威騰電子 (WDC) 2015 Q2 法說會逐字稿

Good afternoon, and thank you for standing by.

Welcome to Western Digital's second-quarter financial results for FY15.

(Operator Instructions)

As a reminder, this call is being recorded.

Now, I will turn the call over to Mr. Bob Blair.

Sir, you may begin.

Thank you.

As we begin, I want to mention that we will be making forward-looking statements in our comments and in response to your questions, concerning, among other topics, our position and opportunities in the growth of data and the storage ecosystem, the growth areas in storage, our investment focus, our product offerings, and our customers' responses to our product offerings.

And demand outlook in our financial performance, including our financial results and expectations for the March quarter.

These forward-looking statements are based on management's current expectations, and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our 10-Q filed with the SEC on November 4, 2014, and those listed in our registration statement on Form S-3 filed with the SEC on November 5, 2014.

We undertake no obligation to update our forward-looking statements to reflect new information or events.

In addition, references will be made during this call to non-GAAP financial measures.

Reconciliations of the differences between the historical non-GAAP measures we provide during this call to the comparable GAAP financial measures are included in the quarterly fact sheet posted in the investor relations section of our website.

The non-GAAP forward-looking guidance we provide during this call excludes amortization of intangibles related to the acquisitions of HGST, sTec, VeloBit and Virident, and employee termination, asset impairment, litigation-related and other charges.

Because we currently cannot fully quantify future amounts for those excluded items, we are unable to provide guidance for or a reconciliation to the most directly comparable GAAP financial measures.

The impact of these excluded items may cause the estimated non-GAAP financial measures to differ materially from the comparable GAAP financial measures.

We ask that participants limit their comments during the Q&A session to a single opening question and one follow-up question.

I also want to note that copies of remarks from today's call by Steve Milligan and Olivier Leonetti will be available on the investor section of Western Digital's website immediately following the conclusion of this call.

I now turn the call over to President and CEO, Steve Milligan.

Good afternoon, and thank you for joining us.

After my opening remarks, Olivier Leonetti will provide additional commentary on our December quarter performance, and our outlook for the March quarter.

I am pleased with our financial results in the December quarter.

We achieved strong revenue, gross margin, and earnings performance.

We also generated significant cash flow from operations in the quarter, excluding the impact of the Seagate arbitration award.

The diversified nature of our business, together with ongoing secular growth in data, and crisp execution by our HGST and WD subsidiaries, continued to enable us to consistently deliver strong financial performance.

Market dynamics in the December quarter were in line with our expectations.

In our business we saw particular strength and demand for capacity enterprise and video surveillance hard drives, and for enterprise SSDs.

As anticipated, there was a seasonal demand uptick for branded products.

We expect ongoing hyperscale cloud deployments, coupled with our expanding product portfolio and customer engagement model, to continue fueling our growth in capacity enterprise for the foreseeable future.

Petabyte growth in this category is expected to remain strong.

Our flash platform solutions business, which includes our expanding portfolio of enterprise class SSDs, maintained its growth trajectory in the quarter, delivering revenue of $187 million.

The demand outlook for the March quarter reflects a normal seasonal decline, with moderation in client, branded products, and performance enterprise, with stable demand in capacity enterprise.

We believe overall supply and demand and associated inventory levels remain balanced.

I continue to be encouraged by the ongoing stabilization of the PC market, where demand has been in line with our expectations.

Furthermore, I am encouraged by the market's response to our strategic growth initiatives, which we believe position the Company to thrive in the evolving data storage ecosystem.

We have strengthened our value proposition by enhancing our technical expertise, expanding our product portfolio, and investing in our go-to-market capabilities.

We will continue to prudently evaluate investment opportunities to advance these initiatives.

We gained traction in key markets during the December quarter.

Our broad line up of high-capacity hard drives, including those based on our proprietary HelioSeal platform, continue to be embraced by both traditional enterprise and hyperscale data center customers.

We continue to invest in high-growth vertical market applications.

Specifically, we have seen strong customer acceptance of our WD Purple hard drives in the security surveillance market.

We launched a six terabyte model in the December quarter that has been well received by customers.

We expect strong ongoing growth in this space, given the rapid adoption of digital video cameras and security surveillance systems worldwide.

There continues to be strong growth momentum in branded with our portfolio of My Cloud solutions, addressing both the consumer and prosumer markets.

The My Cloud software and apps have now been downloaded by more than 4 million users worldwide

We are engaged with customers and partners on our recently announced Active Archive platform.

