Viasat Inc (VSAT) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the ViaSat first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to Mr. Mark Dankberg, Chairman and Chief Executive Officer. Sir you may proceed.

Good afternoon everyone and welcome to ViaSat’s earnings conference call for our fiscal year 2006 first quarter ended July 1st, 2005. I’m Mark Dankberg, Chairman and CEO and I have with me Rick Baldridge, our President and COO, Ron Wangerin, Vice President and CFO and Greg Monahan, Vice President and General Counsel. Before we start, Greg will read our Safe Harbor Disclosure.

Portions of this presentation contain projections or other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the company. We wish to caution you that these statements are only predictions and may differ materially from actual events or results. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the sections titled “Factors that may affect future performance,” in the company’s forms 10-K and 10-Q.

These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. Stockholders and others are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any forward-looking statements. Forward-looking statements in this presentation do not include any impact related to the expensing of stock options under the Financial Accounting Standard Forward Statements 123R.

I will be referring to slides that are available over the web and we’ll start with our fiscal year ’06 first quarter financial results and a business overview perspective. After that, Ron Wangerin will discuss financial results in more detail. And finally, I’ll update our outlook and financial guidance and give a quick summary. And then we’ll take questions.

So starting with first quarter revenues, sales for the quarter were $100 million which is a new record for us and that’s up 19% compared to the first quarter of last year.

The second slide shows first quarter and pro forma earnings compared to last year. Pro forma earnings grew from $4.7 million up to $6.1 million and that’s up 28% and from $0.17 a share to $0.22 a share which is up 29%. Pro forma earnings exclude only amortization of intangibles due to acquisitions and we’ll provide explicit bridge data from pro forma to GAAP net earnings a little bit later.

This chart shows Q1 net earnings and net EPS. Q1 net earnings grew from $3.6 million to $5.2 million or up 45% and net earnings per share grew from $0.13 to $0.18 a share, up 38%.

So overall, first quarter results were consistent with our plans and a good start for the year. Ron will go into more depth on earnings and financials in a few minutes but I’ll put the key points here. You can see that revenues were strong, orders were strong and we continued to build our backlog. Earnings were in the range we planned; although margins are still a little lower than what we’re aiming for. As we expected, we also generated good cash flow from operations which left us with almost $20 million in cash at the end of the quarter.

The balance sheet is in good shape. Ron will talk more about that later. But we [trimmed] unbilled receivables and total receivables were in line with the revenue growth. We’re still aiming at minding the balance sheet further in the next couple of quarters, as well.

We’re still happy with our growth prospects, too. Defense segment reflects continued strength in the MIDS area and information assurance and we’re expecting continued growth in our satellite networks and broadband commercial areas.

As I mentioned, new orders continue to be strong for us with a $60 million MIDS Lot 6 award was a big factor. But we felt things were pretty good across the board. [Several of] orders is consistent with our plan so far for the year. We still have a good pipeline of opportunities on both defense and in commercial sides and anticipate that our business mix will remain pretty balanced for the near future.

We’ve used this next chart the last few quarters to show growth in backlog in the context of our quarterly run rates. And the three-year moving window shows pretty steady growth over the whole time interval. Our backlog has grown a little more sharply over the last few quarters. But remember new orders can be pretty lumpy and we won’t necessarily grow backlog every quarter. Our pipeline does include some relatively large individual orders that can have unpredictable timing; but in total, it seems pretty reasonable to expect that we’ll add quite solidly to backlog, again this year, as a whole.

So now, I'll turn to some of the main business highlights of this past quarter. Starting with government, our government business was strong this quarter. We set new records for sales and earnings. Margins in the government business continue to be good and our mix of production and development programs provides a good balance of current earnings performance and future growth opportunities. MIDS unit production was at record levels. Overall sales and tactical data should show healthy growth for us this year.

