Vicor Corp (VICR) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen.

Welcome to the Vicor earnings results for the fourth quarter and year ended December 31, 2012.

My name is Karis, and I will be your coordinator for today.

At this time all participants are in a listen-only mode.

Later we will conduct a question and answer session.

(Operator Instructions).

As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to your host for today, Dr. Patrizio Vinciarelli, CEO, and Mr. James Simms, CFO.

Please proceed.

Good afternoon and welcome to our conference call for the fourth quarter and year ended December 31, 2012.

I am Jamie Simms, Chief Financial Officer, and with me here as noted is Patrizio Vinciarelli, our CEO.

Today we issued a press release summarizing our financial results for the fourth quarter and all of 2012.

This press release is available on the Investor page of our website Vicorpower.com.

We have also filed a Form 8-K and our amendment to our Schedule TO with the Securities and Exchange Commission in association with issuing this press release.

I remind all of you today's conference call is being recorded, and is the copyrighted property of Vicor Corporation.

I also remind you various remarks we may make during this call may constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995.

Our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those explicitly set forth or implied in our statements.

Such risks and uncertainties are discussed in our most recent Forms 10-K and 10-Q filed with the SEC.

Please note the information provided during this conference call is accurate only as of the date of the call.

Vicor undertakes no obligation to update any of the statements made during this call, and you should not rely upon them after the conclusion of the call.

A replay will be available beginning at Midnight tonight through March 13.

The replay dial-in number is 888-286-8010, and the listener passcode is 17127574.

In addition, a webcast replay of the call will be available on the Investor Relations page of our website beginning shortly after its conclusion.

I will start this evening's call with a review of our financial performance for the fourth quarter, and Patrizio will follow with comments on current performance, after which we will take your questions.

As set forth in this afternoon's press release, Vicor reported an aftertax loss for the fourth quarter of $4.8 million, representing representing a loss of $0.12 per basic share.

Vicor's consolidated revenue for the fourth quarter of 2012 decreased to $50.4 million, compared to $53 million for the third quarter, representing a sequential decline of 4.8%.

The fourth quarter figure compares to revenue of $58.6 million for the fourth quarter of 2011, representing a year-over-year quarterly decline of 13.9%.

International revenue decreased 4.8% quarter-to-quarter, and represented 50.8% of total revenue a decline from 52.1% for the third quarter of 2012, and 53.7% for the fourth quarter of 2011.

We experienced another sequential double-digit percentage increase in recognized sell-through revenue associated with shipments by our stocking distributors.

The absolute figures are relatively small, but the trend continues to be positive.

Consolidated gross margin declined to 39.3% compared to 43.4% for the third quarter, although a meaningful portion of the relative decline was attributable to an increase in inventory reserves, which I will describe in a moment.

The other drag on gross margin percentage was the impact of reduced volume particularly within V-I Chip.

Overall changes in average unit cost and average selling price were favorable sequentially, but offset by an unfavorable shift in mix.

Consolidated operating expenses as reported for the fourth quarter increased sequentially 7.6%.

The fourth quarter total included both the gain from the settlement of insurance litigation, which was approximately $2 million, and the charge of approximately $2 million for the impairment of goodwill.

Financial reporting standards require that we record these unusual events as part of operations.

However, since they largely offset one another, the as-reported figure approximately represents the trend in recurring operating expenses.

The sequential increase in total operating expenses was driven by higher marketing and sales expenses notably compensation, travel and advertising, and higher Research & Development expenses, notably compensation and the consumption of materials and supplies.

Total head count at 1,046 as of December 31 was slightly up sequentially and year-over-year.

However, there has been a shift in the makeup of our employees, as we have expanded our marketing and sales team, while reducing our manufacturing headcount, thereby shifting our overall compensation higher.

As disclosed in our press release last week, based on our assessment of our cost structure and expected capacity requirements for the foreseeable future, we reduced headcount by 50 on February 12th, bringing our current total to 996.

As we communicated in our press release of November 26, we expected at that time to breakeven for the fourth quarter with an expected loss associated with operations, offset by the gain associated with the settlement of insurance litigation that we recorded in October.

Our actual loss associated with operations was larger than forecast, and we also recorded several large noncash charges, which I will now describe.

We recorded a $1.36 million increase in inventory reserves as the charge to cost of goods sold, primarily for inventories of raw materials and components we deemed as excess and obsolete.

