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Here’s the entire text of the prepared remarks from Corning’s (ticker: GLW) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. OPERATOR INSTRUCTIONS I would now like to turn the call over to Mr. Ken Sofio, Direct of Investor Relations. Sir, you may begin. Welcome to our third quarter conference call. Also, welcome to the people on the webcast. Jim Flaws, Vice Chairman and Chief Financial Officer will lead the discussion this morning and Wendell Weeks, our President and Chief Executive Office will join for the Q&A. Before I turn it over to Jim, you should note that today's remarks do contain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve number of risks, uncertainties and other factors that could cause actual results to differ materially. These risks are detailed in our SEC reports. Jim? Thanks, Ken. Good morning, everyone. Last night we released our results for the third quarter, which can be found on our Investor Relations website. In addition, for those of you with Web access we posted several slides this morning that will summarize the key data points from this morning's prepared remarks. The slides will be available on our Website after the call as well. Regarding our third quarter results, we are obviously very pleased to report sales near the top end of our estimate and earnings per share that were significantly higher than our expectations. Let me share with you some of the details. Sales for the third quarter were 1.188 billion, an increase of 4% over the second quarter sales of 1.14 billion. Third quarter sales driven primarily by higher volume in the display segment offset, by lower telecommunication segment sales. In comparison to the third quarter of last year sales were up 18%. Net profit after-tax excluding special items was $405 million in the third quarter, an increase of almost $100 million or 32% over the second quarter. In comparison to the second quarter of last year, net profit after tax excluding special items was up about 90%. A brief historical comment, this very strong NPAT is much higher than any quarter in 2000 when leaf fiber was at its peak. Earnings per share, excluding special items, were $0.26 in the third quarter and much higher than our expectations. This was an increase of 86% in comparison to our EPS x-specials a year ago. You should not, these are non-GAAP measures and a reconciliation to GAAP can be found on our Website. Our strong earnings performance was primarily the result of higher volume, improved manufacturing performance and display. I really should note that our third quarter results did benefit from nonrecurring tax benefits, which contributed almost $0.02 per share. Without this benefit, our EPS was still $0.02 above the top end of our guidance range. Now first, we were profitable in the U.S. during the third quarter, which helped reduce our overall corporate tax rate to 16%. Improved profitability was the result of higher royalty income and lower spending. In addition, we reached a settlement with the IRS on the audit of our 2001 and 2002 tax returns, which allowed us to release reserves about $15 million during the third quarter. This combination of these two items contributed about $0.02 to our third quarter results. You should not anticipate the same $0.02 benefit in the fourth quarter. You should also note that third quarter sales in NPAT were negatively impacted by foreign exchange used in translation during the third quarter versus the second quarter. Sales in NPAT were impacted by approximately $23 million each. Now, let me quickly walk you through the special items for the quarter. We reported a pre and after-tax charge of $68 million, or $0.04 a share, related to the ongoing mark to market adjustment on Corning shares to be contributed to the Pittsburgh Corning settlement. The charge was the result of substantial increase in Corning share price during the quarter 16.62 to 19.33. In September we had announced restructuring charges of $28 million pre and after tax, or $0.02 a share, primarily related to cost reduction initiatives in our telecom segment. We also announced in September, that Samsung Corning or equity invested that produces glass panels and funnels for CRT monitors and televisions would incur restructuring and impairment charges in the third quarter. Our share of their charges was $106 million after tax or $0.07 per share and is reflected in our equity earnings. This is the result of the rapid growth of LCD products, particularly LCD monitors, which has negatively impacted demand for conventional CRT products. We expect Samsung Corning to record additional impairment charges as future decisions on assets and work force are made. These decisions will likely not occur until 2006. We expect our share of those additional charges to be approximately 30 million. It is possible that the third quarter charges may be adjusted in future quarters as Samsung plans are finalized. One final reminder, these charges are all non-cash to Corning. We also, have determined that a separate impairment of Samsung Corning investment asset held on our books was not required in the third quarter. However, we will continue to monitor this closely as Samsung Corning completes its restructuring plans. For your reference, the asset value at September 30 on our books was $233 million. You should note that further deterioration of the CRT market could result in further restructuring charges at Samsung Corning and an impairment of the investment on our books. You can find a reconciliation of all these special items on our Investor Relations website. Gross margins were 46% in the third quarter, much higher than the second quarter and our own expectations. The substantial improvement was due to higher volume and strong manufacturing performance in our display segment. Equity earnings were $74 million in the third quarter, including the $106 million charge related to Samsung Corning. Excluding that charge, third quarter equity earnings were higher compared to the second quarter earnings of 172. The higher equity earnings were primarily the result of strong volume performance at Samsung Corning Precision, offset slightly by lower equity earnings at Dow Corning, which had been expected. I'll discuss SCP and Dow Corning results in more detail in a moment. So, let's move on to our segment results for the quarter. Starting with display, sales were $489 million in the third quarter, an 18% increase over second quarter sales of $415 million. The increase reflects sequential volume growth of 22%, flat pricing and an unfavorable change in the end. As a reminder, when I refer to LCD glass pricing it is on a mix weighted basis. Equity earnings from SCP were $114 million in the third quarter and much higher than their second quarter equity earnings of $85 million. As a reminder, equity earnings in the second quarter for them included approximately $10 million of one-time charges. Sequential volume growth for SCP was up 22% and their pricing was flat also, As a result, Sequential volume growth for our consolidated display segment, including our wholly business plus SCP was up 22% in the third quarter. Net income in display segment, which includes equity earnings, grew almost 50% from $243 million to $363 million. The significant growth in display segment net income was primarily the result of the volume growth, strong manufacturing improvement and also our lower tax rate in the Corning in the quarter. We recognize that the allocation taxes can be confusing and that is why we show it is a line item in our segment results. Where it fundamentally displays incremental sales translated into margin at a high rate. Gross margin in the third quarter, our wholly owned business, approached levels closer to SCP's performance. The increase in gross margin was the result of strong manufacturing performance. In comparison to the third quarter of last year, sales in our display segment grew 65%, primarily due to volume gains of 73%, offset by price declines of 2% and unfavorable exchange rates. Net income, including equity earnings, increased 155% in comparison to the third quarter of last year. Now, I'd like to spend a few minutes updating you on end market trends during the third quarter. I would like to stress we do not have perfect information. We use a variety of sources ranging from services that are available to you such as display search and retail tracking vendors; as well as our own discussions with customers and our own models. We think this information is useful but it is not perfect. With that in mind, you should know the following data has been derived from this aggregated industry. Sources that are considered this time to be only preliminary estimates. Final data for the third quarter will not be available for another month. Be clear, the data I'm referencing here relates to shipments from PC manufacturers and television set makers to retailers. The preliminary data end market shipments is tracking ahead of our forecast for all three end products, notebooks, monitors and televisions. Starting with notebooks, about 15 million was shipped in the third quarter, which is higher than our expectations. Increase of 13% over the 13 million shipped in the second quarter. Overall, we believe notebooks were about 31% of all computers sold. Turning to LCD monitors. About 24.5 million were shipped in the third quarter. Also higher than our expectations. In third quarter, we believe penetration of LCD monitors to total monitors sold was 69%, compared to 67% in the second quarter. For LCD televisions, approximately 5 million were shipped in the third quarter, a 16% increase over the second quarter. LCD television penetration was about 10% in the third quarter and consistent with the second quarter. We continue to believe that LCD television penetration is on track to be 10% of televisions sold for the entire year. As a result of the strong LCD television shipments to date, we now believe the market may do better than the 19 million shipped for year, which original which is higher than our original forecast at 18 million. A crucial factor for what will drive LCD television demand will be pricing. And we are encouraged by the pricing environment over the last 12 months. During that time retail prices for 32 and 26-inch televisions have fallen over 40%. You should note that our third quarter volume was the result of increased demand for Gen5 and higher glass. In second quarter Gen5 and higher accounted third quarter 77%, which was up from 75% in the second quarter. The mix of Gen5.5, 6 and 7 glass was about 33% in the third quarter, up from about 25% in the second quarter. Regarding our Taiwanese customers and their ongoing mix fab ramps, they appear to be generally on track. We're pleased to see that Taiwan panel shipments in September hit another all record high. Regarding our customer deposits, we received $155 million in cash in the third quarter and additional $13 million in October as expected. Including the $234 million received in the first half, our total cash from customer deposits this year was $402 million. We're pleased that all the deposits this year have been received on time. In the second quarter we also began issuing credits against these deposits as the customers began to purchase glass under the agreements. Credits issued $11 million in the third quarter and are now $13 million year-to-date. I would like to take a few minutes to address several market related topics that investors have asked us about over the past. You should note the following represents our opinions based on historical data, our models and discussions with customers. Our objective here is to share that data with you so you can form your own opinion on these topics. First topic pertains to inventory in the supply chain. There were several reports during the quarter that there was excess inventory in the channel especially for televisions. While we feel that there will always be a risk of excess inventory in the channel, we are not seeing it right now. In fact, recent announcements by Sharp indicated shortage of 32 and 37-inch TV panels. Our own analysis indicates LCD television inventories have increased marginally but within normal levels for this time of year. The TV business is more seasonal and the level expected to be double last year. So, we should be seeing more inventory to support the end market. Please remember the LCD television level is doubling versus last year. We have also called 14 set makers and their observations are that there is not excess inventory. Back supplies of certain large sizes are tight. We also believe there is not a significant amount of panel inventory at our customers' panel makers. As a reminder, there are certain metrics that investors can look at to gauge the level of panel inventory. One way is to monitor the monthly panel shipment data that is published each month by the Taiwanese panel makers. Another way is to monitor panel pricing. In times of rising panel inventory, panel makers will typically lower panel prices significantly to stimulate demand. Current data indicates the panel pricing was fairly flat in September for both LCD monitors and LCD televisions across all sizes. Nevertheless, we intend to watch inventories closely and sell through and be prepared to moderate production if we detect a backup. There has also been concerns expressed about panel over supply in the first half of 2006. While we cannot predict what the panel supply demand balance will be in future quarters, we can share with you how we view this balance and what we have seen historically. First, you should note that the panel supply and demand is hardly ever in perfect balance. In fact, since our record keeping began in 1998 the panel market has either been in a state of shortage or surplus. For most of 1998 there was a surplus of panels in the range of 5% to 15%. In '99 there was a shortage of between 10% to 15%. In 2000 to 2001 there was a surplus between 10% and 15%. And from '02 to '04 the panel market fluctuated between surplus and shortage. The takeaway here is panel supply and demand is always in flux. For investors, the key question here should be what levels of shortage and surplus are acceptable? What decisions were made by the panel makers during previous over supply and shortages? And what happened to glass demand during these previous cycles? Regarding what is an acceptable level of panel shortage or surplus, there is no clear-cut answer. To gain an understanding of the current market, we review the number of weeks of panel inventory and panel makers, monitor set makers and TV set makers. Today our analysis shows that inventory did grow during the third quarter but at expected levels given the seasonal nature of the consumer electronics industry. We believe inventories should peak within next month and then begin to decline as seasonal purchases accelerate in November and December. Regarding an over supply next year, there was a research firm report in September that predicted a 10% panel over supply in the first half of '06. It is too soon to comment on next year because we have not seen the fourth quarter sell-through. But investors should know that the industry has experienced 10% or higher over supply several times over the past eight years, without an impact to glass demand. While we cannot predict what will happen in ‘06, the determining factor for glass demand next year, will be the continued penetration rate of LCD monitors and LCD televisions. It is also important to note how panel makers have traditionally behaved during periods of panel shortage and panel surplus. During a shortage of panels, panel makers have typically increased prices, leading to higher profits and to capital spending for investment in new capacity. This eventually has led to over capacity and excess panels. During periods of this excess panels, panel makers reduced prices to stimulate demand, hurting their profits and reducing the amount of capital to invest. These lower prices eventually fuel demand, which again tightens available capacity and starts the cycle again. It is important to note these historical surpluses that drive panel prices down are necessary to drive the penetration to the overall industry growth. The take away here is there is a long history of panel shortage and surplus and panel makers adjust both price and capacity accordingly. The last question is; what has happened to glass demand since 1998 during these periods of panel shortage and surplus. Despite these shortages and surpluses, LCD glass demand has grown each year since 1998. In '99 during the 15% surplus of panels LCD glass demand grew 39%. During the 10% to 15% panel shortage of '99, LCD glass grew 85%. In 2001, LCD glass demand grew 40%, despite a surplus of panels by as much as 15%. And for those investors who are worried about glass pricing in times of panel over supply, the average price decline since 1997 has been 5% per year. Excluding '03 and '04 when glass pricing was relatively flat, pricing has fallen in the upper single digits on average since 1997. The main point here is even in times of panel over supply there may not be a correlating impact to glass volume and price. The key for us remains, to pace our glass demand with end markets not panel capacity. Which brings me to the next topic, seasonality. We've received a lot of questions on seasonality and how it impacts glass demand. Up till now glass demand has been driven by the penetration of LCD monitors and now starting LCD televisions. Seasonality has actually been more of an undercurrent to our demand. Something that we knew was there but did not impact us significantly. That will not always be the case. We clearly understand now that our glass business is strongest in the second and third quarters. However, if LCD television penetration progresses the way we think it will next year, this may overshadow the impact of seasonality. You should also note, it takes about three to four months for our glass to show up in a television monitor at retail level. So by and large the glass we shipped in the fourth quarter will be for products sold at retail in the first quarter. Glass shipments made in the first quarter show up, for the most part, in retail stores in the second quarter. With that in mind let me spend a few minutes discussing seasonality trends. First, for desktop monitors, sales have remained fairly evenly distributed by quarter for the last several years. Even sales of LCD monitors are fairly consistent quarter to quarter with only a slight trend upward towards the end of the year. Despite the fourth quarter up tick, you should note over the last five years, LCD monitor unit sales have been flat to up 15% sequentially in the first quarter due to penetration. Color TV sales have historically been more weighted to the fourth quarter but not as much as what you may think. You might be surprised to learn that the second biggest month of color television sales worldwide is January. As consumers make decisions ahead of such events as the SuperBowl and Chinese New Year and every four years, the Olympics. Over the last five years between 27% and 30% of all color TV sales in a given year occurred in the fourth quarter. So, while there is some sequential decline in color TV sales in the first quarter, it does not tend to be significant. For LCD television sales there obviously is less historical data. The data does suggest an even heavier weighting towards the fourth quarter. Over the last four years, between 37% and 41% of LCD televisions sold in a given year were sold in the fourth quarter. As a result, there has also been a sequential decline in LCD television sales into the first quarter. However, given the increased LCD television penetration, declines have been comparable to what we've seen historically in color television overall. So, while we're not providing specific display volume guidance for the first quarter, I can offer a few thoughts. Our glass demand will be driven by the continued penetration of LCD monitors and televisions. We expect the penetration of monitors and televisions to grow sequentially in the first quarter. We believe there will be a normal sequential decline in LCD TV unit sales in the first quarter. Although, we do expect to see twice as many LCD televisions sold in comparison to the first quarter of '05. Lastly, our first quarter glass shipments will most likely be used to fill the growing pipeline to meet second quarter end market demand. The last topic I would like to address for the investors is the potential impact of higher energy costs on consumers decisions to purchase big ticket items such as an LCD television. Why we cannot predict the future and the decisions consumers may make in light of higher living costs, we can share with you how color TV sales have fared during other historical re cessionary periods. This may provide some groundwork for your modeling regarding LCD television demand. In summary, the data indicate that during re cessionary times consumers continue to purchase color TV's. What we've found is the worldwide color television sales have increased almost every year since 1963 when they were first introduced en masse to the public. Going back to '63 there have been a number of recessions in the U.S. and worldwide. Specifically, in the United States we had recessions in '80, '82 and '90. In each of those periods, color television increased on an annual basis of 4% to 8%, which is in line with color TV growth projections today. We believe this was due to consumers need to save costs by traveling reducing travel and staying close to home and eliminating other entertainment choices. The only period of time when color television sales fell in consecutive years was during the global recession of '73 to '75. And during those two years color TV sales fell 13%. The '73, '75 recession is now 30 years and ago and we need to be careful translating consumer behavior then to today. It's important to point out, there are fundamental differences between that market and the one that exists today. First in 1973 color TV represented 50% of all televisions sold. In other words, in about ten years color TV had penetrated half the market dominated by black and white TV's. Today, LCD television represents 10% of television sales and its footprint is much smaller. In addition, there are numerous market factors that influence consumers decision to purchase a television today that did not exist in the '70s. Back then your choice was either black and white or color. Today consumers have a wide range of different TV choices. From LCD to plasma to DLP and other projection technologies. In addition, consumers are often driven to purchase these higher end televisions because of better content, technology such as the 16 by 9 format, high definition DVD and DVD players. High definition television content and digital signals overall. In summary, we do not believe that today's higher energy prices will materially impact consumer decisions to increase 23:47 new to purchase LCD televisions. Historical data suggests consumers will continue to purchase these televisions. And with enhanced entertainment choices and content available today, the average consumer has more incentive to purchase. Now, before I leave the display segment I would like to update you on the progress at our newest LCD manufacturing facility in Taichung, Taiwan. We have already worked three tanks and are producing good glass. The Taichung facility ultimately will manufactured generations 5.5, 6, 7.5 and larger substrates. You may have seen our announcement earlier this month that our board has approved a $425 million expansion of the plant. This investment will be used to fund the third phase of the facility. The majority of that expenditure will be incurred in '06 and '07. This announcement does not change our capital-spending estimate for this year. And was already included in our planned spending for next year. Initial manufacture from this most interesting this most recent phase will begin late '06. With production continuing to come online into '07. As with our other display expansions, this will occur in stages over a period of time and follow a modular construction plan that will be paced to meet end market demand. If end market demand slows we have the ability to slow or even stop some of the expansion necessary. We will also pace the construction to meet our long-term supply agreements with customers. I'm also happy to report that our Gen8 expansion at Shizuoka is well on track and will be complete next year. Now, moving to the environmental segment. Sales in the third quarter were $144 million. And as expected fairly consistent with sales in the second quarter. In our automotive product line, sales slightly lower due to weaker demand, primarily in North America. Diesel volume was slightly higher in the third quarter driven by retrofit sales to Korea. A segmented loss of $5 million in the third quarter, in comparison to a loss of $4 million in the second quarter. In the life sciences segment, sales in this third quarter was $70 million and lower than the second quarter sales of $75 million. The sequential decline in sales primarily due to an inventory build in the channel during the second quarter, which did not repeat in the third quarter. Third quarter sales were also negatively impacted by weaker Euro. The segment incurred a net loss of $7 million in the third quarter, compared to a loss of $4 million in the second quarter. The weaker performance is the result of higher development and engineering expenses as well as for lower volume. We are happy to report the conversion of our customers to new channel continues to progress. As a result, the impact to our life sciences revenues for this year will be between 5% and 10%. Now, moving to telecommunications segment. Sales in the third quarter were $398 million, a 4% decrease from the second quarter and in line with our expectations. Sales in hardware and equipment products were $182 million in the third quarter, down from $202 in the second quarter. Volume was primarily due to lower demand in North America and Europe. In North America the weaker demand was primarily related to FTTP, as Verizon continued to work through their excess hardware and equipment inventory during the quarter. Sales in our fiber and cable products in the third quarter were $216 million and slightly higher than second quarter. Fiber volume in the third quarter was up in the mid teens sequentially. Fiber pricing was flat. As a reminder, our customers can purchase Corning fiber through an outside cabler or through our own cabling operations. Some of the fiber that was shipped to our cabler, again, in the third quarter did not get sold until the fourth quarter. Sales and profits for us, are only recognized when cable fiber is sold to an outside third party. We have seen this occur throughout the industry as customers have shortened earlier lead times forcing cablers to keep more inventory on hand. The telecom segment second incurred a net loss of $30 million in the third quarter but that includes the restructuring charge of $28 million after tax. In our other reportable business, sales in the third quarter were $87 million. Slightly lower than the