs associated with Sarbanes-Oxley compliance and the continued PeopleSoft implementation costs through Q2 will probably add this 500,000 burden again to SG&A in the second quarter. Other expenses at 2.5 million was down 122,000 from Q1 '04. Interest was 2.3 million, down from 2.6 million as a result of our equity offering, the elimination of a fixed rate swap, offset by interest on incremental borrowing to fund the working capital requirements.

The remainder of other expense was up 200,000 due to foreign currency exchange. We expect total interest and other expenses to be roughly flat for Q2 of '05.

Tax rate 32 percent with 16.1 million shares outstanding, which includes 1.5 million shares from the offering gets us to the 8 cents.

Turning to the balance sheet, cash was down 4 million as we began to implement our cash management initiatives. Accounts Receivable, down 700,000 with DSOs at 61 versus last year at 59. Inventory was up 10.7 million with days at 89 versus the prior year at 94.5, and our investment in inventory is primarily two SBUs. RWC was an increase of 7.7 million, and as Bruce mentioned, that is primarily associated with negotiating exclusivity agreements with key top tier managers. And then DSG inventory decreased 2.2 million to support the New York Stock Exchange order and the upcoming Mayo Clinic project installation.

Fluctuations in other current assets and noncurrent assets are just reclassifications of our deferred tax assets from current to noncurrent. Property plant and equipment, that is up 1 million 1. That reflects CapEx of 2.3 million offset by depreciation at 1.3. Of the CapEx, 1.6 million was IT-related, of which 1.2 million was PeopleSoft.

Accounts Payable, up 2.6 million. That represents days payable of approximately 20 days versus last quarter at 26. And other accrued liabilities are down 5 7, primarily due to the payouts of incentives, 401(k) matching and the June bond interest payment. Long-term debt, including the current portion, is at 119.2 million, which is down 18.6 million, and that really represents the application of proceeds from the equity offering less the working capital requirements.

With that, I will pass it back to Ed to wrap up.

Thanks, Dario. Well, I just spent four or five weeks in August and early September in Europe visiting customers, and I think our Engineered Solutions strategy is working better than ever. We are looking at more design opportunities than we ever have, and we are really optimistic about the future. Specific products like the compensator or the cell enhancer have a very substantial potential, and we are really happy to see the first order come in place in that.

Greg, why do we just take a minute and let you comment on that particular order, and then I will go into guidance thereafter.

Okay. Thanks. We have finished up the majority of the final details of partnership with BrightStar. BrightStar is a $1.2 billion entity that is the largest supplier of wireless accessories in the Americas. They focus on hands-free kits, wireless accessories, and now the newest part of their offering will be the Richardson compensator. The majority of the details will be announced at a later date as BrightStar is going through an IPO.

But we're very excited about it. We have received a 2000 piece order, mainly for products to get into their customer stores and to sell. The opportunity here is fantastic. What BrightStar does is they package accessories with cellphones. The Richardson compensator will become part of a package offering of a cellphone hands-free kits and compensator. We spent all day Thursday of this week training their complete RSMs or sales management team. They have complete kits, tools, product to bring to their customers. And we fully expect to receive the large orders over the next 30 to 45 days getting their customer base ready for the holiday season.

So we are very excited. You have probably seen the press release come out last night. We do have a Web site which you can go to immediately to purchase products, complete product information, and support information. It is cell.rell.com, or cell as in cellular, cell.rell.com. And also we have a complete support staff now to help you with the install or any issues that you have after you have installed the vehicle at support.rell.com with a 1-800-471-2012.

So we are very excited about the BrightStar agreement. We have been working on it for a long time. They have complete access to a channel that we felt would be the strongest for Richardson's products, and again the full details of this partnership will be announced after they have completed their IPO. But it is a great start. We will continue with our retail strategy as we do have sample products for testing and do Best Buy, RadioShack, Avis, Motorola's Accessory Group, etc. as many of you have known. So this is taking off, and as we mentioned before or have over the last few quarters, we fully expected to have an order in hand this quarter and revenue in the third and fourth quarter.

That goes along with our complete Engineered Solutions strategy. As Bruce mentioned, there was five companies at the International Broadcast Show that had our LDU series in their digital broadcast transmitters. We fully expect to see increased revenue as they have shown their product two weeks ago. We are excited and we are on our way.