Proof-of-concept systems are up and running, and initial customer feedback has been positive.

This new category of storage solution will feature high-density peta-scale capacities in a single rack, and deliver entirely new levels of storage efficiency and value.

And as a reminder, we expect revenue growth from our Flash Platforms business to outpace that of the industry.

Before turning it over to Olivier, I would like to thank and recognize our employees worldwide for helping to deliver a strong second quarter.

Our consistent financial performance is a testament to the strength of our team, a well-diversified business, leading products, and a customer-centric engagement model.

Olivier?

Thank you, Steve.

Expected seasonal demand and consistent execution helped us exceed financial expectations in the December quarter.

Industry shipments were in line with the TAM implied in our guidance provided in October.

In our business we saw continued strength in capacity enterprise, the anticipated seasonal increase in branded products, as well as continued steady demand in performance enterprise.

Aggregated channel inventories of Western Digital products remain within our four to six week range.

Our revenue for the December quarter was $3.9 billion.

This included $187 million in revenue related to our Flash Platform Solutions group.

We shipped a total of 61 million hard drives, at an average selling price of $60.

The quarter-over-quarter increase in overall ASP was driven by strength in capacity enterprise, surveillance, along with the seasonal improvement in client and branded products.

Our gross margin was 29.1%.

Our non-GAAP gross margin was 30.5%, which is better than our implied guidance, due to business mix.

This excludes $55 million of amortization of intangibles, and other nonrecurring charges.

Operating expenses totaled $644 million.

Our non-GAAP operating expenses were $620 million, excluding amortization of intangibles, restructuring charges, and the flood insurance recovery.

Expenses were higher than our implied guidance due to incentive compensation and stock appreciation rights.

Tax expense for the December quarter was $20 million, or 4% of pre-tax income.

The tax rate reflects the retroactive extension of the US federal R&D tax credit that was signed into law during the December quarter.

Our net income totaled $460 million, or $1.93 per share.

On a non-GAAP basis, net income was $539 million or $2.26 per share.

This includes the $0.07 per share tax benefit from the R&D tax credit.

Turning to the balance sheet, in the December quarter, we generated $243 million in cash from operations, and our free cash flow totaled $97 million.

As a reminder, we paid a total of $773 million related to an arbitration award in the December quarter.

Our CapEx totaled $146 million, or 4% of revenue.

We repurchased 3.2 million shares for $309 million.

We also declared a dividend in the amount of $0.40 per share.

We closed Q2 with total cash and cash equivalents of $4.9 billion, of which approximately $1.4 billion was held in the US.

I will now provide guidance for the March quarter.

We expect revenue to be in the range of $3.6 billion to $3.7 billion.

Gross margin percentage roughly flat with our Q2 performance, excluding the amortization of intangibles.

R&D and SG&A spending of approximately $610 million, excluding the amortization of intangibles.

A tax rate of approximately 7.5%, and a share count of approximately 237 million.

Accordingly, we estimate non-GAAP earnings per share of between $1.90 and $2 for the March quarter.

Operator, we are now ready to open the call for questions.

(Operator Instructions)

Amit Daryanani, RBC Capital Markets.

Thank you for taking my questions.

Two questions, and a follow up.

First of all, can you talk on the pricing dynamic that you are seeing this quarter and potentially in the March quarter?

One of your peers reported a couple of days ago they talked extensively about pricing concerns starting to creep up, so I'm curious what you are seeing and what you expect as it goes forward?

So if you look at, and this is Steve, if you look at our fiscal Q2, so the quarter we just finished, and it is consistent with my commentary, we saw nothing unusual from a pricing perspective, versus our expectations.

And we see nothing unusual this quarter from a pricing perspective, so what I would say is that pricing behavior and price levels are just simply consistent with our expectations.

Got it, and if I could just follow up MOFCOM, you issued a press release in December talking about the letter you received and the rectification you're doing.

Is there any update on that as you go forward?

Is there a time lime that we start to think about given the fact that you had the update in December?

Let me review where we are at.

We did announce recently that there were a couple of compliance issues that we had, that were resolved with MOFCOM.

We were pleased to get those issues behind us.

We also indicated that, given the resolution of those issues MOFCOM is now fully focused on reviewing our applications.

Those issues needed to get resolved before MOFCOM began the formal evaluation of our application, to have hold separate lifted.

That is in process, and ongoing, and as I have indicated before, our relationship and dialogue with MOFCOM is consistent and constructive.