second quarter. Equity earnings for Dow Corning were $58 million in the third quarter and within our guidance range. Now, moving to the balance sheet, we ended the third quarter with $2.4 billion in cash and short-term equivalents. And that compares to about $2.1 billion at the end the second quarter. The most significant cash inflow during the quarter was the $141 million in customer deposits net of credits. The most significant outflow in the second quarter was $378 million in capital expenditures mostly for display expansions. Free cash flow during the third quarter was $219 million. We continued to make progress on our debt reduction program during the quarter. In September, substantially all of our holders of 96 million in convertible notes, elected to convert to common stock. On the conversion, we issued 6 million shares of stock. As a reminder, these shares were already included in our diluted weighted shares outstanding. We're happy to report the Company reached a new financial milestone in the third quarter, as our cash and short-term investments exceeded our debt by more than $300 million. Also, during the quarter, Moody's upgraded our in debt rating to investment grade. All three rating agencies currently have us at investment grade with stable outlook. In the fourth quarter we you will see us a paying off the remainder amount of the zero coupon debt for approximately $275 million, using cash. Our cash and debt will fall. We expect to end the year with debt of approximately $1.9 billion. After this payment is concluded we will be finished with our balance sheet restructuring program. Now, turning to the outlook. I would like to wrap up by providing some guidance for the fourth quarter. We are expecting revenues in the range of $1.18 billion to $1.24 billion and EPS in the range of $0.21 to $0.23 per share before special items. Although, the revenue and EPS ranges, for the most part, are higher than current Street estimates; I thought I would provide more color in the light of our strong thirds quarter results. As a reminder, our telecom, environmental and life sciences segment has historically been weaker in the fourth quarter due to seasonality. In addition, our third quarter EPS contained the $0.02 from tax adjustments that will not repeat in the fourth quarter. Our selling and administrative spending will also likely return to normal levels in the fourth quarter. Moving down the income statement for your modeling purposes. Gross margins for the Company should be between 43% and 45%. Our gross margin guidance reflects the potential impact of LCD class price declines, lower fiber volume and the continued complexity of adding new LCD glass capacity. SG&A is expected to be between 16% and 17% of sales. RD&E is expected to be around 10% of sales. We anticipate equity earnings to be slightly lower than the third quarter. That point in time will be impacted by normal seasonal fourth quarter declines. As a result, we believe equity earnings for Dow Corning will be around $50 million in the fourth quarter. Regarding our tax rate, it remains difficult to forecast given the change in mix over domestic and international earnings. For modeling purposes, you should use a range of 20% to 25% in the fourth quarter. Lastly, you should use 1.56 billion shares for the fourth quarter in calculating EPS before special items. Now, one note on the impact of foreign exchange on our guidance. We ordinarily do not forecast any change in foreign exchange for translation purposes within our guidance. However, our guidance for the fourth quarter does assume the end of dollar rate of approximately $1.15 versus the $1.11 average for translation occurred in the third quarter. The end of dollar rate moves to $1.20. We estimate the overall sales will be impacted by $22 million and our NPAT by approximately $11 million. This includes the benefit from our hedge portfolio. In the display segment, we are forecasting sequential volume growth for our wholly owned business to be up 5% to 15% in the fourth quarter. The level of volume growth will be dependent on our ability to add larger size glass production during the quarter. As well as our customers' ability to continue to ramp their new fabs. We are expecting sequential LCD glass pricing to be down slightly in the fourth quarter. At SCP we are expecting sequential volume to be flat to up 5%. Unlike the continued capacity ramps at our customers in Taiwan, the first phases of the Samsung 's Gen7 ramp and LPL's Gen6 ramp are basically completed. As they discussed during their recent quarter three calls. As a result, we are not expecting as much glass demand growth from the fourth quarter from SCP. In total, display segment volume is expected up between 3% and 10% sequentially in the fourth quarter. I know this growth rate is lower than the last two quarters, but as I mentioned a moment ago, there are fewer fabs in the process of ramping this quarter. This is not the result of weaker demand in the industry. If we are able to achieve our volume growth expectations in the fourth quarter, our growth for the year will be between 62% and 65%, which is higher than our original expectations. We also believe that 2006 will be another strong year for LCD glass demand. Driven principally by LCD television but LCD monitor penetration will also contribute significantly. We're currently seeing some additional supply from competitors for Gen6 now. Which is not a surprise to us. We have been in the Gen6 market for over two years now. And more competition was going to come eventually. It just took longer than we thought. This will cause more price competition than we had in the second and third quarter. We have prepared for this competition and continue to have the lead in large sizes. And expect to win in competition on Gen6, just as we do on Gen5. As a reminder, LCD glass is a technology industry. There will always be competition and there will always be price pressure. We will need to continue to do what we said we would. Drive down our costs equal to or greater than our price declines. Our competition has been focusing their time and attention the last two years trying to develop these larger sized substrates; we have been using that time to work on our manufacturing process and reduce our costs substantially. We believe our second and third quarter performance provides evidence of our progress. In the telecom segment, we expect sales to be down 4% to 7% sequentially. Fiber and cable sales are expected to be down 10% to 15% sequentially, reflecting lower seasonal fiber demand. Hardware and equipment sales are expected to be consistent with the third quarter, as stronger FTTP sales will be offset by normal seasonal declines. We are anticipating our FTTP sales in the fourth quarter to grow sequentially. I know some investors will be disappointed we are not providing specific fiber volume or pricing guidance. Our decision to drop this guidance was based on the immaterial impacts swings in the fiber volume and pricing had on the Corporation's overall results for the past year. But if we anticipate changes in our fiber business with material impact to results we will communicate those facts accordingly. We believe providing sales guidance for fiber and cable and the hardware and equipment businesses is more meaningful to our investors. Regarding our other segments we expect fourth quarter sales for our environmental segment to be consistent with the third quarter. We anticipate higher retrofit diesel volume to be offset by seasonally lower auto-related sales. Sales at life sciences segment are expected to be slightly lower in the fourth quarter due to seasonality. Sales at our other reportable businesses expected to be up 10% sequentially in the fourth quarter. Driven by demand for our DLP and other semiconductor products. For those who wondering about the influence of higher energy costs on our operation, we are currently evaluating its impact. The impact of higher energy costs is embedded within our fourth quarter guidance. As a reminder, the cost of energy is a fairly small component of our manufacturing cost compared to our history. In addition, some of these energy costs are currently hedged into next year. I will provide further insight during our fourth quarter conference call. I would like to provide some additional information on the overall impact of stock options to our compensation expense next year. As well as some insight in how we are accounting for it. As you know, we will be required to adopt the new accounting rules on stock-based compensation on January 1 of next year. We are providing this information this morning with the strong recommendation that our sell-side analysts update their 2006 models this quarter to properly reflect the impact of stock option expense. I know that there are a few sell-side firms that already require their analysts to reflect option expense in their estimates. We are hopeful the majority of you will take this approach. You should note, we will not consider this expense to be a special item for our reporting purposes. It will be included in our quarterly guidance once we begin 2006. So, for those sell-side analysts on the call this morning, we ask you to include this expense in your '06 estimates going forward. We expect our total stock based compensation to increase as a result of new accounting rules by between $60 million to $70 million pretax and after-tax. The amount is lower than our previous guidance of $90 million. We have chosen the binomial model to calculate this expense. The impact of higher expense will be reflected within gross margin, SG&A and R&D. Depending on whether the employee received the options working manufacturing, corporate or in a research lab. We expect about 75% of the expense to fall within SG&A. 20% in RD&E. And 5% in cost of goods sold. You should also note that our stock compensation rewards are heavily weighted to U.S. employees. Therefore there is no tax benefit recorded on these expenses. We also expect the expense to be spread relatively evenly over the year. If you have any further questions to help in your models, do not hesitate to call Ken directly. One last point I like to make before we go to Q&A. Will all the great detail I went into on the last call about stock trading by senior management; as a reminder, you should continue to expect some members of senior management to sell stock each quarter. This is not a reflection of their confidence in the Company. Ken? THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_234101

Q. If you could talk a little bit about the circulation trends specifically in Baltimore and in L.A.? And then related to Newsday, what kind of pricing power do you think you have in 2006 now that you have lapped the decline in prices that you did last September? A. On circulation results by market, we’re going to get into those when the ABC FAS FAX reports are out. I would just say at a high-level that both in Baltimore and in Los Angeles, particularly when you focus on individually paid circulation, the trends in both markets are significantly better. Newsday pricing, we have cycled essentially the rate reductions that occurred in the third quarter a year ago. So we are seeing on the ROP front some improvement in the revenue trends at Newsday, and we would expect that to continue. Q. In terms of the trends, I am curious on the pricing per unit. Do you plan to have a price increase in ‘06 in Newsday and really overall in the company? A. We’re in the midst of budgeting like most of our peers are at this juncture and continue to work on our pricing plans. I don’t think Newsday has decided overall on exactly what they will do. As always, those rate decisions will vary by category as well. Q. With regard to circulation, do you expect to continue the rate of discounting going forward now that you have seen some improvement in circulation? A. We are working to manage our overall circulation economics, which includes looking at discounts relative to the cost of acquiring new subscribers. We do think it is smart to continue discounting as opposed to run the risk of losing subscribers over a price increase and then incur more costs to acquire a new subscriber. So yes, discounting will continue, but we also believe the circulation revenue decline is narrowing and that that will continue as well. Q. You had mentioned that you expect to be active in the share buyback program in the fourth quarter. Is that a change from like you said just a couple of weeks ago in your conference call given that you have to increase your average because of the IRS deal? You had suggested before that you were going to be less active I guess given the new leverage, but are you now going to be a bit more active, or is this pretty much consistent and will you be opportunistic? Q. Just on the TV segment, I think in the past you have spoken about some of the movie money moving to network. Has that continued over the past few months, and it is only for the fourth quarter? A. Actually movies look positive right now, particularly in periods 10 and 11. In terms of the number of releases we are seeing right now, it is projected that there will be 60 releases in the fourth quarter versus 39 last year. So this appears to be a positive category at least in the pacing we’re seeing so far. Q. Does that mean the declines for the fourth quarter then are really driven by the rating declines as opposed to specific categories that are additionally falling apart? A. In TV we are seeing some weakness in the automotive category and in the fast food category. I think what we have is some weak markets. We are cycling through to some degree in the top three markets where LPMs have now been a factor for a full year. But it is a combination of some rating weakness in access time periods with the LPMs being less friendly to younger skewing stations and then some weakness in key categories for us. Automotive is important for everybody. It is less -- probably about 18%-19% of our business -- compared to some of the affiliate stations which are in the 30% range. And we would expect and hope, as we look at some of our markets for ‘06 where there will be significant political activity, that we will see some tightening of the market. Right now it is a buyer’s market. But those of us who have been around for a long time and have seen it go the other way, we would hope in ‘06 that we will see some of these categories come back, as well as political and Olympics tightening things up a little bit. Q. For the quarter you provided what newspaper ad revenues looked like with and without Newsday, and I’m wondering if you could give that same comparison for September and any of the classified breakdowns for September as well? I’m trying to understand how much Newsday did or did not improve in September. A. I don’t have the exact figure, but Newsday had a reasonably good September. So the spread in revenue growth for the group with and without Newsday was pretty close in the month of September. And then in September, in terms of classified by category, auto was down 2%, help-wanted was up 24%, and real estate 28%. So total classified was up 13% in September. Q. On the TV station side, given the pacings decline that you are looking at in the fourth quarter, thinking about what’s going on with WB overall, and speculation in the market regarding Time Warner’s attitude towards their ownership of the WB network, have you given any real thought to how important that relationship is or is not to you prospectively? Also where you are in your affiliation agreement, which I believe had originally been due to expire this year but you had a one-year extension? A. I think WB will continue to be important for us as a source of primetime programming. It represents about 17% of our total revenues. So we continue to value that relationship. We will be in discussions in October with Warner Bros. on the affiliation renewal. They have indicated to us they are more interested in doing a long-term deal, certainly more than one year, and we are interested in the same thing. So those conversations will heat up again next week, and we will look to get something done. Q. Well, there has just been speculation in the market as there always is regarding Time Warner’s desire to continue to own the WB Network. And obviously that raises questions for you all. I mean, you have had the same question in the past about what you would do in the event that they were to put that up for sale. A. First of all, what we are hearing from them is a little bit different than the rumors that go around the Street periodically. Sometimes I wonder if they are fueled by UPN going back to the early days of the network. Warner has indicated to us that the network continues to be strategically important for them. Obviously, like everybody else in the media space, they want to limit losses as much as they possibly can, and we will work together with them to try to help them accomplish that goal. It is still strategically important. It represents a significant part of their television studio output. So we believe it still is important, and we certainly agree that it is important for our group. Q. And could you maybe just update us on your relationship with them from a funding perspective? I know in the release you indicated you no longer had to book losses given that you have written down the book value, but I’m wondering where you are on the cash funding? A. There are really two components. One is a reverse compensation, which is an agreed on payment every year that is part of the affiliation agreement, and then we do fund a certain percentage of losses. Our ownership percentage as you know is 22.5%. A. Well, we are capped as far as our funding of losses right now. That is part of the overall affiliation renewal agreement. Q. I just wanted to clarify one thing you mentioned. You said that classified in the fourth quarter was pacing comparable to the third-quarter results, yet September was up very strong. Classified was up very strong in September, 13%, on an easy comparison. So is fourth-quarter pacing more similar to July and August in that 4 to 6% range? A. That comment was applied to the quarter as a whole, which is more in the 5% range. I mentioned that more in the year-over-year comparisons benefited in period nine versus the hurricane period a year ago. That benefit impacted the classified category the most. So the pop in classified in period nine was partially the year later impact of normal revenue versus hurricane a year ago. Q. I guess just in that vein, your retail rebounded a little bit in September, and you’re saying it is off to a weak start in the fourth quarter. So I’m asking for a little elaboration on that. How weak is it? Do you see that continuing in November and December, and where is it coming from? A. Well, what we see overall in retail is concentration of spending around the key promotion period. So back-to-school was reasonably strong. Now we’re in the lull period in early October, and frankly it remains to be seen how strong the holiday season retail advertising is. Retailers are putting their money where they think it will have most value for them, so you’re seeing somewhat bigger seasonal swings than you had in prior years. And where the weakness is, it is hard to pinpoint. It is different by market and also different by category within retail. It’s a mixed picture, which is I think what you are hearing from others in the industry as well. Q. So I guess following that logic, you would hope to see some strength then as you get closer to Thanksgiving, post-Thanksgiving period? A. We would hope to, but again you just don’t have great visibility a couple of months out on that. We’re hearing again a mixed picture on the retail front. Q. I was wondering on newspapers how aggressively do you plan to manage down other circulation? Could you put any numbers to it? And do you expect Local People Meter launches in D.C., Philly, Dallas and Atlanta to press your ratings to the same degree as in your top three markets? A. Well, on other paid circulation, for us it is under 5% of total circulation, both daily and Sunday, which is a low proportion compared to many of our major market peers. It is down in the most recent ABC period overall for our markets. There is value in other paid, and we are managing that market-by-market to the value that is there. But overall we are putting our emphasis, as I said, on home delivery and single copy, and that is where are our trends have improved significantly. On the second part of your question, we are seeing somewhat similar trends in the other LPM markets. It once again is a situation where the active participation required by LPMs seems to undercount the younger viewers and that disproportionately impacts our stations. Q. Obviously there’s some asset sales going on in the market on the TV side for some pretty high multiples. I just wonder how you think about those prices being achieved in the market for other TV stations being sold into duopolies and sort of maybe the value gap the market is giving you for your WB stations? A. Well, I think what you are seeing is the premiums being paid in many instances to establish a duopoly, and there is value created through elimination of expense, and we think that kind of consolidation is going to continue. And as we look at our portfolio, whether we can benefit ourselves by trading on a tax efficient basis to establish duopoly positions, we will do that if that is going to benefit our shareholders. A. We would go either way or trade a single station in one market to establish duopoly position in another. Whether that would be an even up kind of trade or two stations for one, however it worked. But I do think you’re going to see more and more of this as the consolidation in the industry increases. But it is not unlike what you saw in cable and radio where people would trade to rationalize their portfolios, create regional clusters. I think you will see the same thing in the TV space. I think that is part of what you are seeing, not only purchases but trades. Peter Appert, Goldman Sachs Q. Could you help us understand better what the cost dynamics in ‘06 might look like as you cycle through some of the cost cuts you have implemented over the last 18 months? A. We are still working on our budgeting for 2006, so we will be getting budgets back from each of our business units over the next month or so. But we are going to continue to have a very strong focus on our controls and our costs going forward. We are not expecting any type of significant increase. I think that it will be relatively low on our costs going forward into 2006. Q. How about thinking about it this way, then. Can you just remind me in terms of the major cuts in terms of headcount reduction again in September ‘04, correct? And then can you just remind me of the timing of the further cuts that came after that? A. We had some in September ‘04, and we have had some that have been ongoing, but relatively small, that our business units have looked at and come up with. But those were the major ones. Q. Can you provide any further insights on Pat’s departure, and specifically what were the points of difference in terms of strategy or focus that led to the decision to separate? A. I don’t know that it would be appropriate. We just came to a decision that change would be a positive. Pat is a good person, a good executive and we wish him well. I don’t think it would be appropriate to comment beyond that. I would say just one thing on your question regarding cuts. In broadcasting the arrangements that we have gone into in Philadelphia and San Diego, probably represent about 2% of FTEs on the broadcast side. Then the Newsday cut most recently. We are reducing 45 positions in the New York City newsroom. These are just a small piece of what has been done across the group. But a lot more has been done, the attrition and the other things across both broadcast and newspaper group. Q. I just wanted to thank you for putting all this circulation volume data in the press release and also in your discussions. It is good to actually get the data ahead of time. I appreciate that. My other question has to do with margins. It looks like your 21.6% EBITDA margins in newspapers was the lowest Tribune had in that division since before 1995, if you exclude the 9/11 impact of the 2001 third quarter, and it is somewhat similar on the TV side. The margin there looks like it was the lowest since before 1997. I just wondered when I look at your company and your peers just given the mass of talk that has gone over the last four to five years, it says something here about taking out editorial staff, you’re getting into some pretty serious muscle here. I mean, is there really that much more cost-cutting you can do in those two divisions to help offset these margins that are at 8, 10-plus year lows? A. Well, let me talk about publishing margins. First of all, in the third quarter, you essentially had a phenomenon where revenues are flat with the decline in circulation revenue and some growth, and not great growth, in advertising. And where all of the cost increase was newsprint prices and non-cash pension costs. So we are in the midst of a period were those two costs are going up at large rates. We think those increases will moderate over time. And in terms of our ability to run more efficiently, we continue to identify opportunities to do just that. We are looking at that newspaper by newspaper, and where we see the smart opportunities to become more efficient, we take advantage of it. That is a fundamental ongoing discipline, and we are committed to continuing it going forward. And so we think with relatively modest revenue growth, we can see some margin improvement over time. A. Non-newsprint cash cost was up 1.6% in the third quarter, and again almost all of that was the increase in non-cash pension cost. That essentially gets counted as cash even though we are making no cash payment into the pension plan. Q. Are you guys saying though if times don’t get any better whether revenues are slightly down or slightly up, do you have anything else that you can cut without cutting into some serious muscle here? I guess that is my question after four to five years of cost cutting. You guys and also your peers have been very tight on cost. Q. Is that also true switching over to the other segment on the TV side? That there is still significant cost you could take out there if trends don’t improve? A. The TV side is more a function of programming costs, and the margin situation is a revenue issue, and the declining revenue in this soft ad environment has made it very difficult. And we were operating at a 42 margin, which was a high watermark for us. So we need to get out of the buyer’s market that we happen to be in right now and things, we would hope, would improve. Q. You had a great quarter in your entertainment line with the Cubs. Obviously the Cubs are not playing for all 12 months, but can you give us a little hint over the next few quarters what you expect in the entertainment line for revenues and cost? I mean these are very powerful numbers there. A. We had two things going on there. One was that Tribune Entertainment was producing less shows, but the Cubs