Thanks, Greg. Well, there's a tremendous number of opportunities out there. In reference to guidance, it is early in the quarter. But we continue to see about a 16 percent sales increase through September compared to last year. And sequentially that would mean that we would end the quarter up about 7 percent over last quarter. And that does not really include the compensator or the cell enhancer business, which we have difficulty forecasting, so that would be on top of that number.

As far as gross margin, we see it up slightly at about 24.5 percent, and SG&A should come in down slightly from the first quarter, somewhere between 20 to 20.5 percent SG&A for the quarter.

So that is about where we are. We are pleased with the quarter. I always like to see more, but really are optimistic about the future and some of the things that are coming through now that we have been working on for a long time.

With that, we will open it up for questions.

(OPERATOR INSTRUCTIONS). KeyBanc Capital Markets, Walt Liptak.

Good morning, guys. I guess the first question is on the inventory build. As we go into the second quarter, are you going to be building additional inventory for those two new franchise or expanded franchise agreements? I guess actually look at it for the second quarter?

We don't really anticipate any further build on it. I think from here just like it was last year, you know we will start working the days down from what we just ended the first quarter at 89, down to around 75 or 77 where we ended last year.

Okay, and on the inventory that was built, is that gross margin commodity type margin, or is it a design engineering sort of margin?

Both. It's a combination. Some of it was for the New York Stock Exchange order, which the margin is quite good on. Some of the Maycom is more commodity kinds of margin.

Okay. Throughout the quarter, we were hearing things about inventory corrections, but it does not look like that showed up. I guess the only -- on the revenue side is the deceleration that we are seeing in North America and in Asia. How should we look at that in terms of what may be happening in those regions? Is business accelerating again, or are we going into a slower period going through the back half of the year?

We had a financial planning review yesterday meeting with the entire staff, and we went over those questions because we're hearing it more from analysts than anywhere else. It appears that North America right now, which is unusual for the last two or three years, North America is seeing substantial increases, and we are not seeing any slowdown on North America.

We have seen in China, and this does not reflect by our numbers, but we have heard in China that the government is putting the breaks on some of the investment into infrastructure and the rollout of some of the Telecom products and that that may have an impact. But so far if you look at our numbers, you don't see it. So I guess from our people we're hearing cautious optimism in Asia, but certainly in North America and Europe as well, we have not seen any slowdown.

Okay. Thanks a lot, guys.

Rob Damron, 21st Century Research.

Just a question. I want to talk to you a little bit about the Security Systems business. That was the slowest growth of your segments, and it seems like you have done much better in Canada than you have in the U.S. and Security Systems. Maybe you could just describe the business model in Canada, what you do differently there? And are you able to apply the successes in Canada to the U.S. operation?

Well, in Canada we acquired VirTech about probably five years or so ago, and VirTech represents the largest Security Systems distributor in Canada. So we're number one there. There is much more competition in terms of USA, but what we are doing, our whole strategic plain is being built upon this, is we're taking the key factors for success in Canada and including even in some respects the organizational capabilities and pretty much either cloning or expanding those into USA.

One thing I talked about was the initiative with this one line called Audiotrak, and that is an example of what we're doing. Audiotrak is a private-label, very high gross margin audio product line, which has been very very successful in Canada. We have introduced that line now into the USA, and the business unit manager of Audiotrak is a Canadian who now has responsibility for managing that line in terms of total North America. You're going to see more of that happening in terms of the product line area, as well as some synergism between the two respective selling organizations. And we are very optimistic about it because the things we tested so far in the USA that we pretty much picked up on Canada have been successful.

That helps. I also wanted to ask you about the gross margin in Asia. That was a nice bump up from last year and also sequentially. I guess, what are you doing differently? Are you starting to get some Engineered Solutions content into Asia, and is that helping to get the gross margin up? Ultimately do you think we will see the Asian gross margin reach the corporate margin over time?

We installed an Engineered Solutions manager for our RF and Wireless in the June/July timeframe who has been with us a long time. He has been the Managing Director of the Korean operation and been very successful there and now has responsibility for Asia. So we're seeing more Engineered Solutions business come through. That is the one side.

The other side is that most of the growth in Asia has been RF and Wireless. Now we're starting to see growth from the Industrial Power Group, which is 30 percent plus gross margin. So the combination of Engineered Solutions and IPG is what the gross margin improvement is, and the answer to your question is yes. We think that in the future more and more Engineered Solutions products can go through the Asian channel, and currently, at least up until the end of the last fiscal year, the majority of the sales there were components. So as we increase the content of the Engineered Solutions and also IPG products that margin will go up.