There’s still some international production awards pending that are good opportunities for us. Plus there should be additional growth in the value of our MIDS Joint Tactical Radio System development contract. Also, as we mentioned last quarter, we had reached a settlement with one of our former MIDS subcontractors that contributed to this quarter’s results.

KG-250 unit shipments were restricted somewhat due to product updates. New orders for KG-250 were very good in the first quarter so we’re anticipating that shipments in the second quarter will be good.

During the quarter, we announced we had won a development contract to demonstrate use of our KG-250 encryption engine to secure a satellite telemetry link. If successful, that demonstration can show that our programmable security technology is good for both the HAIPIS Internet protocol market and the more conventional Link encryption market. That would open up another big opportunity for us in the DOD’s crypto-modernization program. We think that’s a pretty big deal for us and we’ve been pretty happy about the number of new opportunities we’re seeing for our information assurance technology.

We’ve been continuing to work on opportunities in an area called Satellite Communications on the Move or COM on the Move or COTM. That basically uses our archived CDMA technology we developed for commercial VSAT and aviation markets in the mobile military ground vehicle market. We’ve been funded to participate in a couple different levels of trials and demonstrations which have gone well. So this seems like a promising area and there’s at least one near-term project we’re trying to work with partners.

And we’re still seeing a very good opportunity flow in our government markets in general. This includes product sales, some tactical and weapons [dealing] programs, information assurance, international sales of MIDS LVT and international MIDS JTRS participation and secure, portable and mobile broadband satellite terminals. In general, we feel like our government business is performing consistently with our plans for the year.

Overall, our commercial segment results are pretty consistent with our plans for this period. Our VSAT networks business has been pretty steady and led by the LinkStar™ and LINKWAY® product lines. “Voice and Data” magazine in India recognized ViaSat as the leader in the India market for the past year based on revenues. We are really proud of that and it helps [inaudible] that we’ve been steadily gaining market share, a little more so internationally than domestically so far.

Our Antenna Systems business also has been pretty solid. We’ve built a good backlog there, been consistently profitable and are also developing some new products.

WildBlue in the U.S. and Telestat in Canada both entered commercial service with our KA-band DOCSIS® systems near the end of our first quarter. That’s something that we’ve been working towards for a long time so we’re really happy about that and we want to congratulate both for achieving that milestone.

ViaSat’s a couple steps removed from the end customers; but our overall impression is that things are going pretty well and end users are happy. We started ramping up shipments of DOCSIS® satellite modems and U.S. Monolithics Ka-band transceivers during the first quarter and plan to continue to grow shipments this quarter. Our financial results in this business are still being driven by developing, development and testing expenses primarily for network infrastructure. We put out some important development milestones to compete; but if things go as planned we expect that unit shipments will grow, our manufacturing costs will continue to decline, infrastructure development expenses will decline and we could be incrementally profitable here by the end of the fiscal year. We’ll continue to learn more each quarter.

Local broadband is going a little slowly but steadily. The number of Boeing Connection commercial flights continues to increase. And we’ve also received initial production orders for Connection's Maritime Service. Initial product deployments started with ARINC's SKYLink Business Jet Service. We suspended new unit shipments there because of a problem with a subcontractor supplied module, but believe we have that under control and there are several customers in service now.

We also did a demonstration with Gulfstream at the Paris Air Show and we’re exploring expanding service into Europe. We’re also pursuing other outlets for the technology, including ground vehicles for military and the passenger trains.

And finally, U.S. Monolithics is also going steadily. The consumer broadband Ka-band transceivers are in production, which will begin to favorably impact results there. And we’re very pleased with steady progress from developing military applications of their technology.

So at this point, I’d like to introduce Ron Wangerin, our CFO, who will discuss the financial data in more detail.

We’ll start with results from operations with a segment perspective first, then discuss the rest of the P&L, followed by discussion on the balance sheet and then cash flows.

In the government segment, revenues for the first quarter we $53.5 million, a 41% increase over last year and a new record. The increase in the government revenues for the quarter are attributable to increases in tactical DataLink sales, principally MIDS production sales and the new MIDS JTRS development program, offset by reductions in information assurance development revenues and mobile Satcom products year-over-year.