Over three quarters of the charge was for V-I Chip raw material and component inventories, associated with products for which we had earlier forecast reasonable revenue during 2012 and 2013.

However, due to extended delays in receipt of purchase orders and limited visibility into when we might actually consume these parts, they did not pass our mathematical excess and obsolete tests.

We also recorded a $2 million impairment charge to reduce to zero the carrying value of goodwill associated with our acquisition in 1998 of Vicor Japan Company Limited, our Japanese subsidiary.

Financial reporting standards require us to annually assess the carrying value of goodwill, which can be complex and a very subjective undertaking.

With this year's exercise, we concluded the carrying value inclusive of goodwill, exceeded the fair market value of the subsidiary.

The other significant charge for the fourth quarter was associated with the write-off of our deferred tax assets associated with state level activity.

Financial reporting standards require us to assess the carrying value of deferred tax assets based on the likelihood the Company over an extended forecast period would be able to offset future taxable income with the deferred tax assets.

While we concluded our federal level deferred tax assets were viable, we also concluded our state level deferred tax assets were not as they have different applicability.

This write-off totaled $1.5 million, and is reflected in our calculation of our fourth quarter provision for income taxes.

Given the assumed nonrecurring nature of these charges we have chosen not to present non-GAAP pro forma financials, as we do not believe the charges as described above will be recurring, are complex, or otherwise cloud investors' view of our underlying operating performance requiring a non-GAAP pro forma presentation, and the associated reconciliation to our financials.

Our quarterly pretax loss including interest income, foreign exchange loss, and a loss in the estimated value of our auction rate securities was $4.3 million, a decline from the $366,000 pretax income earned in the third quarter.

Despite the pretax loss for the fourth quarter, we recorded a provision for income taxes of $398,000, reflecting the reduction of the value of state level deferred tax assets described above.

Our consolidated effective tax rate for 2012 was 46.6%.

It was 48.3% for the three quarters ended September 30, 2012.

Please note our provision as recorded through 2012 does not reflect any benefit from federal research and development tax credits, as Congress did not renew this credit until January 13.

As such, our first quarter 2013 provision for income tax will reflect the full credit that would have been recorded through 2012.

For the fourth quarter our consolidated net loss before backing out any aftertax profit from the consolidated subsidiaries in which we hold a minority interest was $4.7 million,compared to $280,000 for the third quarter.

As stated, our consolidated net loss available to Vicor shareholders, in other words as reported after backing out the subsidiary net income was a loss of $4.8 million.

This compared to net income available to Vicor shareholders of $191,000 for the third quarter of 2012.

Due to rounding the fourth quarter loss per share rounds up from $0.115 to $0.12.

Quarterly cash flow from operations increased to $2.9 million provision from the prior quarter's $1.4 million, reflecting a $3 million favorable swing in net working capital based on reductions in Accounts Receivable and inventories.

Capital expenditures for the quarter increased slightly from $2.1 million to $2.6 million, but reflected maintenance activity not an expansion of capacity.

We do not anticipate a meaningful change in our capital expenditures in the coming quarters.

Cash was essentially unchanged for the quarter.

Turning to the consolidated balance sheet.

Our Receivables portfolio remains in excellent shape with Days Sales decreasing to 49 days, down from the third quarter's level of 51 days.

Consolidated inventories quarter to quarter were stable before the aforementioned increase in reserve, increasing $438,000,reflecting the reserve annualized inventory turns stood at 3.9 essentially unchanged from the third quarter.

As of year end we had $84.6 million in cash and equivalents.

We also hold long-term investment securities carried at an estimated fair value of $6.7 million.

Included in this long-term total are auction rate securities with a par value of 6.1 carried at a book value of 5.0, representing 81.6% of par.

That concludes my prepared remarks regarding our financials.

Now, I will turn the call over to Patrizio.

Thank you, Jamie.

As stated in this afternoon's press release, our reported fourth quarter financial performance reflects depressed bookings in the second half of 2012.

While we have forecast a lower loss from operations primarily due to anticipated weakness in V-I Chip with the relatively long lead times, we had not anticipated the slowness experienced by the VBU which relies on a higher percentage of interquarter turns volume.

Some of the overall decline can be attributed to the uncertainty of customers over the fact that defense spending fell more in the fourth quarter than any quarter to quarter period in four decades.

Certainly the cloud of the potential sequestration hung over the quarter, but we he also experienced weakness in our industrial and transportation segments.

Recessionary conditions in Europe and Japan were also a factor.

