思佳訊 (SWKS) 2006 Q1 法說會逐字稿

Good day and welcome to Skyworks Solutions first quarter fiscal year 2006 earnings results conference call.

Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Tom Schiller, Investor Relations, for Skyworks.

Mr. Schiller, please go ahead.

Thank you, Operator.

Good afternoon, everyone, and welcome to Skyworks’ first fiscal quarter 2006 conference call.

With me today are Dave Aldrich, our president and chief executive officer, Allan Kline, our chief financial officer, and Liam Griffin, our senior vice president of sales and marketing.

Dave will begin today's call with a business overview followed by Allan's financial review and outlook.

We will then open the lines for your questions.

Please note that our comments today will include statements relating to future results that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially and adversely from those projected as a result of certain risks and uncertainties including but not limited to those noted in our earnings release and those detailed from time to time in our SEC filings.

I would also like to remind everyone that the results we will discuss today are from our pro forma income statement, consistent with the format we've used in the past.

Please refer to our press release within the Investor Relations area of our company website for a complete reconciliation to GAAP.

I will now turn the call over to Dave for his comments on the quarter.

Thank you, Tom, and welcome, everyone.

Today we announced our first fiscal quarter 2006 earnings, and I'm pleased to report that we met both top and bottom line expectations by growing our core RF solutions in linear products business 10% sequentially.

More specifically for the quarter, we produced revenue of just over $198 million.

We recorded $14 million in operating income ahead of our guidance.

We delivered earnings per share of $0.07 in line with consensus estimates.

We generated $22 million of cash flow from operations, and we increased our cash balance and short-term investments to a record $244 million.

As we previously outlined, best-in-class gross margin is a top priority for our company.

We achieved our operating income and EPS guidance in spite of the fact that we were impacted by the simultaneous introduction of three highly custom radio solutions at two of the top tier OEMs.

The early-stage yield performance, however, is on track to return us to our overall gross margin targets during the next couple of months.

I will discuss this further as we highlight specific customer activities and Allan walks you through our margin discussion.

Now, before I go on to address more details regarding the quarter, I'd like to take a moment to discuss two major trends in the market that are changing the way our customers engage with us.

First, there is a clear market share consolidation underway, and by virtually all analyst estimates, 80% -- 80% -- of the handset market is controlled by five OEMs, up nearly 10 full percentage points over the last few quarters.

With the size and the scale advantages that tier 1's possess, we believe they'll continue to shape the wireless landscape.

Second, and perhaps even more dramatic, is the rise in the percentage of handsets that are requiring voice and high-speed data functionality in the same phone.

This trend significantly influences what our customers need.

Relative complexity is much higher.

Maintaining data integrity while at the same time handling a voice session is a significant challenge.

There is a greater need for compatibility among the RF, the analog mixed signal, and system software to help maintain the quality of both the voice and the data transmission simultaneously.

Now, as a result, OEMs today are engaging suppliers, are engaging Skyworks as partners in much earlier in the development process.

As I contrast in the past, handset manufacturers would mix and match PAs and transceivers much more readily with using various suppliers, and they did so rather routinely.

Going forward, the link between the front-end module, the radio, the software, is increasingly critical and can no longer be easily decoupled.

These market shifts are having a profound impact on our design momentum, and now the visibility that we have into our OEMs' platform strategy as we enter '06.

To that end, let's now discuss our performance from a key account perspective, or top-tier OEM perspective.

As you listen, one theme you will notice is the dominance of radio solutions in our future revenue stream with fewer and fewer stand-alone, mix-and-match, single-function components.

First, at Motorola -- we've received lots of your questions about our position on Motorola, so let me try to be very clear, and please keep in mind that all of Motorola's transceiver business was captive to their internal semiconductor source until very recently.

In other words, the serviceable market for radios has increased dramatically as this business has become available to merchant suppliers.

Although we did not win the first generation radio design, we have, in fact, recently signed a strategic supply agreement to support their next-generation EDGE platforms for production in late '06.