In the commercial segment as you can see, we have a new format segregating our satellite networks business from Antenna Systems. And this is consistent with our external reporting in our 10-K and upcoming 10-Q.

Revenues for the quarter were $47.5 million, which was basically flat from the first quarter of prior year. There were increases in Antenna Systems revenues which were due to higher backlog and business activity offset by reductions in satellite networks revenues which was due to lower consumer broadband funded development year-over-year.

For segment operating earnings, the government segment posted first quarter operating earnings of $10.3 million which represents an increase of about 82% from prior year and a new record. The increase is primarily related to year-over-year higher sales of MIDS production units and improved margins in this area, partially offset by higher selling expenses of $1.6 million reflecting higher proposal and sales activities, $600,000.00 in warranty accruals related to KG-250 products and higher independent research and development expenses of $900,000.00. The increase in operating margin also includes a benefit related to our MIDS subcontractor legal settlement we discussed on the last call of $2.7 million.

Commercial segment operating margins saw improved results from our Antenna Systems business from improved program performance; but this was offset by lower satellite networks operating margins. These margins are impacted by higher year-over-year research and development expenses of $600,000.00, a higher than planned investment of $900,000.00 related to a new commercial radio frequency micro-positioning technology and continuing development and start-up costs of our DOCSIS® based satellite consumer broadband system. These investments overcame the earnings from other portions of our commercial segment and resulted in negative operating margins for the quarter.

As we look at the rest of the P&L, for the first quarter we experienced very good year-over-year revenue growth. Results for the quarter, again, included $2.7 million benefit related to the legal settlement with the MIDS subcontractor we discussed previously.

SG&A expenses were slightly higher year-over-year mostly due to higher selling costs due to increased proposal activity and sales levels. And we spent about $550,000.00 in the quarter to complete our year-end Sarbanes-Oxley assessment. Both of these contributed to SG&A growth.

R&D was up significantly in the first quarter year-over-year due to the development of new military satellite communication products and next generation VSAT equipment. We expect R&D to increase in fiscal year 2006 over fiscal 2005; but we will be dependent on the mix of programs we are working on and our overall performance.

Quarterly amortization of intangibles is lower for the first quarter year-over-year due to the completed amortization of certain intangibles. The quarterly amount is expected to remain constant during the year.

Other income and expenses reflect higher expenses related to the unused portion of our credit facility which has doubled from $30 million to $60 million from last year, and interest expense accrued related to prior year amended tax returns.

Our income tax provision for the first quarter reflected projected annual effective tax rate of 19.6% for the year. The estimate was derived from a normal statutory rate of approximately 40%. [Plus] amounts are estimated research and development tax benefits, extra territorial income deduction and the new manufacturing credit.

The effective tax rate is lower year-over-year because at the end of the first quarter of last fiscal year the R&D credit had expired and then was subsequently reinstated in our fiscal third quarter. Overall, our net income for the quarter remained strong.

We include this next slide to show the difference between GAAP and non-GAAP of pro forma earnings and per share amounts. Pro form results only exclude the effect ogof acquisition-related intangibles net of tax impact.

According to the balance sheet, cash and short-term investments increased by approximately $4.6 million during the quarter. And we’ll discuss this further when we turn to the cash flow statement. As we look at accounts receivable, still the accounts receivable increased almost $19.5 million quarter-over-quarter. This was due to the higher revenues, strong product shipments and the achievement of certain development milestones which reduced unbilled receivables by $5.8 million.

I want to point out that we had strong revenue growth in the quarter and the result was growth in billed receivables while unbilled declined. So billed receivables declined about $5.8 million in the quarter. Progress was made overall on MIDS and Enterprise VSAT programs while our SurfBeam programs remained roughly flat quarter-over-quarter. Overall, we anticipate further progress though in unbilled balances over the next several quarters.