But at this point, I can't provide any update as to timing as to when MOFCOM will provide any sort of ruling, but we are working with them in a constructive fashion, and we will continue to do so.

Thank you, and congratulations on a nice quarter.

Rich Kugele, Needham & Company

A couple of questions.

First can you just talk about the capacity enterprise segment and your ability to ship, officially given some of the data center build-out plans as calendar 2015 unfolds?

Sure.

Yes so we, this past quarter, saw good demand for our products, for capacity enterprise products, particularly from hyperscale customers.

We expect that to continue.

The last call, I talked about having good visibility to the middle part of calendar 2015.

That statement remains valid.

Really, what we are seeing is we're seeing meaningful growth in terms of petabyte deployments on behalf of our customers.

We expect that to continue through the balance of calendar 2015.

How that translates to a unit performance perspective is a little bit unknown at this point.

It will vary, depending upon the capacity point that has shipped as the industry transitions, initially from a 4 terabyte drive to a 6 terabyte drive, and then eventually at least for us, to an 8 terabyte deployment.

But we are confident that we are going to continue to see strong petabyte growth for our business, and for the industry in the capacity enterprise space.

And you are comfortable with your component supply and ability to go and hit those demands?

Well, I mean, there's a little bit of a qualification.

It's kind of a yes and no answer, Rich.

Supply is tight.

We are comfortable with where we are at, but it's tight, and so we are watching that closely.

And so these things, they use a lot of heads and disks, a lot of test time, and so we have got to be watching that closely.

But right now, relative to our expectations, we are comfortable with where we're at.

But if we see more variability from an upside perspective, which is obviously possible, we could have -- we could run into supply challenges.

Okay, and then I will ask you obligatory TAM questions.

In the December quarter, you obviously, 141 million, larger than what your competitor was talking about, but not too surprising.

When you look at normal seasonality, how would you look at the March quarter?

What should we be expecting?

So to reiterate what I talked about in terms of my comments, and I know that there were some analysts had different numbers out there, but the TAM for the December quarter pretty much turned out the way that we expected.

So the TAM, and we will see what numbers Toshiba publishes, but a TAM in the 141 million unit range was very consistent with the expectations that we had going into the quarter.

I would say that if you want to call it a surprise, the mix might have been a little bit better than what we thought, and therefore you see a bit higher revenue for us, and resulting margin benefit associated with that.

If we looked at where we think the TAM will shake out in March, I think something in that mid-130 million range is a reasonable assumption.

Okay.

Great, thank you very much.

Aaron Rakers, Stifel Nicolaus

Thanks for taking the question.

I do have a follow up as well.

Going back on the enterprise business, can you talk a little bit about the competitive landscape?

When we look at the numbers and look at what some of your component suppliers have reported, it would appear that Toshiba saw a pretty healthy quarter in enterprise shipments.

So can you talk about seeing Toshiba being at all a disruptor, and going after some of those high-capacity deals?

And if not, whether you think that changes on a going forward basis?

We didn't see anything unusual in that regard.

If we look at what happened in terms of our enterprise shipments, and I am sort of using rough numbers here.

I think our units increased on a quarter-on-quarter basis about 300,000 units, and a bit of that was capacity enterprise, a bit of that was performance enterprise.

If you recall, one of the things that we were focused on from a performance enterprise perspective, was to continue to broaden our product portfolio so that we had full coverage from a market perspective.

We began shipping our 15K small form factor drive, which allowed us to pick up some incremental business in the performance enterprise space.

And with our strong portfolio and position in the capacity enterprise business, we were able to increase our business a bit there.

We believe, although we will have to see how the final numbers shake out, that we maybe gained a little bit of share in that space.

And so, we are obviously pleased with that.

From a customer, call it, satisfaction perspective, but we did not see anything from a competitive dynamic perspective in that space that was unusual, or shall we say, alarming from our perspective.

Okay and as a follow up, maybe a higher-level question, but when you think about your capital structure and kind of the return of cash going forward, your closest competitor raised a very impressive 20-year note in this latest quarter.

How are you thinking about your return of capital and cash, and in particular how you think about the dividend trajectory on a going-forward basis, obviously in the context of the US held cash?

Let me take this question.

So we are always evaluating the way we deploy our capital, and we believe that the current allocation is probably a good balance between short-term management and long-term investment, prudent long-term investment in the business.

And at this stage, we have no particular plan to change the current capital allocation.

But again on the evaluation or the time.