To best illustrate our success and the strength of our relationship, look no further than the recent press release that Motorola issued highlighting their plans to launch our radio design that optimized the EDGE feature in their handsets.

Please keep in mind that, to date, we have shipped nearly 100 million transceivers worldwide -- that's nearly 100 million -- demonstrating our ability to ramp reliable volume production of radios.

This experience, coupled with our rugged system approach, were certainly key factors in winning this strategic business at Motorola.

In the meantime, we continue to be the leading power amplifier supplier on their highest-volume phones today supporting their popular RAZR series in GPRS.

Our CDMA position is strengthening as we now support the new RAZR at Verizon, the E815, and the recently released Q series Smartphone.

In the iDEN family, we are now supporting virtually every model -- this is a new event for us -- every model including their new releases such as the i560, the i760, the i850, the i870, the i920, and the i930.

And, finally, we are starting to see traction in wideband CDMA led by the 3G RAZR, adding to our position in the A1000, T1000, V1050, and the C975.

Let me also point out that Skyworks is the clear leader in supporting Motorola's ODM partners, as we continue to see gains across their lineup of low-cost models targeting emerging markets.

I hope that helps clarify a bit at Motorola.

Now, at LG, our Helios radio solution has been selected for use in their initial EDGE models -- the A7-110, the A7-150.

LG was an early adopter of our EDGE radio solution.

In addition, we've begun volume shipments of our GSM/GPRS radio systems and supported their ultra-low-cost voice-centric handset applications.

So now we're addressing both EDGE, GSM/GPRS.

Also noteworthy at LG is our ability to support their needs within the CDMA 2000.

Most recently within their Black Label series of handsets, we are now providing complete radio plus power amplifier functionality.

We're getting more than $4 per handset for a single-band application, and we are now moving with LG into higher-value tri-band platforms.

That's the situation at LG.

Next, at Samsung we are pleased to announce that we've commenced, we've begun this quarter high-volume shipments of our Helios Mini EDGE solution.

This is a major accomplishment for us, because it marks the very first time Skyworks has delivered stand-alone radio functionality in this tier 1 account.

Today our radio solution supports four new models with specific customer forecast projecting 10 to 14 models by the end of June.

So this is a platform that will proliferate across many SKUs.

Our success in gaining Samsung's confidence on these platforms was largely the result of our ability to offer a collaborative, hands-on software to support, which allowed us to quickly mate our EDGE solution with an industry-leading baseband processor.

Now, at Sony Ericsson -- incidentally, another 10% customer -- we are just delighted to be across their award-winning family of Walkman handsets, migrating from providing stand-alone PAs in models such as their highly successful D750 to supplying complete EDGE FEMs into their recently announced W810 EDGE phone, the W550 and the W600 models.

We have also now secured multiple wideband CDMA sockets with our LIPA, or our load-insensitive power amplifier technology, supporting their P990, W900, and K600 series of platforms all the while increasing our dollar content per phone while reducing our customers' overall cost and footprint -- our content capture strategy at work.

Okay, to put our overall position into context, the Helios family showcases our unique ability to pair field-proven FEM technology with integrated radio functionality.

Our Helios EDGE platform is proving to be the radio of choice with three of top five OEMs.

When coupled with our CDMA portfolio, our radios will soon be at the heart of four of the top five handset OEMs.

It's a new event for our company, and it enables us to uniquely, as we move throughout '06 and into '07, more than double our addressable content per handset as we capture increasing RF content; we are solidifying our already strong position at each of these leadership accounts; and, finally, we're creating a base for further RF, analog, and mixed-signal semiconductor integration.

Now let's switch gears and discuss our linear products business.

Here we continue to introduce a variety of new solutions targeting non-handset applications.

Specifically for the quarter, we began high-volume shipments of our newly released CMOS switch and control logic solutions for digital broadcast satellite with several customers.