Inventory was reduced almost $1 million in the quarter mostly due to strong product sales. We expect inventory to continue to go down slightly next quarter but could be influenced by end-of-quarter timing of shipments.

Goodwill and intangibles were reduced by the quarterly amortization of intangibles. Net property and equipment was up over $1 million due to capital additions. We expect capital expenditures to continue to increase over the next several quarters primarily for facility expansion and to support general business growth. The increase in other assets primarily reflects the increase in long-term deferred income taxes off-set by quarterly amortization of capitalized software.

As we look at the liabilities and equity side of the balance sheet, the accounts payable increased in line with the increase in revenues. Advances were up $3.4 million quarter-over-quarter reflecting better terms on a number of different contracts. At the end of the quarter, we continue to have no outstanding borrowings leaving our full line of credit available less standby LC’s. Therefore, at the end of the quarter, we had $55 million available under our line of credit.

Other current liabilities were basically flat quarter-over-quarter but there were some ups and downs. Warranty reserves increased quarter-over-quarter due to shipments of MIDS units, DOCSIS® satellite modems and VSAT systems and the KG-250 warranty accrual. This was offset by reductions in 401(K) and performance bonus accruals due to the payments made in the quarter. The continued increase in other long-term liabilities reflects higher warranty accruals from increased shipments.

As we turn to cash flows, we had a good first quarter for cash flows generating almost $7 million in cash from operations. Our strong net income and non-cash add backs were the primary contributors outpacing the $1.9 million net working capital impacts.

As we discussed last quarter, the cash flows include $4.75 million received from the legal settlement and we paid out $6.3 million in 401(K) match and performance bonuses in the quarter.

Regarding cash from investing activities our capital expenditures are increasing consistent with our expectations and we received $1.4 million from the issuance of common stock during the first quarter mostly, the exercises of stock options. The net for the quarter cash increased by about $4.6 million.

As we look ahead, we expect to generate cash in the aggregate over the next several quarters, but maybe not every quarter individually, but we expect it to be positive overall. Next, I’ll turn it back over to Mark, who will talk about our outlook.

At this point, I’d like to talk about our outlook for the rest of this fiscal year ’06. Seems like we should get points for consistency because this outlook chart for the current fiscal year is exactly the same as we showed last quarter. Given how things have gone in the first quarter with a little higher revenue, a little higher earnings, strong MIDS production award, and a lower estimated tax rate you could say the probability might tend away from the lower end and maybe more towards the middle; but at this point we think it’s appropriate to leave the guidance essentially unchanged. We think mid-range is still a reasonable estimate at this point. There may be more of an opportunity for upward revision based on some further favorable events; but it will take a quarter or more for those to occur.

We still have a number of important new business targets, and to the extent that we can afford it we may invest any potential earnings upsides towards those targets should such upsides actually present themselves.

That covers all the points that we wanted to make; and, in summary, we’re really happy with the first quarter of fiscal ’06. We’ve had good growth, we met our earnings plan, we generated cash, improved the balance sheet, built backlog, reached some important milestones and we’ve been able to fund some important investments. Company-wide, operating margins are still a little bit lower than we’d like due to those investments; but there’s evidence we’re getting results from those investments. We’re still not quite there in consumer broadband but progress is encouraging. Some of the key things to watch going forward include expansion of the MIDS LVT and MIDS JTRS programs, information assurance, progress in mobile broadband and, of course, the roll-out of Ka-band consumer broadband service.

We’re happy with our opportunities pipeline and we’re optimistic about achieving sustainable growth for several years ahead. So thanks for listening and at this point we’ll open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Tom Watts with SG Cowen. Please proceed.

Congratulations, Mark, another good quarter there. I think Ron mentioned some of the areas that you’ve invested in. You invested more in the quarter that led to the margin shortfall. One of them was increased investment in DOCSIS® results. So I think it was $600K independent R&D. I didn’t catch what that was for. And can you give a sense of how much of that investment is linked to future revenue opportunities versus cost overruns on contracts?