Let me address recent bookings trends by business unit.

Total bookings in the fourth quarter declined 27% sequentially, and were 22% lower than the levels seen for the fourth quarter 2011.

VBU bookings uncharacteristically fell 21% due to lower orders domestically, and from our Chinese distribution network where we are transitioning to a new distribution relationships to reflect our emphasis on larger OEMs and their contract manufacturers.

VSU bookings fell by two-thirds as both supercomputer and high end defense electronics order flow nearly stopped in the second half of 2012.

Vicor which often books orders in tandem with their chip for certain applications, saw a similar decline albeit on a smaller base of business.

As a result we enter 2013 with a relatively low one-year concentrated backlog of $31 million, $22 million of which was carried for delivery in this, the first quarter of 2013.

Based on this low backlog and the anticipated partial recovery in first quarter bookings, we are expecting first quarter revenue to be sequentially lower than the fourth quarter.

Including a severance charge of approximately $1.3 million which will be recorded this month, we are also expecting first quarter net results to be sequentially lower.

As Jamie outlined, we undertook a reduction in force on February 12, based on our assessment of expected capacity requirements for the foreseeable future, and the expanded cost structure which had been established in large part to drive demand for and support increased revenue from our broad array of new products.

While we anticipate this reduction in force will provide approximately $2.10 million of annualized savings in compensation and benefits, we also expect the reduction will not inhibit our ability to execute our aggressive growth plans to which we remain committed.

We do not yet have sufficient visibility into the second quarter 2013 to comment on expected financial performance, but booking trends so far in this quarter have improved from fourth quarter levels.

Average daily bookings across all of our geographies have improved, and we have received some substantial orders for V-I Chips.

As of today, V-I chip first quarter bookings with over a month to go in the quarter exceed all of fourth quarter bookings.

We also expect to a reorganization based on customer feedback to receive additional orders that have been postponed due to uncertainty during the second half of 2012.

I cannot say this apparent partial recovery in booking activity is confirmation of our belief about the causes of our current performance, but we are encouraged by recent booking activity, which may signal that will that the fourth quarter represented a low point for Vicor bookings.

To conclude the prepared remarks, I once again ask investors to take the same long-term perspective regarding our current performance.

Vicor is transitioning from a strategy focused on serving relatively less cost sensitive,low volume high mix applications, to more cost sensitive high volume OEM applications.

With the low cost structure of new part components, we are deploying a broad product capability that leverages the flexibility of our unique bar system methodology to address large high growth opportunities.

In transactions, these now components is taking far longer than we had planned, but the strategy remains valid, and our commitment to it remains strong.

This concludes management's prepared remarks, and we will now take questions from listeners.

(Operator Instructions).

And your first question comes from the line of Alan Hicks with Ansley Capital Management.

Please proceed.

Good afternoon.

Good afternoon.

Just wondering about your end of markets, military has come down, are the other new products and new markets you are addressing, how fast can we expect them to gain traction?

Well, I guess not fast enough as we would like, but there is progress being made on a variety of fronts.

The predicament that we are in is what I think has been described the fastest, the perfect storm in terms of the supercomputing applications and defense applications coming to a screeching halt, and to some extent these is interdependence between those two.

Unfortunately, new applications particularly involving new products have a long recession period, so we are going to have to be patient for the long haul.

Do you see the supercomputing and military stabilizing any indication of stabilizing?

I am not sure it is a smart effort to be able to make a very educated guess with respect to that.

Obviously we all watch the headlines with respect to that, and time will tell.

Just quickly, do you see the uptick in orders this quarter, what markets is that coming from?

Well, it has come from, it is relatively broad based.

To be clear not to the levels of past quarters, but it is a marked improvement over the depressed level of activity over the fourth quarter.

So it is at least as of this moment an reversing trend that we are taking to heart.

But we will have to wait and see with respect to where it goes from here.

In the short-term, we are obviously challenged by recent bookings performance, and the backlog being as low as it has been at the end of the year.

And hopefully we are going to see the improvement in bookings translate in sales in a reversal of the revenue decline and the earnings decline starting later in the year.

Okay.

Thank you very much.

And your next question comes from the line of [John Dunlap, DMB] Capital, please proceed.

Hi, Patrizio.

Hello.

In previous conference calls you have talked about the Intel based server opportunity, so I am just wondering if you could give us some update and some more color on that?

Amplify the question a little for me.

I am not sure I am --?