Lastly for Dario, you mentioned your SG&A has been impacted by an incremental 500,000 this last quarter. You're thinking that it will probably be another 500,000 in the second quarter. But if we look into the third and fourth quarters and going forward, is there going to be some ongoing expense from Sarbanes-Oxley and PeopleSoft? What kind of number should we anticipate going forward?

I think you are thinking like I said we are burdened with about an extra 500,000, and I think what you will probably see continue is something in the range of 200,000. So you will see a drop of 300,000 in the third and fourth.

Okay, that helps. Thank you.

Ed Litman, William Blair.

I would like to talk a little bit about the NYSE order. Bruce had mentioned that you shipped out 400,000 units. How are you guys doing in terms of staying on target and expectation? You mentioned the inventory build in anticipation of that. Can you give us a little color on that?

Well, first of all, a correction. We shipped 400 units in the quarter, not 400,000. I wish we hit 400,000, that would be a great order if we did.

No, we're doing very well. In fact, what we have done in the Pixelink is that we're expanding our number of shifts to accommodate this. We have met every delivery schedule, which has been aggressive, that they have given us.

In fact on Monday, Tuesday of next week, we are visiting the New York Stock Exchange specifically to meet with some of the executives there, as well as some of our other vendors that were involved in the initiative. There is substantial upside on this unit, which is a working already very very well, and we even had to acquire additional rental space in order to be able to accommodate the NYSE order, production schedule, as well as other orders that we have now booked in the quarter as well and also through the first month of September.

Great. Can you talk a little bit about the display margins? They came in at 24.3 percent this quarter. That seems to be down a little bit both so sequentially and kind of where you have been historically last year, if there was anything specifically driving the deteriorations?

I think the majority of the deterioration has to do with the medical side of the business. We have really seen a major change -- I'm not sure whether you have followed it -- but the major suppliers of gray scale monitors over the last six or eight months have cut the resale price of the product about in half. We have been able to sell more units and, as I mentioned, actually show an increase in our total dollar sales. But at the same time, we hit some margin pressure on those products.

We are sort of changing our strategy there, and I think you will see more and more private-label products go through that channel. That's about a $27, $28 million piece of our business. And at the same time, we are going further into the Pax systems area where, instead of just selling the monitor, we sell all the hardware that goes into the picture archiving communications systems critical application. So I think that's a temporary phenomenon, and as more of the NYSE business is manufactured and shipped through Pixelink, that margin will go back up.

Bob Schenosky, Jefferies & Co..

Thank you. Good morning. First question. With year-over-year bookings looking good, given your comments relative to Walt's question on business conditions, can you offer any color in terms of sequential bookings?

Sequential bookings? Well, I think our traditional sequential booking number is usually down in the first quarter.

Right.

About 4.6 percent (multiple speakers) 4 to 5 percent. (multiple speakers). And I think for the company overall, we actually came in 1.8 percent, down from the fourth quarter which was better than our historical run-rate.

Okay. So you're not showing some of the same dynamics that are related to all the concerns of tech right now go?

We have not seen it yet. We keep hearing it, but we hear it mostly from the analysts. We haven't heard it either from our vendors or our customers.

Okay, great. Just secondarily, in the S-1, you made a comment in terms of the potential earnings for the year, and I do recognize it is early in the year, but you talked about a range of 60 to 70 cents, excuse me. Any issues related to that target?

You know I think it is too early for us to really project. I don't think we have any major concerns, but at this point I'm not in a position to project.

Okay and then just finally can you give us a comment at all in terms of the convertible exchange?

Well, I guess the comment would be if the stock remains in its current range that we will probably pull the registration.

Provident Advisors, David Behr.

Congratulations on a very nice quarter by the way, gentlemen. Bob just asked my question, so. Thank you very much.

Stephen Lewis (ph), Lewis Capital Management (ph).

Yes, could you go over the operating cash flow and capital expenditures?

Yes. Capital expenditures were 2.3 million. We had about $3.6 million worth of positive cash flow from net income, and then we had a use of about $13 million in working capital. So cash flow from operations was a use of about $9 million.

Okay. Now that is the second quarter in a role of negative operating cash flow. When do you expect to turn positive?

Well, like I said, we expect to -- our days of inventory went up from the fourth quarter where we were at 77. You know last quarter -- last year we ended up with about a use of about 5 cents for every incremental sales dollar in investment in working capital, which was really good because we were really managing our inventory down. I think that this year what you're probably looking at going forward is something more in the range of an increase in working capital to the tune of like, 12 cents for every incremental dollar in sales. But like I mentioned earlier, I expect that we will manage this inventory from today's 89, down into the range of about 75 by the end of the year.