A lot of, I'd say -- mostly we’re doing now is we’re still completing all of the developments that we agreed to do for our customers. We had said before that we were going to switch from doing a percent complete type of cost accounting to just expensing all that R&D. I think that pretty much accounts for it.

And then particularly on the WildBlue and also the Telesat contracts, they’ve rolled out commercially. Can you give us any sense of how things are going there and when we might start hitting reorder points for the SurfBeam terminal?

As I mentioned, we’re kind of -- a couple steps removed in the distribution chain. But overall, I think our impression is that it’s gone pretty well. And the intent of the reordering, we’re basically working with them on a forecast, a kind of rolling forecast mechanism; so those get updated on a quarterly basis and, in fact, this quarter’s orders reflect some additional orders of Ka-band terminals. Does that answer your question there?

Yes. It does. We’re already in there. And on the aeronautical broadband side, could you give us a little bit more of an update there and does it still look like we could see some acceleration there in the second half of the year?

The commercial aviation flight market is pretty much paid by Boeing and I think that it’s a little hard for us to tell. I think they’re going to be working off inventory for probably a quarter or more. What they’ve announced is they’ll be on the order, I think they’re going to go from on the order of let’s say 100 flights a day that have broadband service, let’s say that was a level maybe in May or June. They expect to be at maybe 200 flights a day by the end of the year. And that’ll involve a fair new number of modem deployments and also I think it will be a little hard for us to tell beyond that. Personally, I think a lot will depend on what Boeing’s plans are.

On the business jet market, we’re just now starting that and I think we’re looking at trying to expand the availability. The service is pretty popular now for new jet orders, especially with Gulf Stream. But, certainly, we’d like to expand into retrofit markets or other adjacent markets and I think probably early calendar ’06 we’ll know a lot more about that. I don’t expect a lot of change this calendar year.

And finally, just to verify the tax rate, that was 19.3% expected for the remaining quarters in the year?

We had 19.6 as our overall rate for the year, Tom.

19.6 for the overall year. Okay.

And your next question will come from Steve Mather with Sanders Morris Harris. Please proceed.

Mark, can you just comment briefly one more time regarding the commercial satellite networks business in margins. Is it largely consumer or an enterprise issue, would you say?

The enterprise margins are okay. They are not that different from the company’s margins as a whole. And on the consumer side, what we’ve been saying and I think this is the case is that the margins are really driven right now by our R&D expenses on infrastructure development and testing. So it’s really too early to draw any conclusions about the margins on a production recurring basis.

We still think we’ll be fine, actually. I mean that’s what we’ve been saying. It will probably be most of this fiscal year before we really have the bulk of that infrastructure development and testing behind us. And that’s where I think the margins for the business on a recurring basis will start to be apparent. Does that make sense?

Absolutely. Just one other question on a competitive side. It seems you have two things going for you. One, you continue to win contracts that seem like they will spiral into more development work; and you seem to win a high percentage of business that you go after. What do you, first of all, do you see it that way? And what do you really attribute that to from --?

Well, we’d like it to turn out that way and I think what we try to do is go after business that hits our sweet spot and we have a few areas we’re trying to grow what those are. And fortunately, for the last two or three years we’ve been pretty successful -- pretty good hit-rate in our sweet spot and one of the things that we said on the government side is that we tend to try to look at things more as a market than on a program-by-program basis; and so generally when we go after programs we do have a plan to expand into adjacent those areas.

I think we’ve been, so far, pretty fortunate. I’m glad you perceive it that way because that’s what we’re trying to do and we put up, I’d say, opportunities to continue to do that.

And your next question will come from Larry Harris with Oppenheimer. You may proceed.

If I could add my congratulations in terms of the results. Just a couple of things, one in terms of a clarification on the tax rate of 19.6% for the year. Should we expect that we’ll have an adjustment say in the September quarter so the effective rate in the September quarter would be below 19.6%? How should we be thinking about the tax rate on a quarterly basis?