We've now ramped front-end modules as part of Broadcom's 54G wireless LAN reference design, and we're in the process of securing front-end module wins on their 802.11N systems.

We've also secured highly linear amplifier sockets at Alcatel in support of 3G base stations and launched ultra-low-power transmit chain solutions for cellular infrastructure.

And a common thread with all these linear products is that they squarely leverage our existing analog capabilities with diverse applications and markets.

These efforts are allowing us to aggressively complement our leadership position within mobile platforms.

And let me summarize -- we are ramping Helios EDGE radios at LG, we are just beginning a volume ramp at Samsung in four phones, we are now going to move to more than a dozen by June.

Motorola will be next with business that we've already been awarded, and that's been made public.

When you add our CDMA full radio solution, our radios are now in volume production or moving into production at four of the top five OEMs and recall we talked about them owning 80% share in wireless.

Meanwhile, we are now gaining significant momentum, starting with Motorola and others with our wideband CDMA front-end modules and our newest linear products.

Our R&D engine at Skyworks is aimed at next-generation multi-mode radios and precision analogs semiconductor setting the stage for a strong second half of '06.

Okay, I'll now turn this over to Al, our chief financial officer, for his review.

Thanks, Dave.

Revenue for the first quarter was $198.3 million, more specifically, revenue in our RF solutions and linear products portfolio was $180.5 million, up 10% sequentially, when compared to $163.7 million last quarter.

Meanwhile, as anticipated, revenue within the cellular baseband product area was $17.8 million, a decline from $26.5 million in the fourth quarter reflecting a shift from tier 3 suppliers to leading cellular handset OEMs.

Gross profit for the quarter was $75.5 million, or 38.1% of revenue reflecting lower-than-planned production and test yields as we ramped a number of increasingly complex RF silicon-based products.

More offshore assembly and tests as we continue to eliminate capacity constraints and optimize internal production efficiencies.

We had lower royalty license expense and also there was no royalty income this quarter, either.

As Dave mentioned, we are committed to delivering higher margins, and we expect to return to our positive trajectory toward our target model as these new products move through our semiconductor learning curve as we increase the internal capacity, which we're doing this quarter, and as our margin-rich linear product mix changes.

Back to the results for the first quarter -- operating expenses were $61.6 million, or 31% of sales resulting in operating income of $13.9 million, a 56% sequential improvement.

Interest expense for the quarter was $3.8 million with interest and other income $2.3 million for net expense of 1.5 and our pro forma tax provision was $1.6 million yielding net income of $10.8 million, or pro forma earnings per share of $0.07 in line with consensus estimates.

Comments on the balance sheet and cash flow -- our cash and cash equivalents and short-term investments during the quarter increased to $244.5 million.

We generated $22 million of cash flow from operations.

Depreciation was $9.1 million, and we invested $13.6 million in capital expenditures, in part, to expand the capacity in the back end of our operation.

Now to our business outlook for the second quarter -- despite traditional handset market seasonality of 10 to 15% sequential unit decline, we are forecasting better performance with March quarterly revenue down only 9% to $180 million driven by our ability to capture increasing semiconductor content per platform.

Operationally, in spite of seasonality, we anticipate gross margins slightly below last quarter as we improve the internal production efficiencies and implement product cost reductions.

If you assume a margin of 37.5% and operating expenses of $62 million, we expect to deliver a pro forma operating income of roughly $5.5 million.

Below the line, we suggest modeling between $1.5 to $2 million of net interest and other expense, along with $1 million tax provision resulting in pro forma diluted earnings per share of $0.02 with a base of 160 million shares.

Incidentally, we expect to record between $3.5 million to $4 million in noncash share-based compensation in the GAAP income statement in accordance with FAS123-R, which we adopted this quarter, and the amount in the first quarter was $3 million lower as our annual grants are generally issued in the middle of the first quarter.

Also, you should note that our stock-based compensation expense will not be tax-affected due to the recording of a full valuation allowance against the U.S.-deferred tax assets.