certainly had a very good revenue year. Attendance was very strong. Ticket prices were up. We would expect next year for the Cubs to be another good year. We are putting an addition on Wrigley Field that will add close to 2000 seats, and we also received increased revenues from the rooftops across the street this year from a settlement that was reached. So there are some real positives with the Cubs, and we would expect those to continue next year. I might just mention that there is a swing in Cubs games. We will have about five fewer in the fourth quarter of this year versus last year. The third quarter had four additional games so that swung the profitability of the Cubs in the third quarter. Q. I know that you are in the midst of budgets, but do you have a general preliminary goal for circulation next year? And then in L.A., national seems to still be lagging. Has the return of General Motors advertising in L.A. Times boosted the numbers at all? And then finally in L.A. I understand that there might be further rate discounting and may even be some issues with Advo’s advertising anchor, Albertson’s given the potential restructuring at that company. I was wondering has there been any changes in the competitive landscape in L.A. with Advo? A. As we have said, we’re focused on individually paid circulation in our core newspaper market, and our overall objective there is to stabilize individually paid circulation. We have made really significant progress over the last couple of quarters. We expect to make more progress in the fourth quarter, and our goal is in general stability. Whether that is up or down a little, it will vary by market, but that is our goal. Your third question related to Advo, and then I will come back to your second one. It is a very competitive market in L.A., but we continue to like our market position relative to Advo with our blend of in paper and mail distribution tied in with the Value Network we have created with other newspapers. I said our revenue growth in the third quarter there was mid-single digits in preprint. There is not a lot of pricing activity in that market upwards, but our prices are essentially stable, and we are growing volume a little bit. We continue to believe we’re advantaged over the long-term. General Motors is back. It has helped some, but General Motors in total is not advertising as much now as they did earlier in the year. So it is a more modest net benefit at the present time. Where General Motors and the domestic manufacturers are going in terms of ad spending is an interesting question. They have scaled back some, but what we are hearing is they are not selling as many units as they would like. So there is an open question whether they need to return to more aggressive promotion. And overall national is somewhat of a mixed bag in L.A. But as Dennis said earlier, we’re seeing some lift in the fourth quarter in the movie category due to more movie releases. Plus, they are buying more color advertising in the Times. Q. And I was just wondering -- you may have said this -- but did you break out the newsprint prices in the quarter? How much where they up, and what the consumption was down to account for the 5% increase in cost? A. That is a tricky calculation because of our conversion to lightweight newsprint where essentially tons are down a lot, but the price per ton actually goes up for lightweight newsprint. A key way to think of it, though, is the newsprint price per page on lightweight is about 2% less then normal weight. So off-line we will give you a calculation, but it has got to be a blend of lightweight and normal weight newsprint, and it’s just a complicated calculation. The key is newsprint expense was only up 5% for the quarter where market prices for newsprint were up like 9%. Maybe a little more. A. Again, there was a price increase announced. It looks like it has taken hold. We will have a meaningful price increase to work against, but we continue to manage consumption, including through the conversion to lightweight that is essentially complete. We will get about 2% benefit in the fourth quarter versus a year ago from the lightweight conversion. Q. Where do we stand if we drill down on Newsday? I know the auto dealers -- you set up a fraud reserve -- have you exhausted that? When will you reverse that? So if you could give us some update on the litigation that ensued the circulation fraud at Newsday? And then where do we stand also in terms of market share, in terms of inserts in your Long Island market? Some of those businesses, it sounds like it is heavily competitive. And then you talked about buying back shares. Are you done with the discussions with the ratings agencies and you see yourself in the short-term moving back and aggressively buying back shares as you were earlier in the year before that abatement? A. Well, as Dennis said, overall we are making excellent progress on resolving the ad settlements at Newsday. On the auto dealer front, there is some meaningful progress there as well, but it is not to the point where anything is official yet. We are not resolved the suit, but what we are seeing is there is not a lot of interest on the part of some of those dealers in aggressively pursuing that litigation. A. We have the $90 million reserve which we continue to believe is adequate, and until there is clear resolution on some of these parts, we’re not going to change that reserve. Q. And then the issue on inserts with Harold Matzner and some of the other chatter in the market, can you update us there? First is the decline in circulation. And second, is competition from a former preprint sales agent that we terminated essentially for what we determined was unethical behavior. We are working to get back to customers who left us and believe that our newsprint preprint sales and distribution capabilities remain advantaged for the longer-term. But New York and Long Island, like L.A., is a very competitive preprint market, and we are working through it to our best advantage. But we did conclude we had to terminate the company-owned by Harold Matzner for what we deemed was unethical behavior. Q. What is the update on your discussions with the ratings agencies? You had mentioned that was an impediment in the near-term to you getting more aggressive with the levers on the share buyback. I wonder if you could update us on the point. A. Let me just give you one more specific on the Newsday situation. $75 million of that $90 million is now accounted for. 34,000 agreements have been signed with advertisers. So there are a few that continue to be out there, including the car dealers, but we really made good progress there, and we are hoping to wrap that up completely in the near future. In terms of our discussions with the ratings agencies, you may have seen that Fitch downgraded us from a mid-A to an A-. We have had discussions with Standard & Poor’s, S&P, and we have not heard back from them as to what they are going to do with our rating. In terms of share ,repurchases we have repurchased about $365 million worth of shares year-to-date. We had planned to do about $500 million worth of share repurchases this year, and what we have said is that we’re going to scale back from that $500 million. But we are still going to be repurchasing shares in the fourth quarter, but not to the extent that we had originally planned. Q. And I assume that is due to Matthew Bender. But is there any thought on divesting assets here in order to get more aggressive? I mean are you looking at your portfolio mix? Is there any radical rethink given the challenging environment and some of the underperforming assets you have? A. That is something we continually do in terms of evaluating our portfolio. We are very focused on steps that we can take to improve shareholder value, and certainly those factors improve operating results, making sure we have the right mix of assets. And what we consider certainly is the strategic fit, what is the public and private market evaluation and also maximizing returns on an after-tax basis. So it would not make a lot of sense for us to get specific right now, but believe me, we’re looking at the portfolio and looking at everything that we can do to improve shareholder value. Q. I just wanted to get a better understanding of some of the cost items involved in both television and in the radio and entertainment line. The costs, particularly on the radio and entertainment, were down by $10 million, and I’m trying to get some better understanding there. Is that Sammy Sosa? Was that diminished production expenses at Tribune Entertainment? That is a handsome number, and how would that be trending over the next two or three quarters, please? And then on television, you mentioned that the costs were up partly due to Katrina, $2 million, and otherwise it looks like a normal 3% run-rate of growth. And I was wondering if you could add some color as to what kind of program the syndication expenses in terms of growth or levels over the next two to three quarters we can expect there? A. On the entertainment line, you’re right. The expenses are down for two reasons. Lower player salaries at the Cubs and entertainment was not producing as many shows, so those were the reasons for that number coming down. On the programming side on TV, we’re looking at Sex and the City, so we have got accelerated amortization on that. Also, My Wife and Kids, which is premiering this September. There is also a slight increase on reverse compensation with the WB. So those three factors will continue, offset somewhat by we are getting further down in the runs with Friends and Raymond and those shows that have been with us for awhile. Q. The accelerated amortization on Sex and the City would obviously hit an anniversary towards the end of this broadcast season. So about 12 months from now you would be in a position to have potentially political advertising growth and diminished expenses on that, at least that particular piece of programming? Q. First, related to your tiered access experience in Chicago, I’m wondering have you seen signs that it has been successful and it is pointing to a potential to monetize your Internet experience through creating a better economic model? And has it done enough that you would want to extend that experience to other markets? Secondly, specifically with the rebranding of Marshall Fields through Macy’s in Chicago, I’m wondering what you expect the impact on your retail revenues to be from that event? And thirdly, and maybe this is too small to get much into, but the decision to make RedEye totally free. What are you seeing in terms of readership and advertising impact? A. So our Subscriber Advantage program in Chicago, where subscribers either blend of print/online or online subscribers get access to more content than our other Internet users, we continue to be very encouraged by the results. What we are seeing is that audience overall for chicagotribune.com continues to grow. Page views are up significantly, and also subscriber churn overall in Chicago is down. So we are seeing benefits there. It is still too early, though, to decide in a broader context whether we want to roll that out further. In terms of rebranding of Marshall Fields as Macy’s here in Chicago, it is still early to tell how that is likely to play out. Certainly you have got the broader Federated context where it is likely as they have said that over time they will move some money to more national advertising than they do from local. But if you look at the rebranding here in Chicago, they are going to need to promote Macy’s in Chicago to a whole bunch of people that are very skeptical about that name change, and we can actually see some upside next year. On the RedEye front, essentially what we concluded was the audience is really good. Only a small portion of that was willing to pay, and that the readership, revenue and profitability of RedEye will be better as a free publication than a partially paid publication. Q. And one related item to the Subscriber Advantage program, are you going to have an Internet only option at a certain price, sort of like Dow Jones does for the Wall Street Journal Online? Q. I noticed that auto classifieds have been improving and was wondering if you could give any details there. I was also wondering if you could give us the online growth for September? A. On auto classified, we still see that as a pretty challenged category, and the improvement in period nine again was Florida hurricane related year-over-year comparison primarily. And online revenue growth continued at a very healthy rate in September. Very consistent with the year so far, and we would project that in the 4th quarter. Q. A question on equity income. Would the fourth quarter be somewhere in the $15, $20 million range given the improvement at Food Network and the other changes? Would you hazard a run-rate for ‘06 second interest expense? I believe you said $50 million for the fourth quarter. Is that net? And would that equate to sort of a $200 million rate for ‘06? A. The interest expense, yes. That is a gross amount of $50 million, and that would probably be accurate in terms of the interest expense projected for next year. It would be in that range, although we had lower commercial paper during the first part of this year, and we have done some fixed-rate financing, plus interest rates are up. So that run-rate on the fourth quarter probably is not a bad estimate at this point. And then on the equity side, we had a very strong fourth quarter last year, so the equity results may be down a touch from that. We’re going up against tough comps, and we are also planning some higher promotional expense at some of our equity holdings. A. We have not projected that as of yet. But you are right, though. The Food Network continues to be very strong. They had a terrific upfront, and that is going to carry over until next year. Comcast SportsNet also continues to do very well here in Chicago. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_234102

Ladies and gentlemen, thank you for your patience and welcome to WebSideStory Q4 2005 and Year-End Earnings Conference Call. My name is Dillon, I will be your conference coordinator for today. At this time all participants are in a listen-only mode, however, we will be facilitating a question and answer session towards the end of today’s conference. Operator Instructions I would now like to turn the conference over to your host for today’s presentation, Mr. Jeff Lunsford, Chairman and Chief Executive Officer, please proceed, sir. Thank you and good afternoon. I also have on the line with me Jim MacIntyre who is the co-founder and Chairman and CEO of Visual Sciences, LLC. Welcome to WebSideStory’s Fourth Quarter and Full-Year ’05 Earnings conference call. Filing a live call and audio archive of this call will be available on our Investor Relations section of our website at www.websidestory.com. Today’s call contains forward-looking statements that are not a description of historical fact, for example, statements about future results of operation, growth opportunities, the anticipated synergies of WebSideStory’s and Adams Business and about the projected future financial performance of Adams, WebSideStory, and Visual Sciences’s businesses are also the forward-looking statements. You should not regard any forward-looking statement as a representation by WebSideStory that any of its plans will be achieved. Actual results may differ materially from those set forth in this release due to the risks and uncertainties inherent in WebSideStory's business. Such risks including without limitations to WebSideStory’s limited experience in the emerging market with unproven business and technology models, the risk of incurring higher and expected cost associated with integrating the operations of Adams and Visual Sciences with those of WebSideStory. WebSideStory's reliance on its Web Analytics services for the majority of its revenue, the risk with sales of Adams and Visual Sciences services will not be as high as anticipated, WebSideStory’s recent achievement of profitability, and the risk that it may not maintain its profitability. The highly competitive markets in which WebSideStory operate that may make it difficult for the company to retain customers, the risk that WebSideStory's customers fail to renew their agreements, the risk that WebSideStory's services may become obsolete in a market with rapidly changing technology and industry standards, and also WebSideStory may incur anticipated or unknown losses or liabilities associated with integration for the Adams and Visual Sciences and other risks described in WebSideStory’s filings with the SEC. Including WebSideStory's Annual Report on Form 10-K/A for the year ended December 31, 2004, and quarterly report on the Form 10-Q for the quarter ended September 30, 2005. Do not place undue reliance on these forward-looking statements, which speak only as of the date of this call. WebSideStory undertakes no obligation to revise or update the information or forward-looking statements in this call reflects subsequent events or circumstances. Okay, today we have a strong quarter to talk about, and an incredibly exciting merger that we think dramatically expands the growth opportunities for WebSideStory. We are joining forces with the highly regarded team at Visual Sciences, an innovative provider of streaming data analysis and visualization software and on-demand services headquartered in McLean, Virginia. That is bolstered under the web analytic thing as the company with the hottest technology in the market. Before getting into that, let’s walk you through our Q4 results and provide some insight into how the business continues to perform. Q4 was another record quarter for WebSideStory. In the quarter we achieved record revenue of 11.7 million, 79% higher in Q4 of ’04, we are $0.15 per share in pro forma earnings as compared to street consensus of $0.14. We added 3.5 million of cash to the balance sheet. Our pro forma pre-tax margins increased from 23% to 26% tracking nicely towards our previously discussed target of 30%. Our Web Analytics bookings were up 47% from Q4 2004, which should help a life year the Google free search initiative we’d heard us in the enterprise sector. I should note the Q4 was the largest Web Analytics bookings quarter we have ever had by a substantial margin. We signed 129 contracts with new customers from various modules of the WebSideStory Active Marketing Suite, up from 110 last quarter. We had great new customers like Sotheby's, Highfield Healthcare and Miller Highman in the Search and Content business and Clear Channel Communications, John Hancock, Seagate, Bell Resources, and Charles Schwab in the Analytics business. Our average contract size for new customers was just over $30,000 in one-year value and our average relationships sites for all customers remain just over $40,000 per year. In the quarter we also launched a WebSideStory index, a new statistical parameter that features techno graphic and e-commerce trends called from the millions of users that visit websites using the company’s award winning Web Analytics technology HBX. We have published two insightful index releases over the last two weeks, one observing the search engines of more than twice the conversion rate of other online customer acquisition sources, and one observing a visitor using a site search box on our customer sites converted at 2.7 times the rate of other visitors demonstrating the value of site search and we obviously provide an on-demand site search solution in our Search and Content solutions group. We completed key management hires in the quarter, expanding our U.S. sales management with a proven industry sales leader who have managed half of our North American sales operation and who previously set sales records of WebTrends and Omniture, and with a proven VP of Engineering, we spent 5 years running development for Webzen right down the street here and very well respected company on Wall Street doing some of their high growth years. We made good progress on getting HBX bid to market, this release is running approximately 90 days behind our original schedule and that’s due to some changing requirements in the APIs - in partnership agreements as we work to connect to the PPC networks. Q4 was a solid quarter for us all around. In the quarter we became convinced with the high-end of our marketplace offered great opportunity for us to expand, that we are actually under investing in sales and marketing and R&D relative to the opportunity before us. You will see reflected in our forward-looking guidance that we are ramping our investments in these areas and expect our margins to compress slightly for two quarters as a result. We believe this is the correct long-term need for the business and we believe we’ll begin to see the paybacks for those investments in Q3 of 2006. Starting the financial detail, the fourth quarter of 2005 was our 9th consecutive quarter of profitability. We achieved record revenues and profitability. Our gross margin was 83% in Q4, 1 percentage point higher than the previous quarter, the gross margin includes $89,000 of amortizable intangibles and stock-based compensation representing less than 1% of revenue. Operating expenses before stock-based comp, amortization of intangibles and other non-recurring items as a percentage of revenue decreased from 61% in Q3 of this year to 59% in Q4, a pickup of two points. In Q4, operating expenses included 209,000 of non-recurring items. Compared to last quarter, sales and marketing expenses increased slightly from 34% to 35% of revenues, we began that ramp of sales and marketing investments that I mentioned previously in the quarter and continued it in the Q1. Cost related to our pro-active insight user form contributed to this change. Technology development expenses as a percentage of revenue were up slightly from a 11% last quarter to 13% this quarter, this reflects our investment and development activities in Russia and lower capitalized software development cost as been in the year’s production. We capitalized 204,000 of certain cost related to the development of our forthcoming bid management tool this quarter, we anticipate the technology development expenses will increase as a percentage of revenue in the first quarter as we scale down the capitalization of those costs and those projects near completion in market launch. G&A expenses decreased from 16% to 13%, non-recurring items related to the restatement of prior period financial statements, sub-lease loss exposure charges and reversal of the sales tax liability also contributed to the quarterly change in G&A. Non-GAAP net income before stock-based compensation expense, amortization of intangibles and other non-recurring items was approximately $3 million or 26% of total revenue in the fourth quarter compared to 23% in the previous quarter and 15% in the fourth quarter of last year. Non-GAAP earnings per share before stock-based compensation expenses and amortization of intangibles and other non-recurring items were $0.15 on a fully diluted basis for the quarter. Turning now to the balance sheet, as I mentioned, we generated 3.5 million in cash in the quarter, demonstrating again the cash generation power of this recurring revenue business model. Our working capital and liquidity remained strong with approximately 35.1 million in cash and marketable securities at the end of the quarter. 