You talked about an opportunity with V-I Chips that will get you into an Intel-based server opportunity, and you talked about an 8-figure opportunity?

Yes, yes.

So that is progressing.

Not surprisingly, one might say it is taking longer than projected for the customer to some to come to fruition, and the volumes are not quite at the level that the customer had forecasted at one point in time.

So the good news is that it is progressing along well.

The bad news is that in the near term, it is not going to be as is significant as we were led to believe.

So are you saying actual production quantity deliveries to that market then, or to that customer?

We are beginning to engage on that general front.

So there is progress and that is all I can say at this point.

Before you qualified it as an 8-figure opportunity.

Is it still an 8-figure opportunity?

It is an evolving opportunity.

It is going to be significant.

It is I would say very hard to forecast obviously the early forecasts at some level of overall, but it is evolving in a positive direction, so I am reserving judgement with respect to the long-term prospects, but it is obviously a very exciting opportunity for us.

Great.

Would this be able to get you into other Intel based opportunities?

Are you now at a point where you have the cost benefit analysis, where you might be able to crack some of the more commodity type servers?

Generally speaking, yes.

Again, we are going to have to be patient with respect to that.

That is not going to be an overnight affair.

I think that with new Vicor products and new V-I Chip products, we are going to be able to address a much broader array of generally speaking lower power, more cost sensitive higher volume opportunities.

But as we have seen with respect to the application and the nameless customer, you were increasingly referencing a moment ago, these things take time to truly come to fruition so the work is progressing.

But it is not going to make a substantial difference for a few quarters.

Okay.

Alright.

Good.

On your high end servers, like I understand how the supercomputer market can be he very fickle, and one day it is hot and the next it is not, but are you still doing well on the high end server market?

Yes, I can say that we have a strong value proposition there.

As with everything is it is obviously a complex task in that there are commodity forces at play, as with other markets and progress may involve taking a step back, before we can take a couple of steps forward.

And that is as far as I can go with respect to that.

But if the color you are questioning is do I believe the technology is strong and a growing proposition in that market, the answer is a definite yes.

But patience is the operative word.

Right.

And kind of in the same line of questioning there, what I am wondering is you had some really good success in the high end servers, and I am just wondering the companies that use you V-I Chips in their servers when they come out with the next generation version of that server, are you still in those particular models?

Not necessarily, not across the board.

That is what I was referencing a moment ago with respect to the recession trends.

What I can say in this regard is that with large companies the that may be different, with different considerations with different transits, and at different times, different considerations will prevail.

So it is not going to be a uniform constant motion in the right direction.

There are going to be steps back but we believe the overall trend is forward, because our value proposition is very compelling.

Okay.

Getting moreso with the new packaging and more highly integrated products, leveraging intergenerational silicon.

What I think I am hearing is that you have had some setbacks, but you have got some new products and you have got a new strategy that you plan to still grow in that marketplace?

Absolutely.

Okay.

And then one more question, and I will get back in the queue.

Usually when I think of orders being down, I always like to hear about design wins.

So I am wondering are you seeing an uptick in design wins?

Are you seeing more design wins?

Are you seeing them across more markets?

Can you give us a little bit more color on what are you seeing as far as design wins are concerned?

Our challenge is not to be confronted with enough opportunities.

Our challenge is to pick those opportunities that make the most sense.

So the applicability of our methodology is broad enough that in all of the markets that we cited as being strategic markets for future growth, we are seeing more and more opportunities, and very strong customer interest in getting us involved in maturation solutions, and to a higher degree as time progresses we are picking and choosing those opportunities that make the most sense from a business perspective.

Just to make sure I understand, it sounds to me like you have plenty of opportunities, the trick is really to prioritize them and close them, and go after the ones that make the most sense for Vicor?

Yes.

And the challenging aspect of this, given the business model, how much of a role levers technological development plays in the business model, is that because of some near level of uncertainty with respect to the development cycle, there is some degree of unpredictability with respect to timelines, and that is an unfortunate attribute of the market.

We are getting better at this.

We haven't been perfect.

It is a source of frustration.

But realistically we can't in effect, expect to have your cake and eat it too, you need the level of innovation that we pursue, is some uncertainty in the timeline.

Okay.

Okay.

I will get back in the queue.

Thank you very much.

Thank you.

(Operator Instructions).

Your next question comes from the line of Don McKenna with [DB McKenna].

Please proceed.

Good afternoon.