It's kind of complicated, but that relates to the NOLs, which we still enjoy.

In closing and perhaps most importantly, in the March quarter we plan to once again generate positive cash flow from operations representing the 10th consecutive quarter that we've been able to do that.

That completes our prepared comments.

Stephanie, let's open the line for the Q&A session.

[OPERATOR INSTRUCTIONS]

Ittai Kidron, CIBC World Markets.

Hi, this is George Iwanyc for Ittai.

Dave or Alan, could you give a sense -- you gave a good rundown of the Helios ramp at several OEMs, but could you give a sense of what type of share you think you have right now and what type of share you think you can have exiting the year?

It's a new ramp, right?

The industry is just really beginning to launch volume -- high volume of truly EDGE-enabled phones.

I would say that at LG we're, I believe, today virtually sole source.

At Samsung, we're sharing that business, but we have essentially more than half.

The Samsung story is definitely looking very strong for us as Dave indicated.

LG -- we have very high share of LG.

In fact, we're their sole supplier right now, but their EDGE of business has not been very bullish.

Samsung, on the other hand, right now, is giving excellent signals for us.

Our share is probably about 20% to 30%, and we see that heading to eventually 50% by the June quarter.

And, of course, the big issue here is Motorola, where today we have a lot of front-end module and growing share on their phones, but we're not in their radio today, and we will be later in the year, and that platform is a replacement-oriented platform we believe that will become a long-runner, because it's based upon a standard that was derived from the bottoms up to drive high-speed data.

So we think that's going to be a big driver for us later in '06, '07, and '08.

Okay, and could you give a sense of how the progress is coming on the GSM/GPRS side for radios?

Well, yes, certainly, we still have customers designed in with GPRS transceivers and, as you know, that is what we call, more or less, a legacy business.

But what is important is the power transceiver program that was alluded to in Dave's opening comments.

This is a device that was recently designed in with LG specifically targeted at ultra low-cost voice-centric phone that will help LG seed and fuel design gain and traction in the emerging market.

So we're really happy about that and quite pleased.

That was something that we worked on specifically for that customer and generated quite a bit of upside.

Let me add to Liam's comment.

One of the real challenges that our OEM customers have is they need to provide more and more multimedia support, simultaneous voice and data in a fixed volume -- the cellular handset -- and both Helios Mini at Samsung and this LG power transceiver are a tiny, tiny footprint, a very small, compact, low-profile designs where we've deployed very unique chip-on-board technology, very high levels of silicon integration.

And so we're providing them not only increased functionality whereby we get higher dollar content, but in both cases the size, the footprint of the complete radio solution is smaller than anything on the planet, and that was nice for GSM/GPRS, it's critical -- critical -- for multi-mode handsets driving multimedia features.

That's why we're winning -- one of the reasons why we're winning this business.

[OPERATOR INSTRUCTIONS] Jeff Kvaal of Lehman Brothers.

My one question would be on the gross margin trajectory, Allan, if we're down a little bit in the March quarter, should we think of that as the bottom?

And how quickly might we ramp up again past 40%?

Thanks a lot.

Sure, Jeff, thanks.

I would think of that at the bottom.

We're getting impacted a little bit by seasonality and absorption, but as we accelerate the ramp of these new silicon products, and as we bring the capacity on, which is happening this quarter, I think you're going to see us get back on the trajectory that we've been talking to you about.

Let me add some specific design elements to these radios, because it is not uncommon, and it is the case with these -- we're launching three complete radio systems with two top-tier OEMs this very quarter.

And what we've experienced, which is not uncommon, is that we've consumed more RF silicon as we ramped initial quantities, and we are now finalizing the production design, the test software, the platforms, the fixtures -- it's a learning curve.

And, in fact, in this case, because these are high-speed data platforms, as our customers have gone through FTA they've come back and we have together tweaked the system performance, which has caused there to be, in one case, high-level math changes.