18.2 million of working capital and no material debt again at quarter end. We are excluding from that figure with approximately $807,000 of restricted cash that we set aside in Escrow as part of the holdback in our Adam’s acquisition. Our differed revenue balance grew from 10.9 million to 12.8 million during the quarter. Accrued liabilities grew inline with the growth of our business. In the press release we issued earlier today, we provided guidance on revenue for the first three quarters of 2006, we also provided guidance for both GAAP and non-GAAP earnings per share for the first two quarters of 2006. Our earnings guidance assumed to cash tax rate of 20% for the year. In Q4, we released the allowance against our net operating losses in the amount of over $3 million trading a large one-time increase of $0.15 per share in our GAAP earnings in Q4. Now that the NOL allowance has been released, we’ll report a full-statement in federal tax rate of an estimate 38% in our GAAP financials even though our effective cash tax rates with the benefit of these NOLs is estimated to be approximately 20% in 2006. Please note that our forward-looking guidance reflects the adoption of FAS-123(R) for expensing stock options beginning on January 1, 2006 as well as additional stock-based compensation charges that will arise out of the Visual Sciences merger. We can deal any other questions on the financials in the Q&A session. So, as you can tell from these results, this business is growing at a nice clip while operating at nice margins. As stated above, we ramp up our sales and marketing spend in Q4 and continued to do so in Q1. So, you should not expect to see margins continue to expand as rapidly as they have in 2005. We consistently said we believe and get this business to 30% pre-tax margins by some time in 2007 and 26% we achieved in Q4 gives us confidence that 30% is achievable. Today we also filed an 8-K announcing a resignation of our Founder, Blaise Barrelet from WebSideStory’s Board of Directors, that’s why I believe 8-K will be filed tomorrow. Blaise served this company well for 10 years and he is easing into retirement spending 6 months each year aboard and working on other entrepreneurial pursuits. We thank Blaise for founding the company and helping to built it into what we have here today. Wrapping up on the quarterly results, with record enterprise bookings, record cash generation and record customer adds we feel the Q4 is one of the strongest quarters since bringing WebSideStory public. The macro environment in which we operate continues to be very healthy fueled by three waves of growth. The first is online ad spending which is growing at 30% a year. The second is online commerce, which is growing at 25% a year. The third is the growing acceptance of on-demand software and that marketplace is growing at approximately 25% a year. We expect these three waves to continue at close to these growth rates for the next two to three years and believe WebSideStory is uniquely positioned to benefit from the high growth opportunities their convergence creates. Now, I would like to talk to you about our merger of Visual Sciences, I can tell you that I’ve personally never been more excited by a technology in my 20 years in the business. As you know WebSideStory’s Active Marketing Suite is currently comprised of award winning digital marketing solutions in Web Analytics, Site Search and Web Content Management. Within the Web Analytics area of the Active Marketing Suite, our intention is to integrate Visual Sciences solutions with HBX to the stream integration platform as we are doing with search and publish. This integration will expand our ability to offer deep ad hoc segmentation, multi-channel data analysis and real-time data visualization capabilities to our more sophisticated customers. In addition to this expansion within our traditional core markets Visual Sciences expands WebSideStory’s addressable market to now include opportunities for call center, e-mail, point of sale, branch and other types of transactional analytics are the core focus. We estimate this combination expands WebSideStory’s addressable market from approximately 1.4 billion to approximately 2.4 billion, a potential annual revenue opportunity. A little context, within the digital marketing sector, four distinct trends are fueling product innovation and affording small companies like WebSideStory and Visual Sciences an opportunity to differentiate. These four innovation drivers are, No.1, the proliferation of new customer acquisition sources and business models on the web. No.2, the rapidly growing use of streaming media and other rich media to enhance the end users experience. No.3, the proliferation of handheld devices and other viewing outlooks that need to be tracked, and No.4, the evolution of single channel Web Analytics into even more valuable multi-channel enterprise analytics. This transaction, this merger with Visual Sciences solidifies our leadership position with Web Analytics space and helps us significantly advance our position with respect to all of these innovation drivers. Focusing on the fourth driver, the movement from single-channel to multi-channel, we see a major trend where single-channel Web Analytics is rapidly evolving in the multi-channel enterprise analytics. As large enterprises contemplate tracking more offline data within their analysis systems, there is a natural tendency from them to consider more in-house solutions. This transaction opens up back half of the market, which we were previously seeding to other players, the WebSideStory. As mentioned above we believe the combination of the in-house marketplace plus the multi-channel analytics marketplace represents approximately $1 billion in additional annual opportunity for WebSideStory. Like WebSideStory, Visual Sciences offers an innovative and differentiating technical architecture and operates a robust profitable business. They bring an established presence in the government, e-commerce, technology and travel sectors, which compliments WebSideStory strengths in media, e-commerce, healthcare and technology. And both companies were strong in financial services. Visual Sciences designed a solution from the ground-up with high volume processing in multi-channel analytics in mind and they have two patents pending on their unique approach. To this merger WebSideStory brings a worldwide distribution platform in over 1100 enterprise customers representing a significant cross sale opportunity. WebSideStory sales and marketing operations which is currently producing over a 125 newly signed customers per quarter bringing world class – brings world class lead generation in customer acquisition capabilities to Visual Sciences to help fuel our growth. In addition to this augmentation of new customer acquisition capabilities, we believe there is a good opportunity to cross sell Visual Sciences solutions into many of WebSideStory’s high-end customers. In addition to Visual Site their Web Analytics solution they also offers Visual Call, Visual Mail and Visual Document, and Jim is available to answer questions about these products for you in the Q&A section. We also believe the cross selling opportunity exists in offering search and publish to Visual Sciences customers. Visual Sciences has approximately 40 employees and over 40 customers, they have built a sterling reputation in the Web Analytics marketplace through selective retarding high-end customers and successfully adding value within those accounts. Their revenue growth has been an excess of 70% in the preceding three years. We plan to invest in the government division and are excited about the opportunities presented by our nation's Homeland Defense initiative. Visual Sciences technology has unique capabilities in the area of real-time data visualizations and dynamic segmentation of massive data stores that are in our opinion unmatched. Visual Sciences management team is a proven group with extensive software development, product management, enterprise sales and enterprise consulting backgrounds. Visual Sciences is focused on the high-end of the analytics marketplace, their average contract size is approximately $200,000, approximately five times larger than the WebSideStory’s average annual customer relationship of $40,000. About 1/3rd of their business is either on-demand or managed services and other 2/3rds are license, software, maintenance and consulting. They recognize their license revenue ratably over the contract to a minimum maintenance term, so most of the license revenues predictable and spread over the first year of the relationship. Their business is characterized by additional growth within their accounts as the customers begin using their solutions and want to expand the scope of the data they are analyzing. Combined these two companies create the undisputed leader in Web Analytics and on-demand digital marketing solutions. As you can see in the guidance the combined business will be generating approximately 14 million in revenue per quarter with pro forma operating margins in the 20% to 25% range. Our topline growth is forecasted to remain in the 40% range year-over-year. Our revenue model will be largely recurring in nature with approximately 90% of our quarterly revenue growth are being already contracted entering any particular quarter. Our gross margins will be approximately 80%, our consulting of software or on-demand services mix will be 10% to 20%, and we will continue to invest in building out an eco system of implementation and consulting partners to help leverage our solutions in the accounts faster than we can do alone. And stream partners to help our customers benefit from interoperability of the many different systems needed to run a world-class digital marketing operation. We expect to generate 2 to 3 million in cash in the first quarter before transaction fees and other one-time charges associated with the transaction. Consideration used in the acquisition includes approximately $57.3 million comprised of 22 million in cash, a senior note for $20 million with a 4% interest rate maturing on July 31, 2007 but call over by WebSideStory at anytime with no prepayments penalty. 568,512 shares of stock with a market value of 11.5 million as of yesterday’s close the development in Escrow until March 31, 2005, and 189,600 shares of restricted stock valued at 3.8 million as of yesterday’s close, plus 350,000 employee options and a warrant to purchase 1082,923 shares of WebSideStory at a price of approximately 1846 to 1847, exercisable within next 18 months. Visual Sciences will operate as a wholly owned subsidiary of WebSideStory, a business unit and Jim MacIntyre and David Scherer the two co-founders of Visual Sciences will serve as the business units CEO and CTO respectively. No cost synergies are planned as both companies are growing at rates where any identified excess costs gets immediately redeployed into other areas in support of growth. Now, in the accounting trend, the accounting on this transaction is a bit complex, so I would to take a minute to discuss it. Most importantly the revenue we are going to be able to recognize in the Visual Sciences business unit is going to be impaired for the first year due to a large adjustment in deferred revenue required in GAAP purchased accounting. We are currently estimating this adjustment to represent around $4 million in lost revenue. Now, I am not an accountant so I will not try to explain to you why or how GAAP creates a situation where you can buy a healthy company that would do just for example, purposes only, say 12 million of revenue and 2 million of earnings in a given year and it’s a very active you are purchasing them and nothing more takes that performance down to only $8 million in revenue and a $2 million loss. As you know we eat, sleep and breathe cash flow here at WebSideStory, so we are not going to let that complex accounting deter us from a great profitable company that dramatically expands our addressable market, and creates a great cross sell opportunity within our customer base. Instead we’re going to go ahead and affect the transaction and have done so, and manage our business on a pro forma basis as if we will still have that revenue coming in since we still have the cash coming in. This leads to a rare situation of our pro forma revenues needed to reflect the operating health of the business. Symantec utilize this in conjunction with their acquisition of Veritas as a reference point for you. The guidance we’ve provided today in the press release reflects combined company operations. And by the way the deferred revenue problem that I just mentioned goes away over the roughly 12 years schedule that that revenue will be recognized normal. The guidance we provided today in the press release reflects combined company operations beginning February 2, 2006. This preliminary estimate is subject to revision upon completion of our purchase accounting analysis with respect to the transaction. The revenue adjustment will call to GAAP revenue and earnings contribution of the Visual Sciences business units to differ materially from how these financials would look on a standalone basis. A reconciliation of pro forma revenue to GAAP revenue and pro forma earnings to GAAP earnings is provided with the guidance. All numbers or estimates reflect the company’s preliminary forecast for the business at this time. My advice is when the accounting gets complex just follow the cash, this transaction has very favorable cash characteristics, because it is not a tax free reorganization, WebSideStory will benefit from an approximately $15 million step-up in basis that will be depreciated over 15 years creating a cash benefit of approximately $1.3 million per year in reduced tax payments. So in summary on a GAAP basis, this business unit will look $4 million worse in the next year but on a cash basis it will actually be over $1 million more profitable. We elect to follow the cash and work to earn more for you every day. Based on the pro forma revenue and earnings numbers we are going to be going to be using to manage our business, this transaction is neutral but slightly accretive in 2006 and accretive in 2007. To be conservative I would ask you all to assume neutral in new models. As stated above we see substantial growth opportunities and now that we have achieved the levels of profitability we are currently running at, we believe it’s prudent to deploy excess earnings generated from the leverage of growth into more sales and marketing R&D and customer service. We think, we seize the high ground with this merger and we’re going to be investing in fortifications to protect our preferred position in the marketplace. I would now turn the call over to the operator and open up the lines for Q&A. Thank you for your time. Thank you very much sir. Operator instructions Our first question comes from the line of Safa Rashtchy of Piper Jaffray. Please proceed. Good afternoon, Jeff and everyone, couple of questions since as you little bit, this is kind of a complex transaction here, but before we get into that, I believe your revenue for Q4 was slightly below the low end of your guidance and I might have missed if you addressed that but can you give us some color as to how the quarter went and was it kind of slightly slower than you expected or just kind of, variation is to be expected? Yeah, so they were really, there was about a – I guess a $400,000 revenue shortfall over consensus which is 12.1, we have guided 12 to 12.3, and there were four contributing factors and none of them really reflect negatively on our enterprise business. The first was we had, as I mentioned record bookings and it was just a backend loaded quarter, so bookings grew 47% Q4 to Q4 and we did more in December and it wasn’t quite as mapped out as we get modeled in that, led to about $150,000 less in revenue, that we had been expecting in the quarter when we guided 12.0 to 12.3. The second is ad revenue as you guys know we monetize free site search by getting that subsidized with ad revenue and that ad revenue came in about $150,000 lower than we had forecast. And this was only our second Q4 they’ve launched that product right at the beginning of Q4 2004. And so, we don’t have and then ad revenues you guys know is somewhat seasonal. We didn’t have the historical sort of basis, so when we were guiding the 12.0 to 12.3 we were assuming about 150,000 more to that ad revenue. We view that ad revenue as non-strategic, it is a funding source, a nicely profitable funding source but it isn’t our core business. The third thing was a swing in the Euro that contributed to about $100,000 of difference in what had been forecasting. And then the fourth thing was HitBox Professional, as you guys know HitBox Professional is about $1 million worth of our business. Since the day we took this company public I have told people that it is not a strategic revenue line for us that we did not like the consumer sector here, we don’t think you can make a lot of money at $20 a month. And that business has been slowly eroding overtime and so that came in about $50,000 less than we have been modeling when we guided 12.0 to 12.3. So, it’s up to you guys to decide whether any of those four things reflects at all on WebSideStory’s core business. We certainly want to do better, a better job forecasting and are going to do that but those of the contributing factors, Safa, does that help? Yeah it did, thank you. Second on Google, you mentioned in your comments that you did not see any impact in terms of customer renewals, I believe. Have you seen any impact on pricing, is there any increased price sensitivity? And also what Google in their conference call yesterday stressed several times that they are really pushing the analytics and I wonder if you could comment on what impact you think that might have on your industry whether it could potentially even expand the market or could it create some pricing pressure for you? Well, when we measured bookings, we measured on a dollar basis and with 47% Q4 to Q4 growth, remember Google acquired Urchin back in I think Q1 of last year and they’ve been pushing it ever since then, and then they cut the price in half in Q2 of last year, and then in Q3 they made it free. So, we’ve had about a year of competing with, a) of Google owned analytics product, b) of Google half off analytics product and then c) a Google free analytics product, and Q4 was the best quarter we ever had, 47% year-over-year bookings growth. And we had 129 customers. So we don’t see it impacting our enterprise business than, whether you look at customer ads, whether you look at price pressure or dollar, we just don’t see it. We are not in denial, we are tracking it and as you know we run our business where we give our customers more volume every year for the same price, the same way Intel does with their chips, we do the same thing with an on-demand service. And it maybe that the fact the works were sort of engineered to drive our unit cost down every year helps us, because our customers feel like they are getting enough from us of an additional upon renewal, that it’s not worked going off and leaving. And I would also just say that the solutions are two different things. And I keep getting many, many questions on the topic and I think at the end of the day, I am just most focused on the results of the business to answer the questions rather than to try to get a feature function or what does Google Free do versus what does HBX do. Now, Visual Sciences is at the extreme high-end of the market. I think, HBX is safe from Google Free, the business is healthy, growing, and I think Visual Sciences is safe and free and even, from the higher end average sale price of 200,000 plus. Okay, and one last question on the Visual Sciences, can we take the guidance you’ve given and relative to your prior guidance assume that, what is implied in there with Visual Sciences run rate and can you also talk about their margin structure. And finally I’m assuming from what you have said and just to look at Visual Sciences products that there is little to no overlap in customers? There is little to no overlap in customers but we think there is a good bit of cross sell synergy. What was the first half of your question? Okay, so you know, I mean if we - you guys know our model, right. If we did 11.7 in Q4 then we would be guiding probably, that $400,000 rolls through. So it recurs expect for maybe the part that was just late bookings in the quarter. But everything else I mean we are going to have to be more conservative on how we forecast the ad revenue. The Hitbox Pro business is on a down slope and has been for two years, so that will stay on that trajectory, we hope we don’t have any Euro swings but we probably on a standalone, we would have brought revenue down a little bit and what I am saying on earnings is it is absolutely in our opinion the right thing to do to step up the sales and marketing and with anything, we shouldn’t have made $0.15 in Q4, we should have made 14 and already had the sales and marketing engine ramped because there were so much opportunity on the high-end, so we probably would have eased in revenue a little bit and, taken earning down a penny which we’ve done for Q1, the guidance, and as I said Visual Sciences is, I plan on that being neutral because we’re here, we’re building this business not for Q1 of ’06, we’re building this business for 2007 and 2008. There’s a whole new market opportunity developing and we think we are in the lead but we got well funded competition and we want to make sure, we can maintain that lead. Thank you very much sir. Ladies and gentlemen, your next question comes from the line of David Hilal of Friedman, Billings, Ramsey. Please proceed. Good, thank you. Jeff, the 47% bookings number you’ve used, I’m assuming that’s combined, so could you give us what the organic growth…? No, no, the 47 was Web Analytics only and I was careful to point that out because I wanted people who were worried about Google to understand that. You know we didn’t break organic versus inorganic and we’re really – I guess we’ve been with Adams for two quarters now. Yeah, over two quarters, there is too much flow in back and forth cross sales and combined deals in cross commissions and so we’re not really tracking at the bookings level in organic versus, or really revenue or earnings level organic versus inorganic with Adams and us any more. Okay, and when I try to be the math on Visual Sciences based on your guidance and what your guidance was, I am trying to figure what a trailing 12 month number was for Visual Sciences and, you know is it somewhere around 6 million and million to ballpark or you can just tell us what it was? No, no, yeah we are going to file an 8-K, their audit is not complete, so it was in the 8 million revenue range and their margins were I think in the 25% pre-tax, 25% to 35% pre-tax range something like that. I mean, when their audit is complete, we’ll be filing an 8-K I think we have 60 days from today to do that and you will see that then. Now, I want to make sure I understand the way they recognize rather than, I think you’ve said, part of the business which is a traditional enterprise software model, however they recognize the license over the minimum maintenance period, so it’s usually recognized over 12 months, is that accurate? Right. So, when we think of our models here, it sounds like we’re going to need to add a new revenue line item for the traditional software model that they have. So when you think of revenue mix can you, you just gave us a total aggregate revenue number. Can you help us explain between kind of on-demand traditional software and then the maintenance they are also getting? At a very high level, I would tell you, I think license revenue, traditional license revenue will be less than 10% of our revenue or about 10% of our revenue something like that. So this is still and because that revenue is largely spread, it’s more predictable, so this business will still have 85% to 90% of current revenue just depending on how you categorize license that gets spread ratably over a year. Good, Jim, what is the split of your business, it looks like Jeff talked kind of played a visual sight, is that your leading product? Hey David, we’re going to breakout their products by revenue line and what we want you guys, I want to give you access to Jim today to talk about his products but not various specifics about his business. When we have the 8-K on filed then you’ll be able to see his business in the full light of day. Okay, all right, I wait for that I guess, and then between that two sets of products, I understand they are going to run as a separate entity, is there going to be, so is there any product integration that needs to happen or the products remain independent, and maybe I’ve connected together but there is no major R&D effort to integrate them? It’s the latter, I think their technology is perfect for layering on top of massive data stores like we have with HBX and then giving you very, very cool and now we’re going to probably setup a day next Tuesday in New York, so those you there in New York we’re going to invite you, and we’re going coordinate all that tomorrow to show you Jim’s technology and you’ll begin to understand what we’ve got here and what the potential is. And so they will connect to HBX to the stream API, we’ve got to report in API, we got to go layer them into our proprietor data store and it’s going to open up a whole new level of reporting for our customers. Okay, then I apologize one more question, Jim the 40 employees can you split those out between like sales and R&D? And what is your sales, I assume its all direct, but can you elaborate on that? Okay, our R&D team is about 10 David, and then the back book of the company about, I guess about 16 in consulting and then the rest is sales, marketing and administration. Thank you very much sir. Ladies and gentlemen your next question comes from the line of Mark May of Needham & Company. Please proceed. Thanks for taking my question, first couple regarding the acquisition, wondering can you give us an idea of the number of customers that the company’s had at the end of the year and what the expectations are in terms of net ads this year? Also trying to understand how there’s a sell-through or sell-in opportunities there, it seems like the products are very similar, and I am trying to better understand that? And then thirdly, related to Visual Science, if they get 8 million in revenues so asking I’m not sure exactly the accounting you are using there, I’m assuming that’s GAAP it looks like you’re assuming around 10 million this year, so is that roughly about the growth rate you’re looking forward which is around 25%? And I had one quick follow-up if I could. Yes, so lets take these customers, we had over 1100 at the end of the year and they had over 40. Sell-through, I have is as we’ve been talking to Jim which is a process that’s taken quite some time from the day I saw their technology, and I would – I travel around and talk to our customers niche and I really I would be interested in doing this, or I would be interested in doing that. And what HBX is is a fantastic analysis engine that has the most material breath of reporting in the industry. So we’ve got these products called Report Builder and Active Viewing and we have our customers sending morning reports out to affiliates, 800 affiliates every morning and segmenting date on those. What Jim has built is the ability to sit there in real-time and say, oh what if this? What about that? And do it over massive data stores and literally have your queries answered in 5 or 10 seconds, and they do not disclose who their customers are, but they have some very customers that use this technology for very impressive purposes. And our customers, he would not be closing $200,000 contracts on the high-end of the market. If there wasn’t, let’s call it an – that just average contract. So he does $400,000 contracts and $1 million contracts and he does it when other Web Analytics guys average sales like ours is 40,000 or 100,000, and we will do a couple of $300,000 to $400,000 a quarter. They are going in and they are showing multi-channel ROI. So it’s really great to get a return on investment from your analytics investment when you are completing the marketing ROI lead for online, and we get a lot of our customers of 10x ROI in the first three months. It’s even more powerful when you start marry in up call center data, branch data, web data and looking at customer interaction across all those channels. So, let’s take one of our large customers as an example, Wachovia, for Wachovia the web is a tiny part of their business, it would be really cool if Wachovia could look at their customers in the call center branch and web, and HBX we are building the ability, we are going to extend our data schema and a created data import API to do all this but Jim has built it, they built, he and David share – built their system from the ground up with multi-channel analytics in mind. They are calling on customers and saying, just think multi-channel Day 1 and whereas we and others are calling on customers saying we are a Web Analytics company and we’re going to add the multi-channel capability down the road. So there is, any of our customers who have multi-channel businesses which is most of them, and who have the budget to spend $0.25 million, or $0.5 million dollars to get that multi-channel capability is across our candidate for Visual Sciences, and we have about 1100 of those customers. And just in traveling around and talking to those customers, I know the first 5 customers, I am going to call and they will use our technology in conjunction with his if I can predict. Now you will remember when we did Adams we predicted that we would have good cross sell there, up site search into our analytics customers and we have had that, and we had another good quarter of cross sale with Adams, and I believe but we will not, I’ll tell you next quarter how we are doing and I’ll give you guys metrics against that success. Also if you look at this transaction and if you look at Adams, the company are about the same size, they were both trying to get about the same profit margins and I think if you look back, what you guys had for us last year, you guys had $0.42 consensus pro forma for 2005 and we did $0.46 I think. I think that this technology, this company it looks the same, when you model the business we got –we got a lot of execution ahead of us but, if you think of what we accomplished with Adams over the last 12 months, actually over the last 7 months, I think we can accomplish the same kind of performance with Visual Sciences over the next 12 months. That was very helpful, and then I had the question regarding the growth rate this year, this write-off roughly $8 million, last year going to $10 million that’s right? No, what we said is 40%, we think that the combined businesses will be able to grow at around 