I think using 19.6 is -- that’s what we’re using because that's kind of -- that is what our estimate is for the year currently. As we go through each quarter we update our estimates. I mean, the big drivers are the benefits we’ll get from R&D tax credit, the ETI deduction and this new manufacturing credit. And we have estimates that we develop for the year in the first quarter and as you progress through the year some of those estimates become actuals and you get better information as they go. So at this point, I would use that as an annual estimate.

There is one fairly significant thing that could change it and that is the R&D tax credit currently is set to expire on December 31st of this year; and, therefore our 19.6% rate only has three quarters of benefit in it because we can’t use it because the law is set to expire. To the extent that that changes through acts of Congress and whatnot, then there may be an opportunity for it to go lower; but until that event takes place we don’t know.

And with respect to the JTRS program, it looks like Boeing has been turned back on again but perhaps at a somewhat slower pace than before. Do you see any significant expansion potential with the MIDS as a result?

I think there's opportunities. A lot will depend on individual platforms and the schedules of the two programs, I think. What you are seeing, I think, are a couple of development efforts that are aimed at particular markets and I think what will happen is we’ll see specific applications and platforms probably start to choose among those. Right now, the MIDS JTRS program is aimed for those to replace the MIDS LVT AVS and it will be up to the program office to determine whether or not they respond to platforms. So that will be the indication that things are happening is what the program office decides to do. And they will do that in response to inquiries or initiatives from particular platforms that might look at it in the schedules, or capabilities and specific radios. But I think the potential is still there for sure.

And your next question will come from Kevin Spellman with BVM Asset Management. You may proceed.

You talked a little bit about starting shipments again of KG-250. Has that revised software spec come out? Isn’t that what you were waiting for?

There were a couple of issues. One was there had been a more current version of the HAIPIS inoperability spec that we were going to release and I believe that release is this month. So I think it’s scheduled to go out this week. I actually don’t know for sure. [INAUDIBLE].

There also were a couple of product updates that we were making that were outside of what the HAIPIS spec, besides the HAIPIS spec update, and those were kind of features or operating tweaks that specific customer committees were working for. And those are incorporated in that same release.

And so do you expect that to now kind of head up and grow again?

Yes. Definitely.

We’ve been waiting on international MIDS for a very long time, things like Spain and Portugal and all those. Can you give us any sort of update or do you really have any idea when those will be awarded?

The process of actually initiating, executing contracts is just long and it’s pretty bureaucratic and it involves bureaucracies across nations. So it’s hard to predict. We know there is a certain volume out there. We have certain expectations of how we’ll do. We’re trying to bake that into our plans; but it’s really hard to predict timing and that’s part of why when we talk about lumpiness in orders and whether or not we’ll have a positive book to bill every quarter, it’s a little difficult for us to tell.

But if you took the aggregate and you throw in Turkey and Taiwan and all those, what is the potential that’s left in the international side?

International altogether, we’re talking a ten-year period. There is a billion plus -- a billion up to 2, actually. It’s in that range. So there’s still a lot to go. A little bit of that will be influenced by MIDS-J but I think a lot’s going to be LVT’s.

I see the F-22’s they were just talking about how they are going to go ahead with adding Link-16 to that and how much incremental --?

I may not be the most current on this; but the plan for exactly how they are going to implement Link-16 on F-22’s has been changing a little bit. This is an FP-22 program issue. And I think what they are going to end up doing is they’re going to try to modify the integrated avionics that they have onboard the platform and it may involve modules or compliments from MIDS LVT’s but probably won’t involve complete terminals. And so I think that who is going to participate in that is a little bit up in the air still.

But they’ll have to tap one or the other of these?

Yes. I think so.

Can you give us some idea of how many DOCSIS® modems you are cranking out at the moment and how many you foresee as the year progresses?