So this is not terribly uncommon.

A bit of it is the price of admission.

These are far from commodities.

They are complicated systems.

What is unique is that in the case of at least a couple of these three, two of the three, we're being expedited to do it very, very quickly, earlier than planned, and, in fact, we're doing three at once.

So we're already beginning to see, moving up the semiconductor learning curve, we know how to manage through these yield issues.

I expect Q2 to be the low point.

In fact, in Q2 you're seeing higher yields on these radio systems being offset by decline in revenue absorption due to seasonality, and I would absolutely encourage you to view that as being the trough.

When might we think that 40% is the -- or that we might see 40% again?

We're not guiding in the back half of the year, but with the volumes and these new product ramps, I think we'd be back close to that level this year.

And we remain committed to that 43% or 45 -- to 45% gross margin with 15 points of operating margin.

We, as a company, are absolutely committing to being on the trajectory to achieve that.

We have, Jeff, a lot of other cost-reduction programs that we're looking at.

We're bringing in, as we mentioned last quarter and this quarter, some of the capital, expanding internal capacity, so I think we're talking quarters in terms of getting back to that level and beyond.

Amit Kapur, Piper Jaffray.

I was wondering if you could just provide some more color on whether you faced any supply constraints and maybe left some revenue on the table during the quarter, how you mitigated them during the quarter, and are there any pockets of supply constraints that still need to be fixed?

The answer is yes.

The one that comes to mind that was most significant towards the end of the quarter were printed circuit boards, PCBs.

We were disappointed by the throughput on -- or the deliveries of some of those PCBs as our customer is trying to ramp -- or our supplier, rather, in this case, is trying to ramp.

It didn't impact our ability to satisfy our customers, but it did, I think, limit the upside a little bit.

We have gone out and secured enough capacity, going forward, but that's the only significant example.

And I think, as we get into Q2 and certainly by the end of Q2, it will be behind us.

But that was PCBs.

And that really constrained us in two ways -- a little bit on the revenue line and ability -- as you notice, we built inventory slightly, and we had a plan to build more inventory, more absorption, and we were constrained there at the end of the quarter.

But otherwise I think component supplies are not an issue.

Okay, great, and just to quickly follow-up -- with some of the supply constraints that you're facing and some of your competitors are also facing, can you talk about has there been any change in the overall pricing environment for components that you see in the market?

We're really on our plan.

We're actually achieving, as you know, to offset ASPs, we're actually -- with volume purchases -- we're actually seeing reductions in some of our prices -- pricing of our key components.

But, as Dave mentioned, in the quarter, because of some of the constraints in the ramp of new product ahead of where we planned, we did have some expediting charges in this quarter that we don't expect to recur.

Randy Abrams, Credit Suisse.

I wanted to just ask one more gross margin question -- as Helios ramps into larger volumes, maybe talk about the impact on mix, once it is up to full yields.

Is there any difference in margin or profitability relative to your traditional business?

More content.

Okay, but same gross margin percent as the target for that part of the business?

Right.

Okay, and then --

One other commercial comment here with respect to Helios.

These solutions really have our own technical signature embedded into the device.

So in addition to the margin improvement that Allan mentioned at the outset, I think we're going to do much, much better holding the line on pricing as these products move into high volume and mature.

Okay, and just on the follow-up question -- as you look at first quarter, could you talk about the trends for full system -- maybe first quarter and then into counter 2006.

Should we expect that to kind of flattish at these levels or will that continue to trend downward, if you move back into focusing on Helios and some of the new business?

Okay, you're saying full systems relative to the baseband business?

Yes, the baseband business.

Yes, well, as we mentioned, we do have some new platforms that are being released right now into some specific markets in Asia -- our Pegasus Q platform and our Lynx EDGE baseband.

So there is potential for certain OEMs to ramp and perhaps show growth in the back half of the year.

Right now, we are modeling more of a flattish revenue that can potentially be down in the second half, but we do have some potential customers now looking at design wins.