40% rate. Okay and then just my last question, no surprise in the fourth quarter that Google Analytics did not impact your business because when they went free I think within minutes they shut off the signups, but I believe in early January they turn this back on, I am wondering have you seen any impact on the business in January from that? Thank you very much sir. Ladies and gentlemen your next question comes from the line of Brad Whitt of RBC Capital Markets, please proceed. I was wondering if maybe Jim could give us, just to help us out a little bit Jeff, maybe give us without mentioning specific customer names, just give us one or two customers as far as how, specifically how they are using this technology, maybe one in the government sector, one outside the government sector. And then also if Jim could talk a little bit about whom he competes with? Okay, the government customers that Visual Sciences supports use our technology for similar purposes as our technology is used in the commercial arena, but the specific use cases of it are not something we in many cases know or can disclose. In the case of our commercial customers we have concentrations of customers in financial services, travel, and a number of other key markets you would expect, technology and ecommerce. We so as many of our customers have started with core Web Analytics, they tend to be customers who have used other Web Analytics solutions in the past and have run into the limitations of them and are looking for either a system that could support very much larger base of data, have more intense questions about the data, what ad hoc analysis capabilities that haven’t been before available. At the same time they would like to integrate data from customer data warehouses, from other channels such as call center data, IVR system data, electronic mail system data and so on. In many of our customers they’ve picked -- started with Web Analytics and then moved to use the product in related areas of Visual Call with the next application we released, it looks that IVR and another call center data. We also released an application called Visual Mail recently that looks at electronic mail system data. But the technology platform is applicable to other types of transactional data and this system is been used to look at travel reservations data, credit card transaction data, network – lower level of network transaction data, and a whole variety of other types of data that are real-time streaming forces of data into which you might like to integrate other data about the customers and systems that they are using. Okay and would you – is it possible Jeff that some of your customers would switch based on what Jim saying from HitBox to Visual Science application? It’s possible but most of our customers are using, the reason we win deals is because of the maturity of the product and the breadth of the reporting. And so on the high end, we’ve been competing with Jim from time to time. And he has won some and we’ve won some, I mean he can – I don’t think I am at liberty to talk you at about one big win in financial services that we won head to head against Jim but then I could tell you and I am not at liberty to tell you his customers names, a couple of big ones that he won against us. It really and Jim maybe you can take this from the standpoint of a WebSideStory competitor, it really kind of depends on the needs of the customers, Jim you have anything to add there? Sure, so what I founded, being involved in a lot of these different sales like those over the last years is that, that the team at WebSideStory has done a tremendous job building out HBX and the reporting capabilities and broader report distribution capabilities of HBX as well as some of the innovative analysis technology they’ve added have made it a very competitor, its really surged over the last year. At the same time Visual Sciences has a very deep strength in ad hoc analysis and dynamic segmentation, customer analysis as we call it. And these two drivers both reporting and broad report distribution and deep ad hoc analysis often tend to be two different key drivers in the sales cycle, so in some cases, in many cases customers have been forced to choose between more depth in reporting that was provided by an HBX or more depth in terms of ad hoc analysis, the ability to answer very board range of business questions on the fly, on an interactive basis. So, the customers in many cases they are forced to choose between these two things, where I think in most every case, if they could have had those two things together are available to them from the same vendor its what they would have chosen. Okay that’s helpful, and Jim how many, I mean, I am assuming these sales primarily through direct sales reps, how many reps do you have and you think that the, the HitBox sales reps will have the expertise in the identical enough to sell this application we have to stick with a separate sales force? Let me take that one Brad, Jim I think you just mentioned it has three or four sales folks, I mean it’s very much a high-end, the enterprise sales rep finds the opportunity within the consulting team really has to prove it out. And that’s how you win million dollar contracts. What we are going to do is take our enterprise sales groups in the U.S. and we are going to train them up, because those guys the way we operate as they have 150 named accounts. So if we take that, I think it’s – I don’t know the extract number its 150, it’s about call it 1200 or 1500 named accounts pretty much all of Jim’s target market is on that list. So these guys already own the territory and we are going to train them up on lets call it qualification of Visual Sciences opportunities immediately. And then Jim has already been investing, and we are going to continue to invest in anybody good that we can find on the consulting or call sales engineering side to augment, that’s really the growth governor of his business is how many of these talented supervisory consultants I think we have working on these proof of concepts that are going to win the million dollar deals for us. And some of him need government clearances to actually be able to be involved in the projects. So our sales force in the U.S. will be working on a high-end to expand its ability to find and participate and really dig into these multi-channel opportunities right, call center, Visual Mail, Visual Document, and but they are not going to, they are keeping their HBX quotas and this is going to be an opportunity for them to earn extra this year. And then in Europe Visual Sciences has no presence, no sales presence at all, and we’ve got about 20 people over there now, we’ve got eight quarter carrying reps. So our guys in Europe will carry the flag for Visual Sciences immediately and right now Jim is getting RFTs from world-class Fortune 50 companies in Europe with no bandwidth that respond to them. And so what I think we are going to be able to do here is they’ve already had a great practice of picking and choosing the big deals that they know they can win and they go win them with like an 80% win rate. Whereas our win-loss rate probably, because we’re doing 125 a quarter with probably a 40% win rate that we are competing agency 4 or 5 other companies. So I think we still win more in after share, and I think we can keep that 80% win rate up for Visual Sciences and, but we’ll have an 80% win rate on half a million dollar averages rather than the few hundred thousand average deals, so we are picking the bigger better projects. Thank you very much sir. Ladies and gentlemen your next question comes from the line of Peter Scheidler of Peninsula Capital. Please proceed. Congratulations on the merger, it sounds like there is not a lot of integration risk in the first six months of this, is that a reasonable assumption? Yes, I mean Jim doesn’t have a marketing department, he’s got a very well regarded industry analyst who just turned him from Forester, his name is Bob Chatham, he is with CMO, but he is now not going to have to built up, the marketing lead generation, webinar trade show engine. We have that ready to plug in, their back office is a talented group of people but he didn’t have a CFO, he had an acting CFO part-time. So we’ve got all the kind of G&A public company overhead for him. And we are going to train the sales folks in a very targeted basis, and we are going to attack these enterprise accounts and we are going to keep hiring in his sales and engineering group. The product integration is Jim’s average implementation, if we have the right people, you can go in there, and have somebody live in a week, and so the question is, can you get to the data? And we know where our data is that’s all we do all day along in HBX. And so, we are going to have a prototype of what we think is capable, probably within a few months here, and hit the road selling it to our customers. That is correct, yeah its – Adams was the expansion from just Web Analytics in offering more digital marketing tools like their site search is pulling data from HBX or going to pull data from HBX with reporting API and then, due behavioral party targeting results of site search to customers that are using both. And that was a sort of creation of the WebSideStory Active Marketing Suite. This is if you think about it expanding along the other axis not the digital marketing axis but just through the enterprise into other channels. And I think, I guess – I think we are being conservative in saying it only expands the turn by $1 billion but we always try to be conservative. But as far as the message to the market it is still the WebSideStory Active Marketing Suite and Analytics which is HBX Search, from search which is site search publish which is web content management. Visual Sciences is going to operate as a business unit and we are going to selectively target their product, we’re not going to, this isn’t a product that you mass market, its much more like a SAS or something like that. Thank you very much sir, and ladies and gentlemen your next question comes from the line of Troy Mastin of William Blair & Company, please proceed. Thanks, good afternoon. I missed in your prepared remarks what you said about big, I wonder if you could review that for me in terms of the timing of the launch? Yeah, bids running about 90 days late, we’re suppose to get into beta in February which is this month now. So lets call it mid late February and the delay has been, we are bolting on to PPC networks, APIs and, one of the networks API went down, they had to change some code, one of them changed the API altogether and changed the business rules. So it’s, when you are layering on top of other people’s technology you are somewhat dependent upon them and, we are not perfect either so, anyway the net result is we’ll get the thing in the beta here by the end of February, let’s call it. And what I’ve been saying all along is, bid is $5 to $10,000 average sales, so it’s not going to dramatically impact the numbers either way but we want that product in the market, the integration is really cool. We’ll show you next week in New York. The primary purpose of that is going to be to show you Jim stuff, Visual Sciences is just at its Visual, once you see it you get it, and the light bulb goes on as to how much value it can add. But we can also show you bid, I mean bid is integrated within HBX and there is just a lot of value in having all that together. Okay and then, did this have any impact on expenses in the quarter, I guess a favorable impact, because you were to begin to amortize some of the developmental cost behind Bid with its launch in Q4? Yeah that’s what I’ve said we did, till we amortized or, I am sorry, yeah we amortized or capitalized two hundred and whatever it was $1000 of R&D expense in the quarter. And we will get all planned on a - I think we might have planned on 100,000 instead we ended up doing 200,000 in the quarter. And we’re driving that number down as quickly as we can because, fewer and fewer people working on it, as it narrows, things kind of crystallize its in QA. And I don’t want to capitalize software development ever, we sort of do it grudgingly because the orders make us. Okay. Then I wanted to ask about bookings, you mentioned 47% for Analytics, I wonder if you can give insight to the other businesses you have in put that 47% bookings growth in perspective to past quarters? Yeah the past quarters, I think, in Q3 bookings were 30% to 40% was the number I use, so it was in between there. What I’ve always said is if we can grow bookings at 30% to 40% and keep renewals at 90 as you know, plus or minus a point percent then the topline will grow at about 40%. And some quarters will do 40 plus percent bookings growth, other quarters will do 30 plus, we‘ve never done less than 30% bookings growth. Well actually I should retract that, I would have to go look at the spreadsheet to see if we have less than 30% bookings growth. So that’s the target Troy, is 30% to 40% growth. Okay. And so the 47% you said again is a record and you’ve generally been running in the 30% to 40% range, is it fair way to put it? Okay and then cash taxes you’ve said 20% in ‘06, how do they look in ’07 do we go to more of a full provision in ’07 do you know yet? Well, we are going to have some tails on these things but some of the stuff created, the tax benefit created through the acquisition of Adams and through the merger of Visual Sciences, some of that stuff tails out for 15 years but it becomes less and less meaningful. I haven’t done tax forecasting into ’07, I probably shouldn’t answer that. Okay and I am just look into your guidance, I am perplexed when I get this all accounting because you are recognizing a pretty healthy tax provision for GAAP purposes, yet you have GAAP losses and I am trying to understand that, I know you might have able to explain it, because that’s maybe some complex accounting, but… Well, yeah it’s because GAAP makes you paint a picture of an, you could paint a picture which is a non-cash loss when you are actually generating cash. And, the tax rates and I’m only the acting CFO and luckily we have one starting Friday I think. You get the tax benefit of the stuff, you may have already flushed it, so the only way if you are going to be a company that is going to be during any acquisitions at all, you just you have to follow the cash because with purchase accounting, it just gets really upside down really fast. I am just curious if there are strange items in 2006 over the next few quarters that make your GAAP profitability look unusually negative that were reversed themselves and within a year or so from beyond your guidance? Well, yeah the amortization of intangibles, sales off and usually that’s a little more front-end loaded. Stock-based compensation now with FAS 123(R) will be an ongoing charge. So it’s really just whether or not the amortization of intangibles, how quickly that goes away. And if, you acquire another business then you just sort of refill that problem, right. And then on the flip side of that this deferred revenue adjustment, we’re now on a GAAP basis, we won’t be able to take 4 million of Jim’s revenue this year. That would make you look better on a GAAP basis from revenue out in the future. Thank you very much sir. And ladies and gentlemen your next question from the line Mr. Sean Jackson of Avondale Partners, please proceed. Yeah good afternoon. I missed the discussion about the competitors in Visual Sciences, I think that obviously I think you mentioned you compete with some of the pure play web Analytics vendors. But given the fact that you can do multi-channel analytics, does that put you up against the SAS or the SPSS or those kinds of companies? I will let Jim answer that, I give you my color and comments from the beginning, we are not standing up saying we are a BI company. What we are saying is that, the space is evolving and actually companies that are high throughput transaction analytic engines like HBX and like Visual Sciences, we think are actually better positioned than most of the other guys whether you call them BI or whatever you want to call them bring to the market. Because most of those are big batch daily change, where data gets batched in one place and it gets batched in another, and it gets batched in another and finally you are going to layer over it and do some whole lot queries. And half of their challenge is how do they architect that, how do they get the data through, how do they get it all consistent and normalized in timely fashion whatever is going around batch. We don’t have that problem, neither one of us do, because we are both real-time architectures. And then the second thing is, those solutions were all generally designed with sort of business P&O and manager CFO types in mind, and our technologies were both developed with real-time ecommerce professionals and marketers and other government types in mind. And we think that the interface, the user interface, the paradigm that we created is much more flexible and much more powerful just by virtue of fact that the customers that we’ve had to make happy as compared to those guys that to make happy. A number of those guys have announced web analytics packages. Some of them, one of them has announced it 3 times, and we still never see it in the marketplace. Right, so we believe that from where we started positions us much better to skate where the pots going to be and play in the enterprise analytics space going forward than the other folks. Okay, so up to this point though within that 80% win rate, Visual Sciences has not seen those guys, you will not compete with these guys, they are still pure play web guys or not? Yeah as Jeff said, well, the web analytics has the characteristic of producing very high volumes of data, that has tackled with traditional data management in OLAP type business intelligence products, it would be very expensive to deploy and often architecturally impossible. There are many other areas, other areas that we tackle are much the same, so when you look at high volumes of telephone call system data or high volumes of electronic mail or high volumes of network data. These have the same characteristics, the traditional business intelligence OLAP type products can’t process this data in real time, they function in batch and work and are extremely expensive. So we been through the discipline of dealing with very high volumes of data on a real-time basis and web analytics able to build an infrastructure that allows that data to be managed much less expensively and in fact allows it to be processed and analyzed in real-time at the same time. That’s allowed us to kind of look for other areas of data like the other customer interaction channels and other sources of such high volume events like data that are outside of the realm of focus for BI companies given their core architecture and as Jeff said, history in handling relatively small sets of data. Okay that was helpful. And also were there any other bidders for this company. I mean was this just WebSideStory or did you talk to anybody else? Thank you very much sir. Ladies and gentlemen your next question comes from the line of John Torrey of Montgomery & Company, please proceed. Good afternoon. Two questions for you, you mentioned Jeff, I think that consulting was accounting for about 10% to 20% of Visual Sciences revenue base, is that correct? No, no. I was saying John, going forward that the pro forma business to combine business will probably be 10% to 20%. Okay. And in terms of the advertising, I know it’s a very small amount, I think you’ve described in the past that the advertising revenue would run around 5% of the total mix for the quarter. It seems like the expectation with the 150 description you described here for Q4 was a little bit higher, should we be modeling a better performance on that revenue line above 5% mix going forward for the core WebSideStory business? All right. And the 47% bookings I know you’ve answered this a couple of times, but just to be absolutely clear, that’s just HBX for Q4? Okay and then on Visual Sciences, I think I understand what you are talking about from a data access perspective, but I guess what I am curious about is among the 40 customers that Visual Sciences accumulated, was the analytic intelligence that the company was able to deliver to its customers used primarily for digital marketing channels or in broader marketing program context beyond, just beyond line of web channel? Yeah, the Visual Sciences started - focused on Web Analytics is the first area of the application of our technology platform and it makes up the bulk of the business we developed over the initial years of that company. And as we evolve the technology platform we began fielding additional applications, all on the same underlying technology platform. Our team was able to generalize, it’s going to apply to other areas like IVR and other call management system data as well as electronic mail and other areas of data. So the vast majority of our business is Web Analytics and we branched into Visual Call with the release of that application in 2004 and further into the mail analytics business in 2005. And then further the technology platform can now be applied as Jeff described to other general types of transaction and event like data. And different of our customers once they initially implemented it for Web Analytics or Call Analytics have taken the technology platform and applied it in a relatively wide range of ways. Hey John, let me jump in for a second. My lawyer has advised me that I can actually answer the M&A question, because we never allowed to comment on M&A activity. But I think it’s important that you guys understand how we got together. This company was bought not sold, I chased Jim around the country for 5 months because I saw what he had and thought that, a) maybe it was a long-term strategic threat to WebSideStory but b) I thought that, the distribution platform that we had was a fantastic opportunity if we could couple his technology which is truly unique with our distribution platform that we could both generate more well for our shareholders together rather than apart. And Jim can comment, I mean basically they were looking at, everybody in the industry was of course calling on them but there was not an active sale process. They were looking at either taking private equity or working with us. And Jim, maybe you want to comment on this sort of why you decided to do one rather than the other. Sure, yeah I mean, as we were considering, looking at the growth potential for the company in 2006 and beyond at the end of 2005, we had a nice year last year following a couple of prior next years and we saw tremendous amount of opportunity and we realized that to expand into the European market and other areas that we would either need to, need to grow through private equity relationships or through other means in this. At the same time we got in touch with Jeff and we never as Jeff mentioned, we haven’t decided what we’re going to do Jeff got in contact, we didn’t have a banker or anybody trying to sell our company and intended to in fact, so we, it was -- if its wasn’t where we excepted to be when we started 2005 or quite honestly when we ended it. But as I get to know more about HBX about the team at WebSideStory and they get to know more about us we decided that this would allow us to take advantage of the technology that we built more rapidly, and we gain a platform that’s quite exciting to us and at the end, the end analysis. So we’re very pleased with this, we think this will allow us to get our technology out in the hands of many more customers much faster than any other route we could see. No I understood. One other quick question, Jeff you had mentioned the $4 million deferred revenue write-down, I wrote in my notes 12 years but I can’t imagine that’s right in terms of the period over which you expect those… No, the $4 million and by the way that’s an estimate and its subject to the completion of our purchase accounting analysis, but we think its going to be above $4 million. That will be a problem for a year. Because if you think of Jim’s average, kind of contract cycle most of his deferred revenue will work off over the first year and then it’s not a problem anymore. It was actually a tax benefit that will be enjoyed for 15 years at about 1.3 million in cash excess cash per year. So you guys can NPV that however you want but, it’s good. Thank you very much sir. Ladies and gentlemen your next question comes from line of Wendell Laidley of RS Investments, please proceed. Thanks, maybe I missed this on the call Jeff that, could you give us a sense for what kind of run rate and expense days Visual Sciences is operating at now and I am curious to know what your assumptions are for that business when you look with the guidance? Well, so what we said is, they did about 8 million in revenue in ‘05 and 25% to 30% pretax margins, and it was an LLC so they didn’t pay any taxes at the corporate level. And going forward we think that these combined businesses, and its going to be just like Adams I mean by the time we get a quarter or two done, its going to be hard to figure out which, where to put the revenue and where to put the expense. But these combined businesses will put up, the kind of 40% growth we’ve been putting up. So, I guess what, you are doing it on the heels of a quarter that for the first time was, below the guidance. So what I am trying to do is reconcile what’s pretty modest sequential growth of the business with what 17% growth in deferred revenues as well as your comments about bookings, so was there some business that fell off in the quarter that you weren’t able to make-up for from a booking standpoint, just trying to, we are talking about roughly 600 grand in subscription revenue so kind of put in context? Yeah I think the, $400,000 or exact 450 when you add it up, it was really the problem and so it’s the core business stood right in the, right in the same sort of renewal rate ranges we target and the bookings were higher than we targeted. Right, so all of the four factors there is something that you have an experience before is otherwise the compounding effects? We had an experience in ad revenue shortage like this, and ad revenue as I said we are just modeling it flat at this point. And because those are smaller websites, there is thousands of them that use our free storage. And then at some point you know and we are signing up, I don’t know how many 14 more everyday or 14 more every week I don’t track the numbers, some number like that. And then, where we, at some point if their online business is growing and doing well then they will want to get some of them will actually want to not have other people advertising on their site, right? And so that’s kind of its own little sort of you know eco system but so we are just in, we were forecasting that to grow and if you go and look at the Adams documents which were publicly filed, you will see what we were, what Adams and we sort of arms like negotiate and we thought we’re going to be, because its time to their earn out. And that’s all with their earn out is focused on is that revenue. When we did the transaction