To answer your question specifically about US cash, and how that is a constraint, we have a fair amount of liquidity in the US to our cash balances, $1.4 billion at this stage, but also debt capacity, which is quite high as well, our leverage ratio is in the range of 4.7, as you know.

So we can sustain our current allocation for at least four years or more.

So, one thing just to add to that, the key thing is that we are focused on longer-term value creation and making sure we had a capital structure that enables us to do that.

And obviously, the dynamics that influence that, our needs for cash, uses of cash, all of that, that is centered fundamentally on what do we need to do as a business to make sure that we are creating a long-term value for ourselves and our shareholders going forward?

Okay, thank you.

Keith Bachman, Bank of Montreal.

Thank you.

I had two as well.

Steve, I want to start with you.

You indicated that pricing was consistent with your view.

I wonder if you could flesh that out a little more.

What were like-for-like pricing either in December quarter, and/or what are you expecting in the March quarter?

And against that trajectory, are the new lighter enterprise performance drives deviating from the overall pattern associated with the rest of your product portfolio?

As an overall statement, Keith, we have been saying, I would call it low, more or less low single digit price declines like for like, and really, that has been holding more or less, I will call it constant or consistent, on a relative basis, over the last few quarters.

Frankly, we just did not see anything -- let me qualify.

There is always pockets -- this is a competitive business.

There is always pockets of where pricing in this segment might be doing something a little bit unusual here and there.

But we did not see anything unusual from a pricing perspective either last quarter, or we are not seeing anything unusual in terms of the March quarter period.

Okay, but within that, just if you could flesh, is near line -- does that also embrace the near line product portfolio, that you're not seeing anything outside of that low single-digit sequential declines?

Near line is a little different in the sense that, that this again is not a change.

The first thing is there's a fair amount of margin on those products.

We're also introducing higher capacity points in those products: 6 terabyte, preceded by 4 terabyte.

You're going to see declines for those capacity points that exceed the overall average, but that is not anything unusual.

When it gets introduced it may be in limited supply, as it begins to -- as the supply begins to increase, and you see greater customer acceptance of that, and as we come down the cost curve the price declines tend to be steeper.

But that is not nothing at all unusual.

And then Steve I wonder if my follow question, if you wanted to provide your views, if the TAM comes out to a mid-130 million, as you said, for the March quarter, how are you thinking about the TAM as you look out, particularly as it relates to PC clients?

I'm sure you're aware of a lot of consternation, especially what the PC market can deliver this year.

I wanted to see if you could just provide some high-level views as you look over the next couple quarters on the VHED TAM and/or that PC client TAM?

And that's it for me, thanks.

Sure.

We would expect at present, and of course our expectations can change, that the March quarter will be the low point for the year.

So at this point for the June quarter, we think that we can see either a flat to maybe slightly up TAM in the June quarter.

We'll obviously update our expectations for that as we move through the quarter, and then obviously, as we move through the back half of the calendar year where we get help from a seasonality perspective, we would expect to see the TAM increase from there.

Okay.

Fair enough.

Thanks.

James Kisner, Jefferies.

Thank you.

I'm going to press more on the PC market, or the client market.

Your competitor ventured a guess what the overall growth rate might be for the year for client units, I think they said low single digits.

Would you agree with that?

Do you have any view?

We have consistently indicated that we expect that PC sales will -- let me back up.

What has been happening is that we've been seeing low single digit decline on a year-on-year basis in the PC space.

That has been consistent with our expectation.

And we would expect that, going forward, that we'll continue to see that.

As that relates to hard drive shipments into the PC segment, we also have to contemplate the fact that more and more client units are using solid-state devices versus rotating magnetic storage, and so our -- we will see more of a drag than that low single digit in terms of hard drives shipped into the PC market.

And so, that is very consistent with what we have been saying for the last several quarters, and very consistent with our expectations.

And a quick follow up, could you update us on the uptake of the helium?

Did it contribute at all to ASPs, or is it not material factor there?

Thank you.

Relative to the helium, let me broaden that a little bit.

Clearly part of the reason that we saw an uptick in terms of our ASPs and also our margins, was due to the strength in our capacity enterprise business, of which helium is a part of that.

Helium as an individual category, particularly as it relates to the 6 terabyte drive, probably did not have a material impact.

We believe that as we transition to the 8 terabyte platform of the helium product, we will begin to see a bit of a larger impact.

Thank you.

Sherri Scribner, Deutsche Bank.

Thank you, I was hoping to get a little more detail on your surveillance market.

You called it out as being strong this quarter.