Brian Modoff, Deutsche Bank.

Hi, this is [Visijer] on behalf of Brian Modoff.

A couple of questions; the first is on pricing.

I just wanted to get your feedback on the current pricing of EDGE transceivers versus GPRS transceivers.

Do you see the pricing converging and the market is at a stage where EDGE is not at a premium in terms of pricing.

Yes, well, right now, EDGE is definitely at a premium, no question.

The low-cost GPRS market is, in some cases, would be under $3.

We think the solution that we offer right now has specific advantages that command a market premium.

But relative to the industry, you're seeing at least a $2 add for a systems solution and EDGE.

All right, and in regards to your earlier comments, I'm going back to one of your top clients -- top customers, LG, you mentioned that you are sole source at LG.

Is this only on EDGE or is it on the GSM/GPRS too?

On EDGE we are sole source, on GPRS, with this new power transceiver, we have a share base right now that's quite strong.

It's not sole source, but it is definitely the engine that they're looking at for all of their new GPRS phones.

What we're seeing with all of the top-tier OEMs to varying degrees is, unlike GSM/GPRS, there was a great deal of -- or at least discussion to desire to mix and match.

Certainly, they did so on the power amplifier readily easily.

And on the radio, a customer like a Samsung or LG would have several, including Skyworks, several radio suppliers.

This complexity, when delivering high-speed data simultaneously with voice, has driven the complexity of the analog solution through the roof.

It's hands-down a far more complex system with a higher degree of coupling between the analog, the software, and the front end to make it work in a robust way for high speed data.

Our customers are engaging us quarters before, multiple quarters before production.

They never did that in the past.

We have great visibility on the platform, and if they have an alternative, it's an alternative that's providing into a different platform, and it may be one of two.

It's not one of three, one of four, one of five, and that's the case with every top-tier OEM we're engaging with today.

Shawn Slayton of Cowen Company.

Dave, I missed your comments on the multi-mode handsets.

Where's the activity there and what's the state of things?

Thanks.

When I refer to multi-mode handsets, I'm using a confusing terminology perhaps.

To us, a multi-mode, a multimedia, is simply we are providing a system that is designed from the ground up to facilitate high-speed data in whatever multimedia feature set our customers may design.

That could be EDGE moving to WEDGE moving to wideband CDMA.

And so we have Helios as an EDGE-based version.

We have a CDMA version that two of the top five OEMs are buying, and so that's what I mean by multi-mode -- specifically designed to provide high-speed data and voice simultaneously.

I will add, however, that we are the only supplier that I am aware of that provides CDMA and EDGE under one roof.

We are a provider of both with IP and, in fact, in the case of CDMA, a cross-licensing agreement with Qualcom to do so.

That provides an advantage in that it increases our addressable market, but it becomes a big deal when you start talking about multiple modes of operation, moving forward, where you have elements of both wideband and CDMA or elements of both CDMA and GSL.

Okay, thanks for the clarification, I appreciate it.

And then, just, Allan, on the CapEx side for the rest of the fiscal year, are we kind of looking at this $13 million quarterly level?

I think this quarter 13, I think the second quarter, because we're still bringing in equipment and actually accelerating it for the capacity, then you're going to see it go down.

James Faucette of Pacific Crest Securities.

This is Steve Clement for James.

I just had a question on the Motorola EDGE win.

I wanted to get a sense for what your expected profit share will be there.

You indicated that that's going to be a replacement platform for them.

Is that going to be a platform that will drive volume handsets or more EDGE-type handsets?

What are your expectations there?

Well, I would, to some degree, you have to listen to what Motorola has said about this Digi RF platform and about the latest -- the EDGE redesign.

It is an engine that will drive many, many, many SKUs in phones over a fairly long period of time, we believe.

They have only formally announced one winner of that business, and that winner is Skyworks.

That's the only formal announcement, you'll note, if you can find the press release on their website with a quote from their chief technology officer.