with Adams we were worried about the volatility of this revenue stream because it was very new and so we structured for it. And if you run this rate out right now then it will be somewhat self-correcting not on the earnings multiple basis but on a sort of a one for one dollar basis, its sort of self-correcting that if we were $0.5 million or $1 million or whatever below the forecast over that period and we’ll get some of that money back out of that earn out. It’s taken both the businesses and growing them at roughly the 40% rate that we said we thought we could do. So, but if they are doing at 8 million in ‘05 presumably they are exiting ‘05 doing at least 2 million a quarter. Right, so I mean, you got to figure all that into it too, because we’re only getting the math of February 2nd. So that maybe why, if you trying to do the math and maybe why Q1 was lower than you thought as you only got 58 days. Right, obviously the skeptics going to say, you are buying a company on the heels of decelerating growth for the core WebSideStory business that has, has Adams right now. So to the degree you can be more transparent about the contribution from Visual Sciences that we can compare old guidance versus new guidance and understand what the implied performance of WebSideStory as that would be helpful? Yeah it’s just real difficult to figure out like I’m going to probably try to plug Visual Sciences into a big renewal we have going on, and where do I credit that revenue. So we were trying to be more, yes simplistic in our modeling and I said earlier we would have taken the revenue guidance down standalone. Our business is very forward, it’s got visibility and we would have, you can’t take $400,000 off of Q4 and then go and make it up, make up $800,000 in Q1 plus whatever your formally projected growth rates were. Probably we taken out less than 400 because like I said the bookings does fill back in between the quarter right. So… My last question, will you be transparent and breakout the Visual Sciences contribution in the first two quarters of ‘06. Just to get comfort as far as how the core WebSideStory business is doing? We’re going to do exactly what we did with Adams, which is we gave you, we filed an 8-K. And again I don’t think I can talk with financial accuracy around with what’s the earnings contribution next quarter. Okay, so we’ll be able to look at what the core WebSideStory business is for at least the next two quarters – did with Adams? You are going to be, what’s you are going to be have to see is license revenue which we didn’t have before, right. And you are going to see consulting revenue which we currently have very, very little of like 50k this quarter or something, it is very small. So you are going their business pop in right away. And then but the further we get out, it gets very difficult to try and figure out where to put the buckets. I understand them, more transparency you give will help with that 400k delta in context about whether it’s the beginning of the trend or a one-quarter readjustment. Thank you very much sir, ladies and gentleman your next question comes from the line of Jeff Osher of JMP Asset Management, please proceed. Hi guys, Wendell asked the question I was getting at, but just for a little more transparency and clear you along those lines, if Visual Sciences exited ‘05 with trailing revenues of 8 million, its you presume if you just assume when your quarterly revenues today with 40% growth you get about eleven two in ‘06 and if you just look kind of if you assume there is some linearity to that eleven two and layer that in, I am sure you can see Wendell’s point that it looks from your guidance relative to, the old guidance somewhere kind of consensus was for the first three quarters that you are taking the core business down significantly, so any transparency you can give moving forward. I think would be a bit positive because the skeptics as Wendell pointed out are going to look at the extreme just of our acceleration of the core business? Yeah I guess the only thing I would say about those skeptics, again I haven’t done the math because I’ve been focused on what the combo looks like going forward but it probably would have come down 300,000 or something like that of the 400,000 and that would flow completely through the year, so that would have taken my internal models down by something like 1.2 million or 1.5 million, I don’t know, but it’s a, you have to look at the bookings in customer ads is actually the forward-looking sort of predictive indicator, and that and then obviously attrition, and we’re not saying there is an attrition problem, because we’re saying we’re running in the same basic renewal rate ranges we have been running in. Yeah, I hear you on that Jeff, I just looking at the numbers – from everything we’ve heard there is, the attritions is certainly normal which says a lot about how you are serving customers, but the consensus estimate are kind of the mid points of guidance, ‘04 was 42.5 million rate, and I am just taking Q3 consensus, not that the analyst got it right, but just kind of taking the 15.3 in your mid point, netting out the rest of black hole revenue is 48 million. So, for the first three quarters that assumes that had the organic business been what everyone was kind of expecting, that assumes Visual Sciences only adds 5.6 million in that… Revenue, I’m taking 13.1 which was the mid point of your guidance for Q1. 14 million for Q2 again the mid point and I’m just throwing the 15.3 for Q3 which was analyst consensus. No, no, no sorry about that. No, I’m just taking the first three because that’s all you guided for, right for the combined entity. So there is, if I assume the core business was roughly the same or take 400,000 out, which would be the lower basis is what I am saying, even if I add the 400 back that you missed from this quarter and assume the basis is where you would have like to been and we would have like to seen you. Yeah, I don’t think it’s quite as a haircut as you guys, so 2.64 quarters. So if they contribute 6 to that out, and I don’t have the math but I think that it probably gets pretty close to whatever the eleven six number you were talking about is. Okay well, we’ll run, but again any transparency if you can give, going forward I think is going to help you use the concerns about the core business, Jeff thanks a lot. Thank you very much sir. Ladies and gentlemen your next question comes from the line of Richard Baldry of First Albany Capital, please proceed. Thanks. In terms of the structure of the deal, can you talk a little bit more about the unsecured senior notes for 20. And you have this is now your second acquisition less than a year, are there any covenants associated with that, note that would preclude you from doing other acquisitions first write to any follow-on offerings etc. that might limit your financial flexibility? Thanks. Yeah there are no covenants, and there is no penalty on prepayment of the note. So basically Jim and David have built their business and wanted this, they actually wanted some downside protection and they wanted as much equity upside as they could preserve and this structure sort of gives them 2/3rds of downside protection as represented by the cash and the note and also provides them with 2/3rds of equity upside as represented in the worn, in the stock, in the restricted share and the options. And so what they sort of got and I told them if I over ever sold my company I don’t want to do the same thing. This is a good trend, a good structure is a one-sided collar on the further proceeds which is very rare to see in an M&A transaction. So, but there are no - that’s how we sort of got to the structure, right. And then Jim and I are focused on the combined business going forward and, we’d neither one of us wanted to leave the combined business with low on cash. So I think we went up after this transaction with about 13 million in cash and if you look the cash generation of the business there will be cash on-hand to pay the $20 million note of plus interest at the end of 18 months if we need to, so we don’t have a gun to our head, we don’t have to go and raise capital, and we have the luxury of delivering for you guys for a couple of quarters if we wanted to raise capital if the skeptics, we are not against the optimist tomorrow. So we got a good situation where we are going to run our business and we got the cash to pay up the note when we need to, there are no covenants preventing anything further but we are not, I guess don’t view the fact that we did Adams in May and in Visual Sciences in January meaning that we are going to be running around doing a bunch of M&A, I mean these two businesses now we have more than we can say great serving, we can get the a much better investment of our time and spending time hiring the good sales guys and good consultants and good engineers to grow this business and not trying to get spread too thin too fast. So always say plugged into what’s going on out there, but I think that we are going to focus on execution. A pretty basic question, in looking at the headcount of the WebSideStory proper exiting the quarter, if then maybe growing underneath them to the sales quarter side and whether, retention in the sales side is good which seems to be reflective of the high bookings figure in the quarters? Thanks. The, sort of basic headcount for the whole company excluding the acquired headcount turning out of the fourth quarter and then total number of quoted reps, how that’s changed in retention within that figure? Yeah we had about 220 people at the end of the year and I think 34 quota-carrying reps on new business and about 14 employees quoted on renewal business. So its only one sales head added in the last quarter, if I go back to my notes, what would you expect to see that exiting ’06? Well we also added sales managers, we added a couple of people in consulting. So I am giving you quota-carrying reps. The other thing we are doing is, we ramped our marketing budget starting in Q4, and our marketing program spend is going to be 60% higher this year than it was last year. That’s last time you guys, we are doing what’s right for the business long-term because of the opportunity that’s there, and so we are actually investing more in marketing. And you got to look at the sales and marketing expense as, as a combined investment not just at the sales ad, our sales ad productivity has been growing for the last three years. Those guys are getting better more and more tenure, people are been here with us for a year, do better than the new folks and all that good stuff but it is a combined investment, not just the heads there. Thank you very much sir. And ladies and gentlemen our next question comes from the line of Kyle Evans with Stephens, please proceed. Can you go over the competitive landscape, you people have been pretty focused on Google but could you talk more about Omniture, Coremetrics, WebTrends, etc.? Yeah, the answer would be pretty much exactly the one I’ve given for the last four quarters. Omniture is doing well, growing fast right here, they are going to try to go public, they’ve hired, the CFOs and General Councils and something like that. So I would expect to see them try to go up this year. And Coremetrics is doing well, good brand, good customer attention in the ecommerce sector. WebTrends basically the same from what we see, not much has changed still kind of the larger presence in the market with a big install base that’s an asset to them, their big install bases and their WebTrends 7 release which is out a year ago or whatever got them back into the game, they were sort of out of the game for a while, but it hasn’t been a dramatic ascendancy back to market leadership, and then Visual Sciences as the up incomer that basically everybody was enamored with, and has kind of quietly walked in and took about twenty of the biggest accounts in the space and got everybody’s attention with their technology. Okay. One of the things that investors appear to like about your business model is the stability and the visibility, so can you help us understand how the ecommerce bookings got back in loaded and happen along with that, any kind of average deal size trends within that as those bookings that came in towards the end of the quarter? Yeah, I mean bookings we have like as an example in Q1 of last year, we had this very similar situation where we loudly outperformed on bookings but back then I think we have guided $0.07 to $0.08 and we did 7, so you guys whacked us, whack to start from 14 to 12 or something like that or even 11 and because, and the reason we did seven was because we had such great bookings, and they were late in the quarter. So the extra penny was extra commission, because we would had a record bookings quarter in Q1 and at the time I said, look its a forward, its a forward indicator this is back then I said, literally this is the best sales quarter I have ever had in the software business. As far as everything just coming together, but it came together at the end of the quarter, and we have a very similar situation this quarter although this time we beat by a penny on the earnings but some of that, half of that penny was from the excess software capital. So to me we basically I think we managed our expenses a little better this quarter than we did back in Q1, and you can’t really control sort of within a quarter when your deals are going to come in, you just push hard, we close every month here, we don’t close every quarter, we close every month and push our guys to monthly quarters and it just happened that in Q4 a lot more of it came in December. Well actually I didn’t – well I can’t answer that because I didn’t look at average bookings by months, I just look at it for the quarter, and for the quarter it was about like I said 30 grand across all businesses for one year value of the new customer has. No that’s 40, there is a difference between a new customer booking which was 30,000 I think for the last two quarters it’s been 30, 000, and the average annual relationship, the average annual relationship includes our existing customers, but so do you follow me? It was in that 30% to 40% range. In the target of 30% to 40% range and I apologize, I don’t know exactly I think it was in the mid 30s. Okay, so, the Adams business is still 20% to 25% it, it sort of just the bookings in that piece of business, obviously slow? Yeah and, the reason I apologize because Adams measures bookings on a multi-year value and we measured on a one-year value. So I think I want to say 34%, but I’ve got all you guys up on my stream. So Adams is again growing in the 30% to 40% range that we are growing in and they have some quarters where they do better than that and some quarters where they are in that range, our bookings growth in that, I think Q1 of ’05 was 50%. And then my SG&A team brought in when I, because I said earlier I don’t have the numbers. And, then it was like 35% in Q2. So it just kind of whack up and down. Yes, yeah we closed, I think seven cross sale deals, I think it was about $580,000 or something like that in one-year value or total contract value, of cross sale deals between selling site search or web content management in the HBX customers. So, back to the guidance, I just wanted to be clear on the deferred revenue piece that goes away in purchase accounting, so the piece that you are going to add back in for the sort of non-GAAP revenue. I assume that there isn’t actually any cash associated with that and that its already been paid? No there is cash associated with it, if it’s still receivable, so like us Visual Sciences books to deferred revenue when they invoice, not when they get paid. And so what happens is the cash flow of the business is not interrupted at all. Okay, and then the next question is, and I know there been a lot of questions about guidance and obviously the whole idea is to try to figure out what the core business guidance would have been. We talked a lot about the revenue and I think that as we all go back and put the numbers into our model we’ll figure out in either be pleased or not pleased and then we can all follow-up back with you. But we haven’t talked too much on the EPS side and so and looking at the guidance it looks like the new EPS guidance, pro forma guidance is $0.11 to $0.13. And is it my understanding that if you backed up the deferred revenue then that new guidance could be $0.06 to $0.08? No, no, no, no. It will be $0.11 to $0.13. Well, if you, when you say back up the deferred revenue, you mean if you take it down because I reconcile that down to GAAP, right down at the bottom of the guidance. Right, so it looks like there was a nickel of it was like, when you are getting back to GAAP. So I guess what I am asking is, the deferred revenue as it flows through the P&L would add the nickel to guidance? The way I am running the business is, I think the consensus for Q1 was $0.14 and in that same math if I get to include the pro forma revenue which was the stuff that was written off, so with cash then we are guiding to $0.11 to $0.13 as compared to that 14 its consensus. Okay, so then, so I guess I am just trying to figure out what, I guess, I mean -- all right, so if the business is, if the acquisition is going to be neutral and I guess the way to think about it is if you didn’t take the nickel of deferred revenue then there would, the business, the acquired business has expenses and so that’s we should think about that sort of as a breakeven. So the core business you would have guided to $0.11 to $0.13 had you not made an acquisition? No, no I am saying with the acquisition, but or was out of it, because it’s neutral, it’s neutral to slightly accretive. Yes we did and again what as I said at the beginning and in the middle and in the end, is the reason we are bringing down guidance is because we are ramping the spend on sales and marketing, its not because of the roughly $300,000 in revenue that we would have probably lowered per quarter because you look at the margins we generated in Q4, right? So this is really sort of two questions there, what’s the revenue growth of the business and then what’s the earnings performance of the business. And so, I think what we probably would have done to give Wendell the transparencies we probably would have taken revenue down, the guidance range is down by about 300,000 a quarter or something like that for the two quarters remaining. And then we probably, and we still would have guided to $0.11 to $0.13 because we decided we are ramping sales and marketing and that’s the right thing to do. And if anything we made too much money in Q4. Okay, so that’s what, I mean my questions were, I am just trying to get to how much of the difference in EPS with sales and marketing and so the answer is its all of the EPS difference with sales and marketing. So its those three areas, I mean what we are saying is the high end of the market is on fire while the world think its getting, going to get raised by Google, we actually think its on fire with opportunity and we’re hiring sales people growing our marketing spend by 60%, and hiring more developers in Russia to ramp-up the R&D throughput of the development engines. And then maybe all of that messaging got mucked up in the acquisition, Jim we probably should have closed your deal tomorrow so we could have done a standalone announcement and then announced your deal. Well, whatever would have been, we would have been just as confused I suspect but, that’s good, I mean its nothing but a few good quarters that’s been clear up and that’s sort of the way the things work. Okay, so then and then the next question is as we think about combining the businesses, one of the pluses of this business has been there is a subscription revenue that is not just a deferred license revenue but it is actually subscription revenue that is connected to a product that can be turned on and off. Is there, so in other words perpetual licenses are, in my opinion from an investment standpoint a less desirable way to run a software company, obviously the most popular way to run them in the past. Looking forward do you think that, you will continue to run the acquired business partially as the perpetual license deferred over 12 months? We are going to be running the business the way Jim has run it which is you basically go into these high-end opportunities and you would listen. First thing you do is you spend two hours listening to their needs and that’s how you close million dollar deals. In my former, but that’s how we closed $10 million deals and then we get it by going with these big global banks and really spending time to understand what they wanted and then mapping our solution into what they needed and delivering them real value. And so the first thing you do is listen and then if they wanted in-house and they are going pay a $1 million and then that’s the beauty. I’ve said this opens up that market to us. And there is two bad things about the traditional perpetual license software model. The first is the unpredictability of the revenue, the second is that when you run your software in-house you got to maintain all these back releases on all these various platforms like Solaris, IRIX, HBX etc. And you can solve the first one with contracts, you can solve the second one with an efficient delivery system that once your solution is installed in-house it auto updates and, as Norton Anti-Virus, an on-demand software company or a licensed software company, right. And Jim’s architecture is sort of exactly that but at the enterprise level if you want him to take the time he can describe it to you, it’s a pretty unique approach. Okay, well, I mean that is something I look to get into in the future but we don’t have to now. But especially my understanding is that, at the high-end this is you basically got to give them want they want. And, so the best way to approach that is just create a high where you can auto update or if they want the license they are going to get the license. Hi Jeff, it sounds like the average deal sizes were kind of inline with prior quarters, what about the length of the contracts, there’s been any lengthening of those average deals? 17 months. Yeah kind of like clockwork, it been that way for a year. We’ve been trying to get it longer because it does help you on the renewal side of things, but it seems when I got here it was 12.2 months or something like that, we got at the 17 and it seems the sort of level off, seems like half of our customers will do multi-year deals, and the other half pretty much wanted to do one year to start off. Thank you very much sir, we do have another follow-up from the line of David Hilal, of Friedman, Billings, Ramsey, please proceed. Jeff, when you guys report the March quarter, how many revenue lines are going to be on the P&L and what are they? Okay. So, as acting CFO I can’t answer that question, and I will work that out with Claire Long and we will start out Friday and we will get back to you, because I am going to give, I am all for transparency, but I also don’t know other rules, you know what I mean. Okay. So its sounds like we’ll continue to add obviously subscription and advertising lines, so there will be a license line, so we have at that level at least three and what you are not sure is whether there is going to be a four and I guess that would be consulting, and if its not a four, consulting is going to go on to one of those other three? And you mentioned maintenance, so I don’t know, I know we’ll have license that will add, and I don’t know the GAAP, 97 to definition of what maintenance is and whether Jim’s support is included in that, that’s what I am saying, I just I don’t want to make a commitment that I am going to add a bunch of lines that I don’t know if I even can’t add. So the thing that this business has are consulting, maintenance and license. We do have consulting today but the bulk of our consulting gets bundled in, we’ll sell a $200,000 deals that will include 10 days of consulting. When you guys made that determination, having probably a mid quarter call to give that guidance will be helpful because otherwise I think there will be lots of confusion in 90 days from now on that. The other question I want to ask, Jim… Well, people will focus on the revenue mix, right, so just one of those point we want to understand, what’s strong and what’s weak. Its clearly we can’t, we can’t figure that, because we know something strong, we know something is weak in the business too. We can’t answer like pinpoint, which is which. Well, no I thought that I in giving you the four components of ad revenue, bookings, Euro, and HitBox Pro that I was doing exactly what you want, which has given you visibility. I mean most companies might not spend the time and tell you about their HitBox Pro business which was $50,000 worth than they thought. So I am trying to give you guys all the visibility that you are asking for, but sometimes you ask for questions that we don’t even have calculations for, and so then the question is alright do I need to figure that out on the fly because the way I run the business is bookings, attrition and cash flow and in customer ads. If, when you try to get more complex in that then I’ve got to go hire three people in FP&A just to run all the different scenarios for us and it’s just how work the investment. Alright and then my next question, so with the perpetual licenses that Jim sells, he recognizes that over 12 months which is the first maintenance contract period, what, to do that, there needs to be, I think there needs to be some outstanding deliverables, so accounting allows you to defer and recognize. So Jim, what do you do in different, in the way you license that software that allows you to recognize it over 12 months as opposed to be enforced to recognize it upfront like most software companies do? David, we have a variety of ongoing support services beyond the scope of the maintenance agreement that we extend to the customers to that period of time. So it’s because they are large and implementations of our system where people are often integrating new these types of data as the weeks and months go by. We have a team that’s allocated that stays involved with that expansion process. It also allows us to stay very involved and look for the natural areas of expansion for the product line at the same time. Thank you very much sir and that concludes our Q&A session for today, I’ll like to turn the call back over to our speakers for any closing remarks they may have. That’s it folks, we are going to work on giving you all the transparency you need and we are going to schedule a day, I believe its going to be next Tuesday in New York where any of you that want to be there or any of your investors would be out to come and see this technology live, and I think the folks will understand more, I think they will be pretty bullish on what we were up to when they see that. So we’ll get back to you when we know more about that event. And at that time we’ll stop the call. Thank you very much sir. Thank you ladies and gentleman for your participation in today’s conference call. This concludes the presentation and you may now disconnect. Have a good day.