I think we said in our release we delivered a little over 12,000 this quarter. About half of those were delivered in the last month of the quarter so our production rate is going up into that range and up from there. So it also -- there’s several moving parts so if you have a shortfall of one of the components you don’t need a glut of some of the other ones.

It’s still early, we’re still ramping production and they’re still kind of coordinating the logistics between all the various parts, Kevin. So, we can’t give you an exact per month forecast of what’s coming out. We’re also delivering to multiple parties, so we’re delivering some KU versions of that, we’re delivering to Telestat and to WildBlue. We expect to be, again, over on a monthly basis prospectively to be more like what we did for last quarter.

So more than 12,000.

In that range; in the 10 to 12,000 range for the internal.

Do you still have a decent demand for KU terminals?

Yes. We do.

Okay.

I think the Ka-band market is really what’s going to establish the market and that’s what’s going to pace things. But the KU is still pretty significant in the aggregate because there’s more individual customers. What you’re hearing is it’s still early. I mean they just entered service in June. I think things are going pretty well but there is still a lot that has to be confirmed and I think we’ll know a lot more next quarter.

I peruse the world, looking for experiences from users of WildBlue and it appears there were a lot of issues that were blamed as bad modems that turned out to be things like cabling and pointing and even the pole they’re mounted on. Have you had to take back equipment that’s faulty or is it more along installation problems?

We can’t say it’s been zero; but it’s insignificant.

Yeah. The number of modems that we’ve reworked I’d say is pretty small. I’d say overall we’re pretty optimistic. But it’s a complicated roll-out and there’s a lot, like Rick said, there’s a lot of moving parts. But I think it’s gone pretty well so far.

Users seemed happy.

No, they want more, there's no doubt. We’ve started off a little slower than what they’d like to see so we’re working on that.

Your next call will come from Jim McIlree from Unterberg, Towbin. You may proceed.

Ron, I’d like to ask the question Larry Harris asked, again. You’re looking for a 19.6% tax rate for the year?

Yes.

But you had higher than that in Q1. That implies at least in some quarter or quarters it will be lower and I think the question was do you make that -- do you have that make up in Q2 or is that spread throughout the year?

Our rate in Q1 was 19.6% which is our overall rate for the year that we are expecting. So when we look at it we’re applying 19.6 to each of the following quarters; but as we progress through the year we’ll update our estimated benefits with our actual experience and modify the model accordingly and then there’s this R&D credit expiration thing that we’re attracting as well. We’re using 19.6 just for the quarter and for the year.

Okay. I was looking at the pro forma tax rate not the actual. And then the guidance calls for $400 to $425 million in revenues, second half stronger than the first half. But you are already at $100 million in Q1, so it seems like either you’re going to have a down Q2 sequentially or maybe it’s 425 to -- 425 is more like the midpoint of the guidance that could go higher. Am I reading that right?

I wouldn’t be that aggressive. I think there are still some lumpy events and I think that just because we had a really strong first quarter, I think we’d like to take a little measured and responsible approach to guidance. But I think that your observation that we did $100 million in the first quarter and four of those would be $400 million, that’s a correct observation. And we would have to go backwards a little bit if we’re going to grow in the second half and still only hit 400. But that's not necessarily what we’re expecting; but we’re trying to provide a range.

Right. But is there any reason to expect that the September quarter is down sequentially?

Right now I don’t think we see that. We’d probably see it probably fairly flat revenue-wise.

And lastly, the government operating margins were up substantially over the prior quarter. What is that attributable to?

[Well, remember --].

I’m sorry. Never mind. I withdraw the question.

And there are no further questions at this time. I’d like to turn the conference back over to Mr. Dankberg for closing remarks.

Thank you. That includes all the information that we wanted to present. Thanks everybody for your time and attention and we’ll look forward to speaking with you the same time next quarter.

Ladies and gentlemen, thank you so much for your participation in today’s conference. This does conclude the presentation. You may now disconnect. Have a great day.