Can you give us a little more detail on the magnitude of that market and where it is represented in your unit numbers?

Yes, well is it in the consumer electronics number?

Our CE line on our data sheet is where the surveillance drives are contained, Sherri.

And it's a market that we expect will grow in low single digit growth rates.

So it is an expanding area, obviously we have seen some of the news, and the impact of that.

And so, it is a good market for us, and it also carries a gross margin profile that is above the overall corporate average.

Okay, great.

And then, just thinking about the enterprise SSD market, that business looks like it was up 20% for you year-over-year.

What types of growth expectations do you have for that segment going forward?

Thanks.

Yes we had a very large order at Q2 last year, if you look at the sequential, it is pretty strong.

And as we have indicated, we would expect to grow faster and the market is expected to grow at about 40%, and we are staying behind that trajectory.

Thank you.

Katy Huberty, Morgan Stanley.

Yes, how are you thinking about any risk of cloud vendors either catching up with demand or getting through their investment cycle, and some more lumpiness as we go into the back half?

Is there any visibility or high-level thoughts on whether we could see lumpiness further out in that market?

And then I have a follow up.

Katy, that's something that we keep a close eye on.

We are seeing, as I indicated strong growth from a petabyte perspective.

When we talk to our customers and they talk about what is happening from what they are seeing, they expect that petabyte growth to continue.

But at times, they can be a little bit unpredictable in terms of their order flow, and we saw that last year.

So we feel very comfortable with where we're at right now, but it is something that we monitor pretty closely.

We are confident that overall data growth will continue to be very strong.

It's just a matter of how the storage gets deployed against that, where sometimes the lumpiness can potentially come in.

Okay, and Seagate is talking about turning over their entire product portfolio this calendar year.

Is that something that impacts your OpEx, and if not, do you view yourself and any advantage with disadvantages they go through that cycle?

Thanks.

We are not expecting there to be any abnormal increase, I guess I would say, in terms of our operating expense as it relates to product deployments.

We are continuing to invest in some of these new growth initiatives, but that is different than refreshing our base hard drive product set.

So we would not expect that we would see a surge in our operating expenses as it relates to that, and we continue to expect that we're going to have a competitive product line-up to match up against our competitors.

Thank you.

Joe Yoo, Citi Research.

Thank you, Steve, I apologize that I'm asking another pricing question, but I was wondering if you have any thoughts on the weakness of the yen and its potential impact to hard drive pricing?

Did it have any impact to your pricing strategy, or do you think that maybe it affected Toshiba's behavior?

That would be speculative.

I don't know.

And so, it's question that ultimately would need to be directed to Toshiba to get a more specific question.

I would reiterate really one thing, in that relative what we saw from a competitive dynamic perspective, we didn't really see anything that was particularly out of the ordinary.

The other thing I would add, which is an anecdotal comment, I was Hitachi and the CEO there, and yen movements did not impact at all anything that we did.

But I don't know how it impacts Toshiba.

Great, thank you, and my follow up is on the flash platform solution, can you provide some tangible factors that give you the confidence that you can grow above the market?

Well, let me take the most tangible factor, is we have been going faster than the market.

So I think that history is probably the thing that gives the most tangible proof of that.

The other thing is that we have a product road map that we are focused on, that has been discussed and shared with our customers.

We are sampling some new products with our customers.

We're getting positive feedback.

And so, as we go through the development process and we go through, call it the prequalification process with our customers, our confidence in our ability to grow faster than the market continues to be solid.

Thank you, Steve.

Ananda Baruah, Brean Capital.

Congratulations on solid quarter.

Two if I could.

Steve, I would love to get your view on the need for the industry margin structure to continue to rise, as we talked about the cloud demand and hyperscale picks up and the negative supply environment there begins to tighten up.

The impact that could have on your ability to ship the overall TAM?

I would love to get your thoughts there, and then I have a follow-up as well, thanks.

Let me take that question in a different direction, rather than me speculating on where the industry margins go, let me talk about the things that are impacting our Business.

What's fundamentally happening from our standpoint is, the secular forces, if you want to refer to it that way, are basically -- what is increasing is those elements of our business that carry higher margins.

So we have a tailwind, in effect, that is pushing us to higher-margin opportunities.

Also, the things that we're investing in, these strategic growth initiatives, generally speaking, carry higher margins.

Right now 58% of our business is quote non-PC.

And we know, we said this in the past, that the PC market is more price-sensitive, and there is less ability to differentiate, and accordingly, those products carry lower margin profiles.