EarningCall_234103

Here’s the entire text of the Q&A from Oracle’s (ticker: ORCL) fiscal Q2 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Thank you our question and answer session will be conducted electronically. If you would like to ask a question, you can signal or type us in the “*” Key followed by the digit “1” on your touch tone telephone. If you are turned in on your speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. We do ask that you do limit yourself to one question. Again it is “*”, “1” if you would like to ask a question. Hi, good afternoon, guys. Larry, Database grew 8% and RAC was up bigger than expected. Is Release 2 looking like the catalyst to drive adoption? And for Safra, deferred revs were higher than we had expected. Is this due to strong support renewals on the application side? Thanks. Jason, the big issue with moving to RAC is making RAC as easy to use, a RAC of 64 machines or a grid of 64 machines, as easy to use as one computer. And we have been working at it, we have had Grid working for a very, very long time, but having all the management tools, being able to patch 64 separate machines as if it were one machine, to tune it and have all the tuning to be completely automated is what’s been blocking us from mass adoption. I think we’re largely over that hurdle now, though it gets better and better with every release. And I think we’re going from the early adoption phase into again, the next phase. And we think over the next three, four, five years, the vast majority of our customers will be using RAC even for small installations. They’ll use a couple of small, a couple of tiny Dome machines, or a couple of small Sun machines to run their applications. But they’ll always have at least two computers on the Database. It’s all about now, not does RAC work, but is it absolutely as easy as a single computer? Yep, and Jason, on the deferred revenues, it’s basically support as usual, and the acquisitions really and the support from the acquisitions. So that’s the only difference really. And are you seeing on the support side, I mean it sounds like renewal rates are probably in excess of 90% plus. I mean what… I don’t want to get ahead of myself too much here but Siebel had some challenges, right, with customers renewing maintenance contracts. Are we crazy to think that perhaps we could see an acceleration in renewals now that Siebel is in your hands? Well, I think we have invested very, very heavily in PeopleSoft customer support. We said we were going to keep 90% of the engineers and 90% of the support people and actually redoubled our efforts. And we’ve measured customer satisfaction and seen substantial increases in customer satisfaction among the PeopleSoft users post acquisition. We think that same exact thing should happen with the Siebel customers and their renewal rates should go up as well. We’re going to work very, very hard to achieve that. Our plans are similar. We plan to retain the bulk of the Siebel engineering team and the bulk of their support team, and we’ll be adding Oracle people to again get those satisfaction levels at the same level that we have right now at PeopleSoft and Oracle. Let me say that, I’m going to get myself in a little bit of trouble here, but we’re trying to be the very first company to win the JD Power award for support excellence, and we’re getting close. I don’t know if I just killed it right there, but we are really focusing on delivering a very, very high level of support to our customers. Hi, thank you. Couple of questions. First, I think one thing, the Database business didn’t reaccelerate as fast as some had hoped, I think off of last quarter. And I was wondering what would you expect as you look out next quarter? And, Larry you made the comment on the last call that I think if you look on an LTM basis you would view this segment as a 10% grower. When do you think we could get back to that double digit range? Actually if currency hadn’t moved from last quarter to this quarter, we would have grown exactly 10%, right? We got 2% help last quarter. With the 2% help it would’ve been 10% this quarter. So we’re pretty happy with the results, the Database results. As Charles mentioned, every place else in the world, in North America, Asia Pac, Latin America, every place else in the world that we measure, we’re over 10%. Europe is just in a bit of a funk. And if you look at the slowing economies in Europe plus the unfavorable currency translation, it’s really hard to fight both of those headwinds. Are there any signs that that could get better or reverse itself many a little bit in February or is it still too early to tell? We know our pipelines are stronger in Q3 than they are in Q2. As Safra said, the pipelines look very, very strong in Q3 but we’re expecting another 2 points down in currency. So the business looks very, very strong, but currency is going to wrong way. And again it is “*”, “1” if you would like to ask a question. We will move now to John DiFucci with Bear Stearns Yes. Thanks. Just a follow up to Heather’s question on Europe there. Even on a constant currency basis, it looks like it dipped, Europe hasn’t been great for anybody lately over the last year, or year and a half. But this quarter Database on a constant currency basis was flat and Applications was up 1%. I’m curious if, so are things getting worse there? It sounds like your pipeline looks better, Larry, but what about in your guidance, what should we, what’s implied in Europe? Are you expecting it to actually get better next quarter or are you just assuming it’s going to be in the “funk” you call it? No, I think Europe is going to get better next quarter. But again, we’ve got these two issues. One is some of the German economies, excuse me, some of the European economies are growing very, very slowly like Germany and Italy. France isn’t doing so well either, and the unfavorable currency translation is kind of a double whammy. Nonetheless, we see very strong pipelines in Europe for Q3. So the business, the underlying business looks pretty strong versus Q2. But we expect currency to take yet another downturn in Europe. So we’re kind of thinking that those things will cancel each other out. But we’re optimistic we can do better. Yeah and I think also just in gross numbers, we had a tough comparison for Europe from last year. And so I think we’ll have a little less of that and so I think that you’ll see that things look a little bit better there too. I think the other thing to keep in mind, it’s the small deals have been fine. And it’s been the large deals, and that’s an indicator of the economy. But if you look in the pipeline, some of those are starting to come back. Hopefully we’ll see that happen in Q3. And some of the big European deals that we have signed, we haven’t been able to recognize the revenue. In fact, we’ve signed a number of large deals where we can’t recognize the revenue. The big Air Force deal, we haven’t recognized the revenue. The big Russian deal, we didn’t recognize the revenue. So we have very, very conservative revenue recognition. We’ve recognized very little revenue for example since the Retek acquisition because our rev rec policies are very different than theirs. Hi good afternoon. I had two questions on the applications business. Obviously you had a real nice recovery from the first quarter. To what extent did some of the transaction flow that fell out of first quarter that you talked about positively impact second quarter? And secondly, given the commentary you made about the strength in renewals on the applications maintenance side I would have expected to see maintenance revenue for applications increase sequentially in second quarter. I was wondering if you could comment on that? Thanks. Yeah you’re right. The deals that we talked about in Q1 slipping out of the quarter did close so none of those deals went to a competitor. And a lot of them closed in the first week or two. Some of that always happens, but it was a little bit higher than normal this quarter and so we started off this quarter in pretty good shape, as we did Q3 as well. And on the maintenance revenue in the applications business, I would have probably expected to see that increase sequentially given that it sounds like the positive tone on the renewals. Yeah. It’s, I don’t know specifically what the impact is. Anyway it’s for things the way we recognize what we’re recognizing in this quarter is stuff that was paid for whatever months ago since we’re doing it really a month at a time. So sort of a renewal rate in particular during the end of the quarter wouldn’t make too much of a difference frankly. I don’t think it’s any different than the typical seasonality, but I’ll take a look at it after the call and we can talk about it. Okay. Just one last question for you. What was behind the substantial re-acceleration in a couple of the options you highlighted, in particular the Enterprise Manager? Thanks. I don’t think there’s anything specific but we have had more focus in the sales force with more overlay groups, as we see more opportunity and we’re going to do that with Security in the coming quarter. So a lot of these areas around the Database are bigger opportunities than we probably first imagined, everybody was so focused on the Database. But the Options Enterprise Manager, RAC and especially Security now is going to be a big one. Okay. I think there’s one interesting thing, in terms of Enterprise Manager. As we have gone to our own backup technology, as we have gone to what is called Automated Storage Management, as we have gone to Grid Computing, you do need management tools to manage a grid of computers. We have management tools that do that. Because these are rather innovative features, Automated Storage Management and Grid Computing, companies like BMC, VERITAS really don’t have tools or systems that apply to those features; therefore, we’re selling a lot more of our own management tools rather than competitive management tools. We’re selling an awful lot of our own Storage Management systems, so we’re competing effectively against third party management companies and effectively against VERITAS in the file system area and soon in the backup area with our new announcement of Secure Backup. We have also expanded the number of platforms we support. We used to only manage Oracle applications and infrastructure, but now we manage WebSphere, WebLogic, other operating systems. It’s a bigger footprint we’re going have out in the market. Thanks. First question would be on the guidance looking at Q3, and just guidance broadly speaking. A quarter or two back we had some full year top line guidance and last quarter pretty much kind of resolved to some earnings guidance. It sounds like the pipeline is getting stronger. Is there any reason to believe that some of the guidance that was out there previously for both top line and earnings would move in one direction or another? Yeah. I think the only, our only thinking was the only really significant adjustment would be the currency change. And you know, now we have Siebel, so we thought it made sense to since we’re not 100% sure Siebel will close, but we believe that it will actually be closed the entire quarter we were just planning on giving you that number, the moment we close. Okay, very good. And then just on products and specifically Middleware, Charles had given some detail on kind of the growth of the business and Larry mentioned gaining share. Are there any other instances you can give us or just further backup to support the share gains in Middleware vis-à-vis case examples? If you look at the trailing four quarters we were up 24% compared to a decline of 1% for BEA. If you look at the core Middleware excluding our legacy development tools that was up 29% in the quarter. The other thing that we have done is we have certified all of our applications on our middleware, which now just creates a huge potential to go back into the install base and up sell Fusion Middleware. Thanks. I just wanted to be clear on Q3 guidance on Database. You had a big sequential ramp from Q2 to Q3 last year in Database. Should we assume something similar? Are we going to be able to see year-over-year growth in the Database side, just exclusively on the new licenses side, would that be mid to high single digits? Okay. And just as a house cleaning, do you have what stock option compensation expense would have been in the quarter? Yeah. I think it’s less than a penny. We’re thinking, for the year did you ask for the year or for the quarter? Okay. I think it’s less than a penny so it would be about 3 cents for the year. Is what we’re thinking. Now, again, that was including Siebel? Okay. That’s we’re already starting to tell you our Siebel numbers here. That would include our estimate for Siebel too. This is John Walsh for Brent Thill. On the 10g Release 2, do you see that as a catalyst going forward and can you give us an update, I see you gave us 30% of your installed base of Database customers on 10g, as maintenance ends on some of the older products is there a need for those customers on 8, and 8i. and even the original version of 9 to move off that? No, there’s no need for them to move off of that. But I think there are a lot of advantages to moving to 10g. Automated Storage Management which improves performance, lowers the amount of labor to run the database. But there are options you then would buy. You will buy the RAC option, you will buy management tools, and we’ve seen acceleration in those two things. As you move from the old style of database computing where the application has one and only one Database server, although that’s all IBM can have. I’ll just do a little advertisement here. IBM DB2 can have one Database machine running SAP. Microsoft can have one Database machine running SAP. We can have between one and 64 machines running SAP. So we have, we have this great capability that is unique in the marketplace. And with that, if you want to adopt Grid, you have to buy the RAC option and you’re probably going to want to buy the enterprise management tools, or what’s called Grid Control to manage that array of computers. The other thing that will help us is just the trend in the industry. Clustered machines are now 16% of all server shipments, according to IDC. If you look back a year ago, they said it was only 12%, so the industry is shifting in our direction. Any update on the breakout that you can give, you gave 30% on 10g on the some of the other versions? Great thanks. Can you help me understand what’s happening with the cash flow particularly given the strength you’re seeing on renewals on the growth in the maintenance stream? I’m surprised that cash flow has slowed down here. In fact is down year-to-year so far in first half. So should we expect that to pick back up here or what’s really happening there? No, we had a very significant tax payment in the quarter from the American Jobs Creation Act. Our HIA dividend, we, as you may remember, brought back a very large amount of money that was permanently invested outside the United States, and so we had a tax payment during the quarter which impacted it, and also another tax payment that would have been at a different earlier time, we paid in this quarter also. That’s the only thing going on there. So should we, sounds like we should expect cash flow to start growing again in second half of the year and probably more in line with the overall growth in maintenance? All right. Snuck in there. First, headcount in Europe seemed to move up a bit and wanted to know what the driver there was, or where those people, what part of the company are they in? And then Larry, you talk about the 20% EPS growth over the next few years which is certainly impressive, but I was wondering if you could take a stab as to what percent of that would be organic versus acquisitions. Thanks. Let’s see. First question was the growth in Europe has mainly been in consulting. The consulting business is growing again. As we know the consulting is a feast/famine business, where the consulting business shrunk a few years ago. It’s now growing very, very rapidly, around the world by the way. North America, Asia Pacific and Europe. There’s more demand than we can supply in consulting. That’s the headcount growth. As far as the split between organic and acquisition, I would expect more or less of an even split. Between that, in terms of growth via acquisition and growth via innovation and/or organic growth. But it’s going to be a combination of the two. We don’t think we can get there, that 20% EPS growth for the four or five year plan without some strategic acquisitions. Again let me emphasize, whatever acquisition we make, that acquisition is aimed at making us Number One in the software category in which we participate. Or, such a strong number two that we can challenge for a number one over time. The software industry is actually very easy to understand. The lion’s, almost all the profits go to number one and a little bit goes to number two. But to meet our goals of EPS growth 20% per year over a five year period, we have to increase the number of software categories where we are the leader. I think we can do that. We think we can get to number one in Middleware, we think we can strengthen our number one position in Database. We think we can get to number one in Middleware and we think we can increase the number of targeted industries and applications where we can be number one globally. So we’re pretty optimistic that we can pull this off. Yes. The other headcount growth obviously is in development outside of the United States. In a number of different countries. And that’s it. great well thank you everyone for participating in today’s call. The telephone replay will be available for 24 hours, the replay dial in number is 7194570820, again that’s 719 457 0820, pass code 6107194. You can also access the website broadcast at Oracle.com/investor which will be available through December 22nd. Thank you and I will turn the call back to the operator. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_234104

Here's the entire text of the Q&A from Motorola's (ticker: MOT) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we'll incorporate your corrections. And please note: we have paid to have this conference call transcribed, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Operator Thank you sir. At this time if anybody does have any questions you may press “*” 1 on your touchtone phone, you will be asked to record your name prior to asking a question, again please “*” 1 to ask a question. If your question has already been asked you may press *2 to withdraw your question again that’s “*” 1 for any questions. Q - Edward Neider: Thank you very much, great quarter clearly it’s throwing off a lot of cash on a basis this year and if it becomes a passage you actually went ahead _____ in other business, that most are going to be sitting on substantial cash reserves and generating a lot per quarter. I know you get an aversion in the past to larger acquisition or any mergers, what are your expectations to a repatriate that money to the shareholders or to use it for some other purposes rather than just accumulation? A – Edward Zander: I don’t we think we’ve changed our position here, we are certainly pleased for a company that two years ago struggled to get net cash and operating cash was something that came in before I got here focused on, it’s good to see us beginning our operations to generate this cash. We are as you know as an aggressive stock buyback which we will continue to do, we will continue to use it for some of these smaller acquisitions we have been doing and you will see those from time to time and we will continue depending on whether with this happens over the next year, always continue to evaluate our options but right now I think it is the stock buyback and any small acquisition that we will do. A - David Devonshire: We also mentioned that we were looking at repurchasing a billion dollars worth of debt in the first half of 2006. Q - Michael Lingin: Thank you. Could we get an update on where we are on the first GSMA tender of those 6 million units in terms of how much of that is shipped and then just looking into the fourth quarter, how we should expect that unfolding into just general kind of regional mix in the handset business, what trend should we expect in Q4? A – Ron Derricks: From a GSMA perspective, this is Ron Derricks Mobile Devices, from the GSMA tender one we’ve shipped about half of the tender one to-date of the six million units we’ve shipped just about 3 million of them, we believe between Q4 and Q1 of next year we would execute the remainder of phase I, we will be beginning working on the phase II part of that. Second part of the question was regionally how do we expect we will do, I really feel right across the globe, that we will have a market share growth as well as continued profitability in all of the five markets that we speak about. Q-Armstrong: Thank you very much, congratulations on the quarter. Going in to the fourth quarter I see a lot of things that have actually helped your margins within the handset business, continued volume momentum, the new product shipping as well as additional RAZR shipment, but what are the couple of things that you guys look at that could stand upward momentum in terms of margins within that business in Q4? A – Dan Maloney: That’s a good question, that’s what we can talk about a lot, there are so many moving parts here, so many geographies so many economic issues, you see oil prices, you see disasters, you can put down atleast ten. Now our job is to rank them and stack them and put weighted averages on them, I will tell you that they are very consistent on this for almost the better part of two years now in that we wanted to continue to invest and we did a commitment and we said we are moving up to our targets of 13% to 15% and we talked about every business here moving in a direction before towards that number Ron and his business has done an outstanding job in getting here but we are as equally excited about the many investments we are making in R&D, in field expansion in brand equity and other things so we have to play that a lot within a quarter and we think in Q4 we have a pretty good product lineup, the markets look pretty good, but we are also planning some more wild products in 2006. Q - Christine Amacart: Thank you, I wanted to ask the question on the networks group, you guided down sequentially on operating margins due to favorable customer mix. Can you give us an idea of how much of the iDEN business grew within the network systems and to the extent that you would quantify it, we want you to quantify what percent of that business is next half? A – Dan Maloney: As far as the sales of iDEN infrastructure in the third quarter Christine, iDEN infrastructure sales did increase from the third quarter of 2004 so that business continues to grow, it has had growth virtually every quarter so far in 2005 versus the comparable quarter of 2004. We don’t discuss the relative profitability of one technology versus another in that business or in any other business. A – Edward Zander: Yeah, I will add to that, I know where you are going in thinking but this business is not lumpy but you do have the ability to get some big contracts during quarters and you can ship the margin, and in addition AG’s team is also focused on cost reduction and supply chain and margin and everything else. We are just giving, I mean, I would love to see him to do it again but we don’t want to give you where we think the business is, we want to gain market share, we want to invest here. We think the more normal is 12% to 15% range and the guidance for Q4 total as a company factors that in. So I think that’s irrespective of iDEN or anything else that’s where I think the business should be and that’s where we planned it. Q - Ehud Feblum: Okay thanks. Just clarification in my question, my clarification is, David you mentioned the $91 million reorganization charges, did you mentioned how much of that came from Cog versus Apex? A – David Devnoshire : I could handle that, and then you can go on with the other question there, relative to that question, about $34 million of it was in Cogs and the remainder was of SG&A. Q – Ehud Feblum: Great thanks that. Okay so the real question is on the handsets, and you made a comment that the low-end handsets were up 50% I believe quarter over quarter. How do you define a low-end handset is that below $100 below $40 and when you look at the marginal increase from 10.3 to 11%, how much of that came from these low-end handsets, the volume of these low-end handsets, actually making the margin of this low-end handsets better so therefore raising the margin in that group of handsets versus how of much it came from just more high-end handset like RAZRs etc., that have had phenomenally better margin naturally, do you know what I am saying? How is make shift percentage how much of that particular category of low-end in fact improving in terms of income of margin? A – Brown: Well thank you, I think if you, look at Q3 and you look at kind of what we call growth in the low-end, we generally define low-end as below $50 and we look at that in Q3 and it was roughly balanced with the growth in the high end and the growth in the low end and both of them added bringing a wee percent up the seven tenth of a point that was driven. A – Edward Zander: The key here is that we observed a lot of growth in the very low end and we were still able to improve the operating margin in the segment. That is the thing that the investor should understand A – Brown: And I think the other thing, that I continued to harp on when I was in India and if I can get the cold low end going in India, I am going get the high end going in India, there is a lot of people in India first, and there is a lot of people with enough money, that go buy RAZRs in India. So we need presence there and that’s what we are doing and we think we can sell as many RAZRs as we could probably make for India if we just get on the street, get into the retail channel so, we saw that in China back over the last 10 years and I think we are going see that in places like Russia and South America, Latin America and also in India. Q - Scott Coleman: Great thanks guys, just could you clarify the operating margin for handsets where you guiding for growth, are you guiding for often the 10-7 or the 11% operating margin? And second if you could give us a little more detail about the nature of these chargers and what you might expect on a go forward basis? A – Ron Derrick: This is Ron Derrick, I will answer the first one, when we articulate that we are going grow share and profitability the profitability is often the 11% number and the market share is year-over-year. A – Edward Zander: I know what it was, we don’t plan every quarter reorganization of things of lines, we do think within our budgets so my staff the four general managers actually do a lot of things within the quarter that you don’t see, retargeting, redeploying some people and a lot of things go on during the quarter and as Stew Reed pointed out during July, we do have to do some very high level manufacturing procurement, rationalization which does involve labor and does involve people and lot of what you see divided between the four business was centered around some of that work. No will that ever happen again? I don’t know. Will some of that be covered within in the normal business? We certainly tried to do that but once in a while you are going to have to do what we did this quarter. Q – John: Thank you, question on your enterprise product portfolio in the mobile device segment, and is the queue still on track for first quarter of ’06 and there wasn’t a lot of discussion in your comments on mobile devices, I am just wondering do you see upside in market share or operating profit potential in ‘06 as you release new enterprise centric devices? A – Ron Derrick: This is Ron Derrick, I will answer the first one on the enterprise device. I am actually sitting here using a queue on the call and its working quite well so I am very confident in it’s ability to ship in Q1 of 2006. For 2006, I am going to give basically the same guidance I’ve given every quarter for the last four quarters and we expect to grow faster in the market and continue to drive our percent up versus the previous quarter in the previous year. A – Gregory Brown: This is Greg Brown, this is a little additional color in addition to the mobile office queue product plans, we continue to expand our efforts in the other key verticals and product segments around the mobile computing and asset visibility as well as private radio networks and radio products. We continue to have very good growth in the enterprise segment and both private networks and radio products we also just introduced the HT700 Windows mobile based platform which gets Motorola into the commercial off the shelf rugged mobile computing market as opposed more of the custom courier business that we’ve traditionally served and we are very excited about that. Q -: Hi guys, congratulations on a great quarter, talking about the supply chain that you just mentioned. Two questions on the action, will you tell us of the 5-6 areas that you mentioned as areas for improvement during your analyst David, can you tell us where is most of the progress still left to be made and second obviously volumes are continuing to grow specially into the next quarter, can you tell us if you have experienced any component shortages anywhere or do you anticipate any as you ramp up for the holiday season? A – Edward Zander: I’ll answer the second one than first, we don’t see any components shortages there is lot of stuff in the press but I‘ve seen and I have in fact I just check with Stew before the call to make sure I had the facts right, he hasn’t seen anything from the suppliers at this point of time. The first question was where we are working on, and I think next time we will probably have him in the call here too, its still more the same we do have manufacturing around the world but we still have to rationalize, there are certain things in the wrong places and so on and so forth, the second area we are working on is supplier both on supplier procurement when it comes to cost, but equally if not more important on quality. And as we improve the quality in this company not only do we get more customers satisfaction which leads to more sales but we do get cost out of the systems, we spend a lot of time Ron and I as a matter of fact, even with Dane and Greg pulling apart the gross margin line of this company and if you do it its addition of course to the manufacturing cost get into display of stuff and get into the quality stuff and you have ways to improve into those three areas, so I think it’s a continuing thing and it will be here for a long time and we are not the world’s best supply chain