Just a quick question on the linear product -- can you give us a sense for what percentage of revenues they are now and what you expect them to be at the end of the calendar year?

We don't break that out, but it's less than 20% but we think it's growing.

We're not segmenting that anymore.

Satya Chillara, American Technology.

Dave, can you particularly comment about what you said in the press release about your WCDMA radio traction with analog solutions, setting us straight for a strong second half.

Can you quantify that?

How should we think about the revenue growth and particularly when you are ramping up new programs, what about the gross margins?

For the past -- this quarter and next quarter, the gross margins are under some pressure.

So how do you manage that?

Yes, thank you, I think I understand the question.

Clearly, we're not providing numbers in the back half of the year, but the programs we're ramping today, and those programs are EDGE, radios, Helios is our brand.

They're ramping at Samsung, they're ramping at LG, and they'll begin to ramp at Motorola later on.

We have CDMA, radios coupled with a front-end module ramping at LG and one other top-tier OEM.

That's going to drive second half.

We also have wideband CDMA front-end modules products at Sony Ericsson, Motorola, LG, Samsung, in varying degrees of volume production.

So those platforms together will be ramping the second half, and with respect to gross margin, as Allan responded, we are ramping -- adding capacity, expediting, adding costs, being asked by a couple of customers to expedite the introduction of these EDGE transceivers.

We incurred high silicon costs, those yields are coming up as we speak, and so we view that gross margin pressure to be more of an event, and we're managing our cost structure to continue to have bottom-line integrity and generate positive cash flow.

So the back end of the year shapes up that way, we think.

Okay, great.

Just as a follow-up on the royalty income.

When do you start getting royalties, or how do we think about that royalty income?

We had said with the -- we've signed an agreement with Qualcom, we have confidentiality in the agreement so we didn't disclose the terms.

But we had said last year that was an '06 event.

It didn't start this quarter, and we actually have some other IP revenue.

It's lumpy, we don't get it every quarter, so that's why we made the comment.

[OPERATOR INSTRUCTIONS] Edward Snyder of Charter Equity Research.

What revenue run rate are you going to need to get to to see gross margins move into the, say, low 40% range and/or be closer to your operating margin targets?

Oh, we were running in the low 40% gross margin before we started ramping these radios, and we were doing so in the $200 million range.

We don't see anything that's change there, and we'll move beyond that as we begin to capture more dollar content with these high-contribution radios.

The contribution margin across our product line is in the mid-60s, and so you will begin to see us move up as we increase revenue beyond that level -- really no different than where we were a couple of quarters ago.

In the Motorola EDGE business here, where are you in the process?

Are you going through qualification, they've designed it into a specific handset, or are you still in the eval stage?

Well, Ed, we've actually been -- again, if you look at the press release, we've been given a contract at Motorola on DGRS, so we have gone through numerous stages of sampling, engagement across multiple sites and, again, this is the platform expected to launch later in the year.

So in terms of which phone will be supported is unclear, but we're certain we have the business.

Ed, let me -- it's a little bit different.

I commented earlier that the engagement is much earlier, much more intimate, much more intense to develop this complete system.

So what a customer like Motorola and specifically Motorola in this instance has done is very early on selected a partner, selected a few partners, and then down selected over a period of time to help actually develop this system.

So it's not -- we sample, do you like it, get feedback -- because we design this together, and we're doing things like software and protocol integration of a complete system that will have a driver set in addition to the overall high-speed analog solution for the ground-up high-speed data.

So this was not a casual engagement with this customer or any other customers here.

So this is a big investment on their part, a big investment on our part.

Gentlemen, at this time, it seems we have no further questions.

I would like to turn the call back over to Mr. Aldrich for any additional remarks or closing comments.

Okay, well, thank you so much for listening, and we look forward to updating you shortly.

Thank you.

Ladies and gentlemen, that does conclude our presentation for the day.

At this time, you may disconnect.