But as our revenue increases in the non-PC segment, generally carrying higher-margins we have a bias over time for our gross margins increasing, as opposed to decreasing over time.

That being said, we continue to have a stated gross margin in the range of 27% to 32%, but as these things continue to evolve, we will look at whether or not we need to reevaluate that gross margin range.

Got it, that is really helpful.

I appreciate it.

And just as my follow up quickly, do you believe that the TAM has a chance to grow in 2015 and 2016?

We believe that we will see low digit growth from an overall TAM perspective.

Got it, thanks a lot.

Steve Fox, Cross Research.

Steve, just going back over the pricing one more time.

I understand what you are talking about, just typical pricing patterns, especially as you go up to a higher capacity.

It seems like your competitor is saying that the typical pricing should not apply, because of the rising complexities and the tighter components, and just the overall cost of capacity.

Can you just react to that statement as to whether there is the potential for the industry to change in terms of how it looks at pricing as you go from 4 to 6 to 8 terabyte products?

It's difficult for me to comment on that specifically.

The bottom line to it is that I'm going to repeat two things, in that pricing was consistent with our expectations, and at the end of the day, in order for us to be able to do what we need to do, we have to have pricing that is competitive with the industry.

Whatever that means, in terms of what price declines are, is whatever it means.

But at the end of the day, we did not see anything particularly unusual.

And remember the margins in that business carry higher margins.

We are comfortable in general with where we are positioned in that regard.

Fair enough, it was worth a shot.

And then just as a quick follow up, your average capacity was up 24% year-over-year.

Obviously some of that, or a lot of that was driven by the enterprise capacity drives.

But can you dissect that a little bit further and talk about how average capacity looks year-over-year in some of your other products?

Thanks.

I mean we could, obviously as Steve indicated, we saw a big increase year-on-year in Exabyte in capacity enterprise.

If I look at the rest of the business platform and enterprise growing low single digits and the rest would be pretty much stable year-on-year.

So tying it back to the point that I was making earlier.

As more and more of our business is deployed against non-PC applications, generally speaking, those are higher mix products, whether it be branded products, it be surveillance, it be on the enterprise space.

So as our mix transitions from an overall business perspective, we are going to get a nice bump in terms of the average capacity point shift.

Great, thank you very much.

Joe Wittine, Longbow Research.

Steve, you acknowledge hard drives will lose share within the PC category, and we have seen that accelerate exiting the year.

So assuming your expectations of low single digit declines for PCs, is the current trajectory in your client units, which is down 7% or 8% on a year-over-year basis, is that a good guesstimate or barometer going forward of what the trajectory will be?

Thanks.

We expect, we anticipate, again we will see what Toshiba publishes, that we lost a little bit of share in the notebook space.

And that was primarily because -- which has happened over the last couple of quarters.

Some of that may have a little bit to do with gaming, and then also, that is where margins tend to be lower.

And that may be some of the area where we just choose to not participate in some of the business.

So I would say that decline is steeper than what the industry is seeing.

Helpful, thanks.

Jayson Noland, Robert Baird.

Great, thanks for taking me in.

Steve, a question on the archive market.

You have launched product that seems to be built specifically for that opportunity.

Could you talk a little bit about traction there, and what the potential is longer-term?

As I indicated in my remarks we got some, I hate to call it sample units, but we've got some customer applications running, and test units and that kind of thing.

And positive response so far.

Our customers are very pleased that we actually know how to construct a subsystem for them, given that we have been a component supplier for so long.

And we are encouraged, and I think it is fair to say that our customers are encouraged as well, with some of the progress that we are making in that area.

And when you say you will be moving up the enterprise stack, is this an example of that?

And will some of that be more obvious down the road, or is it mostly going to be things that happen behind the scenes?

Yes, this is an example of that.

We're going to have to see how all of that evolves.

We will look at opportunities to intelligently move up the enterprise stack, and we will do our best to do that, which we have done so far, in a collaborative fashion with our customers.

Our goal is not to compete with our customers, but to figure out a better way of enabling them, so that they can extend their value proposition to their customers, whether that be through other software, services, or other kind of offerings.

So that is what our base strategy is.

Okay, great.

Thank you.

Any more questions?

That was our last question.

All right.

Thank you again for joining us today.

In closing, I want to thank all of our employees and suppliers for their commitment and outstanding execution, and our customers for their continued business.

Thanks so much.

That concludes today's conference.

Thank you for participating.

You may disconnect at this time.