I would like to follow-up on the comments you were just making about the numbers of opportunities and prioritizing them, and that is something you have talked about for a number of years, and having so much on your plate it is just a matter of which ones you want to go after first.

The fact that you had that for years now, and yet we continue to see sales decline, would that be an indication you have picked the wrong ones to go after?

I wouldn't say so.

I think regarding the comment about the number of years if we look at the timeframe within which we put in place and expanded marketing and selling infrastructure, that is an effort that goes back in terms of its initiation to less than three years ago, and in terms of bringing the complement of talent onboard, I would say less than that.

And again, I would make the comment, Rome was not built in one day.

I think we have to be realistic with respect to timeframes.

Generally speaking with respect to the focus on markets, and what it takes to make penetration in each of the markets that we targeted, we think we are on the right track.

This has been some fine tuning as you would expect.

I can't say that everything that was originally targeted is still at the top of the list of priorities, but for the most part we see in each of the markets that we have identified as being strategic, ranging from one end of the spectrum automotive, which is a very long-term market opportunity, to at the other end of the spectrum, let's say Intel sockets or other server opportunities or communications opportunities, we know these markets and with all of the products that they are needing is supporting the market initiatives, we see common delineator characteristics.

Do you still see the goal that you announced probably three or not three, but maybe a year and a half ago of tripling sales in the five-year time period as being achievable?

Yes.

It will not clearly at this point turn out to be achievable in that timeframe in which we originally targeted that goal, but I firmly believe that we have the technology, the products, and the vision and the infrastructure in the front end of the business and back end of the business to deliver that.

And it is unfortunate that we are sitting in a situation where we have had setbacks with supercomputing and defense, or the near term market would be looking a lot better than it is.

What would you say your timeframe is now to accomplish this?

Obviously we got to, first of all, reverse the revenue trend.

It has been heading in the wrong direction, and as you heard me say, as you measure it from the perspective of top line or bottom line, you aren't going to be seeing that this quarter, because in effect the quarter was casting complete, based on bookings level in the fourth quarter and the third quarter prior to that, which were very depressed.

But if we see a continuing positive trend in terms of the bookings rate and book to bill ratio as the year progresses, we should see the inflection point from which that 3x5 reorganization should be measured given where we now are.

Okay.

And I have one last question for you, too.

And that is if you could just kind of give us a little bit of the rationale about the stock buyback, as opposed to paying out that excess cash in the form of a dividend?

Well, obviously we are not making money.

We just lost a pretty substantial chunk of money, and we are going to be losing probably a little more this quarter.

So in my mind it is not the time to even think about dividends, and regarding the opportunity with the Dutch auction, simply stated we see the stock as representing a good long-term investment, and that is why we made the offer back in November.

Okay.

I will get back in line, too.

Thanks.

Thank you.

The next question comes from the line of Alan Hicks.

Please proceed.

Can you an update on the issues with Synqor and progress you are making with the integrated bus converters?

So the litigation goes on, and I don't have any significant update to make with respect to that.

But I you can say that we are making progress with respect to selling larger quantities of IBCs to a growing customer slate.

Okay.

So your orders are increasing in that area?

Our orders are increasing in that area, but to be clear what we have seen in the first couple of years of our effort in that space, particularly in the very early timeframe, and what we are still seeing today has been greatly impacted by Synqor's activities in the marketplace, meaning their threats to customers, and to some degree misrepresentation of the goodness of their legal position.

So do you think that will have to go to a final trial?

Very likely, yes.

Okay.

Thank you very much.

You are welcome.

And your next question comes from the line of [John Delmo, CUB] Capital.

Please proceed.

To kind of follow-up on Alan's question, in the communication market I understand that the IBCs are being held up by Synqor's litigation.

I am wondering, are you talking to these same companies about factorized power and are you having any success with that?

We as discussed in earlier conference calls, part of our strategy in entering the IBC market was to enter the IBC market and demonstrate by doing that the capability of our technology in an open frame break platform, that would enable customers not just to want to buy these products for their obvious clear superiority and differentiation, but also as a way to make clear to customers that it would make sense for them to pursue other solutions with us that involve other power component building blocks, including V-I Chips, Vicor SIPs, and so on, and so forth.

And we are seeing that with virtually every customer that has had an interest in IBCs, we are seeing a growing interest with respect to factorized power and other V-I Chip and power enabled solutions.

So we are still very much of the opinion that this was a very strategic choice that will have long-term value.

It has been unfortunately handicapped by the interference that Synqor has played in the marketplace.