And how about capital expenditures for the year?

Oh, probably -- I did 2.3. I think we will probably do close to 3 in the second quarter just as this PeopleSoft thing becomes complete, and I expect that for the year we will be in the 9 to 10 range.

Thank you.

(OPERATOR INSTRUCTIONS). Walt Liptak, KeyBanc Capital Markets.

Okay. No one asked any questions about the BrightStar relationship. But I guess the first question I have is what is the ship date on the 2000 piece order?

The ship date is the immediate shipment of 500 units the balance before the end of this calendar year. But I can mention, Walt, we just trained their complete sales staff, so I think it's a no-brainer that those things could potentially need to ship over the next 60 days. We are having another follow-up meeting in 45 days to get a re-forecast, if you will, after they visit with all their service providers and their outlet stores in their indirect channels. So that 2000 pieces was mainly just to make sure that they were in Q and they had parts in inventory to support their immediate prototype needs. So before the end of the calendar year. (multiple speakers). I'm sorry go ahead.

At this point, production -- how many can you produce I guess on a per month basis?

20,000 units a month at our facility in Elgin, Illinois. We already have agreements set up where we could increase that. So 20,000 units a month is our current production capability at our own facility.

Okay, so if they sell fast, you can ramp production real quick?

Absolutely.

Okay, at what customer stores, retail stores is BrightStar going to put the product into?

They just have a contract with Kmart in terms of a retail store, but the rest of our indirect channels like MobileTel, etc., and they are the largest provider of hands-free kit through hands-free kit installers. So it will be that entire network throughout North America of companies that do installs for hands-free kits.

Okay and why did they decide to package it with a hands-free and a cellphone versus just packaging it as a stand-alone product?

Well, they are going to do both. It's going to be as a stand-alone product as it stands in terms of the portable version, but you know we have two versions. One, the one we have been selling to Motorola's telematics organization to the tune of about 300,000 units. That is a wired unit and that is the one you show with the hands-free kit. It is actually wired to the phone antenna itself.

And that's what they are going to package -- that is their forte. They take and buy the cellphones directly from the manufacturers -- in this case like a Sprint PCS -- and then package it with accessories. So they are going to be offering this new product which includes the compensator to these installers. So, it will be a kit.

So it's exciting because it is an existing business. It is an add-on sale for their salespeople and their customers. It's just a real nice fit, and it's a channel we have been hoping to get into for a while.

Okay, well congratulations on signing that channel partner. How close are you -- maybe I should not even ask that question -- but I guess you are still pushing on Avis and Motorola or other channel partners?

Yes, we are farther along with RadioShack than any other retailer. That part has technically been approved. There is a pricing issue when you get into that part of the market and those types of stores. So we're working on that. But it is tough.

We've got products in, we've got the context, it is in their technical organizations to get it technically approved to go through their stores. It is just this BrightStar thing will get us off and running, and I fully expect our retail strategy to be in place before the end of the fiscal year.

All right, thanks a lot.

Frontier Capital, Jim Coligan (ph).

Two questions, please. Gross margins by the end of the year, what is the goal there, and what is going to be the mix between Engineered Solutions and Components?

Well again, as I think you have heard us say before, we are looking to try to improve our mix of Engineered Solutions from today's 50 percent to 65 percent over the five-year period. But in order to make progress towards that goal, I mean you have got to expect that sales from Engineered Solutions towards the end of the year should start to become at least 55 percent and you should start seeing gross margin in the 25 percent range by the fourth quarter.

Okay, great. And what is the ASP on the compensator and the gross margin there?

The gross margin for this large order and the order has been to meet our corporate objectives of over 35 percent.

I'm sorry, what was the ASP?

Average selling price, it is 245 in quantities. The wired line, the one that is designed in, is at 195.

Okay, good. Thank you very much.

Thank you. With that Mr. Richardson and our host panel, I will turn the call back to you if there are no further questions.

Well, thank you all very much for spending time with us this morning. We are in all day, so if you have follow-up questions, please call us directly. We appreciate the investment in Richardson Electronics.

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And that does conclude our earnings release for this first quarter. Thank you very much for your participation, as well as for using AT&T's Executive Teleconference Service. You may now disconnect and enjoy your weekend.