It seems like with the 48 volts, that is a real sweet spot for you, and it has been a couple of years now.

Are you seeing any one getting close to adopting a factorized power solution, or using the V-I Chips or Vicor SIPs in their architecture.

Are you starting to see any kind of production orders in some of that market?

We are starting to see some production orders from that market, outside of the supercomputing space.

That is not with the IBCs, but with the V-I chips and the SIPs and all?

It is with the factorized power solution that involves in effect PRM building block, followed by current multiplier VTM.

That is real good news.

When do you think you will see something significant?

Will we see something later this year hopefully in that?

I think to some degree the same kind of opportunity that was answered in an earlier question and earlier answer, so as I mentioned earlier, once again, we were confronted with a situation where the actual timeframe and volumes turned out to be not as good as they once appeared to be.

On the other hand, there is a lot of incremental activity taking place, and we will see how that pans out.

I am optimistic with respect to that coming to fruition.

So it sounds like things are going, I mean I hate to say this, but it sounds like they have gone pretty well as far as activity, design wins, opportunities.

Just that it sounds like people are not taking what you thought they would, and things are getting pushed back, and you have the lawsuit.

Am I hearing that right?

Yes, if we could ignore financial reporting we would be looking pretty good.

Well, no, well, that is important because obviously we have been with you a long time because we believe in your strategy and your products, and it is important for us to hear that.

To the Dutch auction for a second.

From the numbers that we have seen, it looks like you are not going to get close to the amount of stock you would like to buy.

My question is if you do not get the amount of stock that you would like to buy, will you continue to buy stock on the open market after the closing of the Dutch auction?

I am not going to speculate with respect to that.

I think we made a decision late last year in November.

We obviously given changing demand and the worsening picture, we deemed appropriate to extend the expiration date.

I doubt there are going to be further expansions, and we will see where we go from here.

When you say further expansions, though, you have put a number out there.

It was $20 million, and so if you don't get your $20 million, are you still going to be inclined to spend that $20 million, or are I mean if things are going reel relatively well with the exception of the financials, I mean wouldn't it make sense for the Company to continue to buy their stock, if you already said you are willing to spend that much?

Help me out a little.

I am trying to understand what the logic would be?

I think the logic was as of November that the potential acquisition of $20 million worth of Vicor stock in the price range that we had targeted would be a good long-term investment, and that was the basis for making the offer.

And then again, subsequent developments caused us to expand the expiration date, and so here we are, and we will see where we go from here.

Okay.

One last question.

And on your capital additions, you went from Q2 of $1.5 millionto Q3 to $2 million, to $2.5 million in Q4.

So your capital expenditures keep going up while your bookings and revenue are going down.

You would not expect to see that, and I heard Jamie say a lot of that was from maintenance, but it still seems like are you building up for something?

Is there something that you are expecting?

At this point we are really, we have as I mentioned in my remarks plenty of capacity.

So capacity is not a short-term challenge.

Demand creation and demand realization are the short-term challenges, and once we get a little further along with that then we will start worrying about capacity again.

I am glad that we didn't do anything premature about further capacity expansion in the timeframe a year ago, earlier than that when it appeared that we might need it.

And at this point in the recent past, the investments that have been made have been as Jamie suggested, really maintenance type investments.

Capacity expansion is not on our near term radar screen.

$2.5 million sounds like a lot for maintenance.

Is this a recurring that we will see?

Is that about the run rate for maintenance on your cap now?

Frankly I don't have in front of me the details of what went into that.

It is not a huge amount given what we already saw in terms of capital equipment, and I can't tell you whether that is a number that might go up or down a little bit over the next few quarters, but I can say that we should not expect to see anything major in terms of capital equipment investment taking place for a while.

Great.

Thanks a lot.

Thank you.

The next question from the line of Don McKenna.

Please proceed.

I wanted to ask you about the headcount reduction of 50.

Is that primarily direct labor?

It is to a high degree direct labor.

Not exclusively.

There were some other changes made concerning the integration of some infrastructure to achieve greater economies.

But that was a significant component of it.

The beefing up that you did a couple of years ago on the sales and marketing, and bringing in some higher powered folks, their compensation is largely based on stock incentives.

Have you been able to retain all of those, or have they moved on at all?

No, they are here.

They are believers as I am.

So I am frankly not concerned with respect to that.

Okay.

Thank you.

And at this time there are no further questions in queue.

Thank you very much.

We will be talking to you in a few months.

Ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.