yet, we did increase probably we did not mention it, the inventory returns this past quarter I think to, on a four quarter trailing over a nine full year. So we made great progress, not great progress but good progress in the first time, we ought to be double digits in that area, so we know the metrics and I think actually Stew outlined this for everyone at the call and we are just going keep knocking at this thing. A – Unknown Speaker: I think that is right and one more clarification here, the re-organization charge that we took some of those actions were implemented in the third quarter others have been announced publicly to employees but are not yet fully implemented and will be implemented in the fourth quarter and into the early part of 2006. So simply because we took the charge doesn’t mean all of the actions have been completely finalized in terms of implementation at this point. That’s an ongoing thing we will do. Q -: Yeah hi and thank you. Gross margins down a little bit company wide, but I was hoping to know what the gross margin trends were within the handset unit on standalone basis? Thanks. A: Earnings I want to mention before I turn it on to Ron is gross margin was actually relatively flat quarter-over-quarter. You saw it year-over-year but if you look quarter-over-quarter it is relatively flat and that’s even with mobile devices forming a bigger percentage of our business so you can see, if you look at Q2 to 03 the cost savings we are doing the quality improvements we are doing and the kind of thing Ron is doing in generating more margin dollars is kind of taking place because again we did hold gross margins well, I think within 10th of a percent flat quarter-over-quarter. A- Ron: Yeah we not share the gross margin in business like this, in order to create the additional wee percent, the 11%. I will tell you that we use all levers in order to be all to get to the 11% way. Q -: Hi, I might have a follow on question depending on your answer. Can you guys kind of talk about what you might think unit volumes will be on handsets in this financial quarter, can we expect them to be in the mid-to-high forties and what do you instruct with ASP trends, given the mix you have, could they be flat-to-up sequentially? A - When I look at it, I rate it to be in two pieces and from a overall hand perspective we expect from the nice growth basically sequentially Q3 to Q4 which is traditionally been in the side of this business, we’ve already said we don’t expect to lose share and we expect to gain share from Q3 to Q4. I think if you look at those two numbers it gives you a relatively good idea of where we think we are going to be from a unit perspective and I believe ASP’s will be roughly flat as we grow both in the high end and in the low end. One of the reasons we and with some of my competitors, I don’t, again I just have done this, this is just a forecast or ____ and the units because if you know it is ramping this quarter and the numbers were 10 to 20 units less during the quarter, having people changing in your forecast everyday, and the _____ goes up and whatever so, I never know, we think we know what consumers are doing and we think we know what this quarter foresees about but just as we were all pleasantly surprised in Q3, the ____ I think was bigger and our market share grew accordingly bigger all we know is whatever the tam is we think we can get more of it. So I will see what I can do, I wish I knew exactly how many consumers going to buy a mobile device this quarter. Q -: Given that your revenue guidance seems to be a bit ahead of ____ if it has above the range, given what you said on handsets, would your EPS guidance perhaps be considered conservative? A - : The key here is some thing we have already discussed. The key here is the sequential operating margin decline we expect in the network business, which is a bit above 17% in Q3 and which we think will go into the 12 to 15% range in Q4. The other aspect of this we are trying to carefully point out to people relative to our guidance was that the Q3 tax rate excluding the significant items in our press release was 36%, which I think is a little higher than what most people were modeling for Q3 and we told you to use the same tax rates for Q4 and finally our shares outstanding were a little bit higher than most people were modeling for Q3 and we again told you to use the similar amount of outstanding shares for Q4 as well. So when you take those three factors into account, those are important elements to the basis of our guidance for Q4, the most important of which of course is the operating margin declines sequentially in networks. Q -: I was wondering if you could give us an idea of when we should expect, I guess the timing of the impact of some of the supply chain initiatives that you have got in 2006, you talked about a cup on basis points and then kind of maybe contacts those as how much of that is margin improvement which is actually expected to come from that versus general improvement volumes market share and next these types of things? Thanks A - : Before we start it Brandly I wish I could articulate that, I think you saw some of benefits this quarter and I think the nearly a whether it’s a 11 _____(12 –6 for the whole company had all of those ingredients for the revenue, the product portfolio but also kind of the work that Stew is doing and Mike Finger we don’t talk much about, these driving quality initiatives in this company, its number one, its on every employees mind right now. All of that we see, we see it in cost of product or quality numbers we see it in our supplier mixes, in terms of the purchasing power. And I think we are going to see it in every quarter now and in every quarter in 2006, but 6,7,8,9 I think, we think we have got a lot of work to do and can continue to improve quality in supply chain and continue to build great products. I wish I could break it all down for you, but I am not sure we do it to the level, although we do have a good understanding about gross margin and our profitability and Ron for example or Greg who is sitting here or Dan who is on the phone feed that into their _____. Q -: Hi, I am wondering if you can give a little more clarity on the low end side of the business, when you speak about low end, should we think about it as sort of $40 phones all of it, what’s the proportion of $40 and may be $60, $70 phones, what is the size of low-end and the percentage of total shipment just little bit more clarity on sort of the composition of this shipment? Thanks. A – Ed Zander: We don’t really want to get into that too much now. I think we have given enough about the low end and I don’t want to give my competition too much worth on what we are doing what here. We don’t even think about the low end certainly GSMA, when Ron presents to me his product portfolio, he has different price points but again just I was in the middle east or in Europe, Eastern Europe this past couple of weeks and in India just a few weeks before that and I am just a believer in you have got to be in the geographies and you have got to sell across the product line in any great company has to have all the various price points and if you do it right you can end up with, I think the US still has low end markets, I think there are a lot of people I bump into that want a low cost handset to make telephone calls so I think with what Ron has showed me anyway and what the company looks out, we have got a balanced portfolio across the border that we can continue to do and I think there was a lot of not skepticism but a lot of questions about this quarter with GSMA shipping in volumes whether we could grow operating earnings. We grew volumes as you can see the 387 and some of that volume was in the low end and yet we produced the kind of OE we have not seen for a long time around here. So, I think we are going to continue the PT driving in and balancing it and I think we are designing for it. I think I said a year ago when our market share was flat we were not ready to go in the low end in these markets cause we did not have the products designed. I think mobile device team has built now products that we can make money at the low end. I also think, I will say this and the only nice thing I will say about number one. Our number one competitor has shown has that you can have a three big positions in those spaces and make money and I always look at the leader in the industry and I say to myself, if we see it we can demonstrate what you can do with low end, Ron don’t you think? A- Ron: The only thing I will add to it and it really echoes what Ed said, the only way to grow market share while doing it more profitably in the number one priority industry shows this quarter after quarter is you must have a balance portfolio from low end to low mid, to mid to premiums sphere. We are clearly executing that strategy and we believe it is a requirement in order to do the things that we say we are going to do in Q4 as well in 2006. Q -: Thank you, some what activities have picked up significantly in the industry relating for the government business and in particular around hurricane Katrina. Can you talk about how big of an incremental opportunity this could be and when those benefits might start to kick in? Can we see you know the acceleration in double digits year over year growth with these opportunities? Kind of what we have seen historically? Thank you. A- : Yeah in Q3 obliviously with what happen down in the gulf coast we will Motorola corporate wired mobilize pretty quickly, our focus was on reconstruction, restoration and refresh and it was modest volumes in Q3 do I think if highlights the importance of an industrial strength, prior to radio system absolutely end to end, I do believe and we believe that will have generally stable both influence in Q4 and inter 06 because if highlights the critical major intermission, critical communications, so obviously we see at the as contributing to our momentum in Q4 and Q4 will be very good for the government business also recognizing the government public safety traditionally is very seasonally strong in Q4, we have had enough check in the federal volume and also on a order spaces as they finish the federal fiscal year in September and the state local business will remain strong as well, as well so grown over all home line security demand worldwide. A – Dane Maloney I think we’ve certainly had a lot of discussions with our customers as they look to work on the rebuilding of their networks and we’ve just begun to see a little bit of that in this October over the coming quarters we continue to see Next question please. Q -: thank you very much, just one if could have a clarification and then second qs the clarification was on, and you mentioned that the shares outstanding should have some flat next quarter, how should we think about, you have a pretty big buy backs, should we start building and assuming shares outstanding declining because of the buy backs, how should we think about the shares outstanding and then more related the qs was kind on 3G, any optics on with at the market you guys will be cautious in rightly zone for 3G demand, what’s the latest part, how do you see the market kind of playing over next year, how big of a drive it is or not? A let me cover the shares outstanding qs, we were reporting to every quarter upside and the issues providing that there are two influences that can create shares, what shares at in the given quarter, thrice a year we’ve a employee stock purchase program, that winds up seeing shares issue to employees from money that this we tell from their pay checks month by month through the year and we issue new shares to employees in the fourth quarter and in the second quarter when that occurs and we also have general stock option grants, those grants invest over four years. All we can include in the fully diluted share calculation is the vested portion of each stock option grant. Those vesting periods occur every May. So what occurred here will occur each May over the next couple of years is a another element of previous grant scat invested even though no new option this were issued and that two has an influence on me on number of option issues that we are forced to use our in calculations. So I think we will try give you a better look at this quarter like quarters we go forward and when let you know is in as far in advance as we can what the share changes will be. I will just add a little bit of that net that it is a weighted average over a 12-month period. So you will not see the full impact of the share that we purchased that we began for until its run is course over 12 months and so you will see an overall aggregate gradual decline overtime. A This is the last question we this is wrong from a UMTS size of the market in Q4 let me member of and such prescribe this it is a relatively small number of hand set in the overall number of shippings and we are going to make it is still hard to call the size of that hand. I believe they will hold our share in that part the market independent of how large that can is but when I look at Q3 to Q4 growth. I see moderate moderate high UMTS growth specifically in the European market. The next question please. Q: Thank you just a question on a Japan actually like hood. Do you talk a little bit now you have some handsets over there that are kind of work to way in to the 3G network just give us a little update on the progress layer in the outlook in and on a related note _____ question, but if I could ask another royalty question. Is there something with the move to 3 G in Japan that has been a benefit or will continue to be a benefit for Motorola on the intellectual property revenue side given that the some of those companies rely on Motorola for GSM in WCDNA type of pack Thank you. A: I am sure from a Japanese market perspective we went ahead and we launched the first UMTS wifi device in the M1 1000. We are still seeing a very brisk sell and sell through and we are also working very closely we though come how on HSDTA on type a devices and HSUPA devices number quick core development perspective and we continue to support the Vodafone KK globally as a part of the Vodafone group I think we have the pretty exciting road map for 2006 and want to avail this important FAM. Although our business is extremely strong with KDDI on the infrastructure side we haven’t participated inside of the handset this is inside of KDDI CDMA one X and or deal perspective. As from a royalty perspective from the understanding that I have of the question we see no additional benefit for lack of benefits or selling additional phones into the UMTS market in Japan. Q -: Thanks my question is do with the head count reduction of the charges you announced I think grossly amounts to 2000 employees. So the question is it going to be a net decline to head count going forward or do we hirer in other divisions and if it is not a long term decline to head count can we still expect the benefit to operating margins as that because it is coming out of the inefficient supply change. Thanks. A: We are on in a I don’t was in Europe when all that got ((indiscernible))01:05:59 in United States surprise by other 1900 number and all its number is equally we added in the quarter some number close to that head counts relatively flat has been some time that’s what you see the revenue from ((indiscernible)) going up so we haven’t improved deficiency in management unfortunately and nobody even do by one on involuntary basis of employees but we are doing this part of our supply chain and in some cases that might be smaller things and need to go do, but we had lot of injury in United States a lot of good marking people, a lot of good sales and they try to bid some GNA and more lowest to the right and around the world so if you look at the overall head count its well pleased but same and its got a move that direction so we didn’t the more reduced by what the number was 1900, but we added in the quarter two and other areas itself. I _____ even got that message how the way probably we should come across. All of those people had left the company yet I did that’s the several year back that’s going to encourage stages over the next couple of quarters with some degrees as well. Do you thinking that more efficient with the current net can we have we may of there in some places help again efficiency as well drive why now. Mission most simply by revenue from play which we showed you a progress. During this call we made a number of forward-looking statements or any statements are any statements that are not a still _____. These forward looking statements are based on the current expectations of Motorola and that we can know sure that such expectations were improved to be correct. Such forward looking statements include that are not limited to our comments and answers relating to the following topics. Guidance from Motorola sales and earnings per share for the 4th quarter 2005. Motorola is expected to effective catch rate in the 4th quarter 2005 and for 2006. Expectations regarding the volume and impact of our stock we purchase program. Motorola is expected stock option is expensive in 2006. Expecting gains from the favorable investments in 2006. Feature sales profitability operating earnings, operating margin, ever sound prices in market share for each of Motorola segments. Expectations from Motorola’s future operating margin and various factors in its improvements. Expected timing for the enhancement launch in shipment is new products. The sales impact of pricing of products availability is for materials and use available cash reserves. Because forward looking statements involve risks and uncertainties Motorola’s actual results could differ materially from those stated in the forward-looking statements. Information about factors that could cause us to _____ and we found in the _____ press release on page 72 various Motorola’s 2004 annual report and Form 10-K and the Motorola’s other SEC filings. Thank you all for participating this afternoon’s conference call. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_234105

Here’s the entire text of the prepared remarks from Rite Aid’s (ticker: RAD) fiscal Q3 2006 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Executives March 1, 0000 ET Good morning my name is Lenin. I’ll be your conference facilitator today. At this time I would like to welcome everyone to the Rite Aid Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time simply press “*”, then the number “1”, on your telephone keypad. If you would like to withdraw your question, press the “#”. Thank you. I would now like to turn the conference over to Mr. Kevin Twomey, Chief Financial Officer for Rite Aid. Please go ahead sir. Thank you, Len, and good morning everyone. We welcome you to our third quarter conference call. Mary Sammons, our President and Chief Executive Officer, is also in the call with me. Agenda for today’s call will be as follows; Mary will first give an overview of our third quarter, I will follow with the review of the third quarter financial result and comment on our fiscal 2006 guidance, and then we will take questions. But before we begin, I’d like to remind you that today’s conference call includes forward-looking statements. Actual-results could differ materially from those projected in the forward-looking statements. The factors that could cause actual-results to differ are described in our fiscal 2005, annual report on Form 10-Okay, and our periodic reports on Forms 10-Q and 8-K if any. Consequently all of the forward-looking statements made during this call are qualified by these and other factors, risks and uncertainties. Also during today’s call, our non-GAAP financial measure called adjusted EBITDA as mentioned. The definition and purpose for using this measure is described in the Form 8-K, we furnished with the SEC this morning. The Form 8-K can be accessed through our website under the tabs entitled our company and investor info. You are also directed to consider other risks and uncertainties discussed in documents we filed with Securities and Exchange Commission. Now we’ve covered the administrative aspects of the call, let’s begin. Mary? Thanks Kevin, good morning everyone and thank you for joining us today for our third quarter conference call. Third quarter’s same-store sales increased by 1.7%, pharmacy same-store sales rose 0.7%, and we saw positive script count growth at the end of the quarter. This is good news and even better, both our front-end and pharmacy sales improved each month of the quarter, with November posting the strongest performance in monthly comps in over a year. Even the central division which has borne the brunt of the negative impact of the United Auto Workers shift to mandatory mail order for prescriptions, starting to see improvement over prior quarter. We are pleased with these positive sales trends which have continued into December. Today we reported a 5.2 million net loss, and a decline in adjusted EBITDA compared to the third quarter of last year, an increase in S&GA as a percent of sales and higher occupancy cost resulting from more sale-leaseback transactions year-over-year, continued to negatively impact EBITDA comparisons as they did in the second quarter. The increase in S&GA reflects our commitment to the Rite staffing levels to improve customers satisfaction as well as additional advertising spend for market specific tactical marketing plan, and our Medicare Part D marketing program. As you know the benefit of sale-leasebacks, the additional capital they provide to invest in our store base. Hurricane Katrina had no significant impact on our operating result as much as the pharmacy business from our four stores that were destroyed, and our 13 stores that are that are still closed moved to other Rite Aid stores in the neighboring areas. Our associates continue to work hard to serve the many Right Aid patients who have been transplanted by the storm. Let’s talk about pharmacy results in the quarter. The improved sales reduced several key items, the cycling of major health plan changes, a slightly more positive cost cold and flu season improved customer satisfaction in the pharmacy, and the tactical marketing and operational plans and select markets that I talked about earlier. These tactical programs coupled with extra focus by field management on customer service initiatives delivers significant results. We will continue to invest in these initiatives. New generic dispensing negatively impacted our comp sales by 164 basis points that positively impacted margin, with generic dispensing up 336 basis points year-over-year. We continued to focus on the opportunity to take advantage of new generics and grow the overall contribution as generics to our mix. We improved our margins and delivered great value to both our patients and Managed Care. Front-end sales were strong throughout the quarter, posing a 3.4% increase. Core drug store, health and beauty care and general merchandise all showed gains. Vitamin sales improved and we opened 61 new GNC stores in the store vitamin department, bringing the chain wide total to 1166. Consumables continued to show very strong growth with double-digit increases. Private brand sales were also up over last year. So far this year we have introduced 353 new private brand SKU’s, and are well on our way to our goal of 400 by the end of the fiscal going year. Digital photo of sales once again performed better than the overall one hour photo film and photo finishing category. We are seeing good response to the digital one-time used camera and video products we introduced in 800 of stores in November, and which we will rollout to an additional 700 stores this month. The new digital print-to-store online service which is now available in 800 stores and will be offered chain wide by the end of the fiscal year also strengthens our offerings in this important category. During the quarter we continued to make significant progress in our key strategic growth initiatives. Our store development program continues to be on track to meet our goals of 80 new and relocated stores this fiscal year. And we are well underway in planning for a 125 to 115 new and relocated stores for fiscal ’07. New store growth and strategic markets whether the organic, or through acquisition continues to be a top priority for us. As I mentioned earlier our customer satisfaction scores continued to improve again this quarter both in pharmacy and also on the front-end, with pharmacy scores for timely filling of the prescriptions, and courtesy and timeliness of staff increasing to mount. As part of our initiatives we gained new customers Rite Aid Health Solutions our new pharmacy benefit management company made significant progress in the quarter. We developed a comprehensive sales and marketing program and began using it with potential Managed Care clients. We hired a Vice President of Sales with extensive pharmacy benefit management and Managed Care experience that we will name later this month. As we have said before, our goal is to strategically target plans and employers to provide a low cost alternative to mail order as well as develop clinical programs that can reduce health care cost. Our acquisition team continued to aggressively identify and pursue prescription file-by, making it quarter goal and putting this on track to make our target for the year. We made good progress in initiatives design to bring more customers into our stores, focusing on our health and wellness positioning. Take Care in-store medical clinics, (indiscernible) practitioners who provide diagnosis and treatment for common family illness, vaccinations and physical exams successfully opened in 10 Rite Aid stores in the Portland, Oregon area. So far the response from customers has been outstanding. More than 1000 customers visited the clinics in the first two weeks, taking part in the grand opening event as well as receiving medical treatment including immunization. We drew many new customers to our stores, and have seen positive impact to our business. We have planned some place to expand the in-store clinic concept to other market. In November national diabetic month we reemphasized our commitment to patients with diabetes focusing on the disease as part of our quarterly health condition marshalling program. Our diabetes specialist, our website that carries the most up to-date information about the disease, and our partnership with American Diabetes Association continues to put us at the fore-front of diabetes care. Perhaps our most significant initiatives during the quarter, is the extensive education and marketing program we have launched around the new Medicare prescription drug benefit. Today we and our partners including United Health Care, Aetna, and Coventry have hosted 1000’s of in-store events, often attracting several hundred seniors in one day. We are also getting good response to our in-store Medicare information center, which explain the benefit and also carry a listing of plans available in each of our stores specific geographic area. And our pharmacists and we have promoted as a key resource for understanding Medicare Part D, our busy answering questions both from seniors as well as our care givers. Seniors tell us they want to take advantage of this prescription assistance but as they also want to take their time to make sure they enroll in the best plan for them. Our Living More senior loyalty program has grown to nearly 2 million members during the quarter, as we enhanced these benefits to attract even more senior customers to Rite Aid. Through news letter mailings to living more members, circular advertising in key senior market, and in-store promotion, we are positioning Rite Aid as the best choice for seniors covered by Medicare Part D. One other important initiative in the third quarter is the new corporate structure we announced in October. We had combined all functions that directly impact our stores under the strong leadership of our new Chief Operating Officer, Jim Mastrian. And on Jim’s team all the functions that impact marketing, merchandising and supply chain under Mark Panzer, and all the functions that directly impact our pharmacy business under Mark de Bruin. This gives us a stronger more cohesive and effective operation. Jim and his team are currently in the process of further strengthening our field operation to make it even more pharmacy focus. I will have more details on this on our next call. I mentioned earlier that our positive sales trends that continued into December. Focus on our key strategic initiatives is delivering results. With this positive momentum going forward we are definitely expecting to have a strong December, and to finish this selling season coupled with the extra week in, a 53 week year to have a strong fourth quarter. Now I will turn it over to Kevin. Thanks Mary. Let’s begin with the operating statement. Total revenues for this quarter were 4.15 billion compared to 4.11 billion last year, or an increase of 38.3 million. We operated 3,333 stores at quarter end versus 3,363 stores at the end of last year’s quarter, which is a net reduction of 30 stores. Hurricane Katrina caused the closure of 13 of those 30 stores. Revenue increase for the quarter was 38.3 million is primarily due to the 1.7% increase in same-store sales that Mary mentioned. That improvement is primarily due to this quarter’s positive pharmacy sales of 0.7, which was a positive for the first time since the third quarter of last year, and also due to the front-end same-store sales of 3.4%. Our programs including customer satisfaction, especially in the pharmacy are gaining traction. The impact of Hurricane Katrina was included in the third quarter as Mary mentioned, it initially impacted a 109 of our stores primarily to the loss of power. Currently we have 18 stores that are closed because of the Hurricane, but prior to those 18, are operating out of trailers and we except them to reopen soon. The 18 stores have been excluded from our same-store sales calculation since the beginning of September, but are not significant to our results of operations. We have adequate insurance for replacement value of the inventory, replacement value of the fixed assets and for business interruption losses and expenses. Just continue down the operating statements and then I will cover gross profits. Gross profits remember, are net of occupancy expenses and they were 1.02 billion or 24.55% of revenues for this quarter, versus 1.01 billion or 24.56% of revenues for last year, so the percents were relatively flat. The current quarter included a non-cash LIFO charge of 7.6 million versus a charge of 5.8 million last year’s quarter. The LIFO charge increases simply due to the effect of higher estimated product inflation. Excluding LIFO this quarter gross margin was 24.74% compared to 24.70% of revenue last year, or an increase of 4 basis points. The 4 basis point increase in our FIFO gross margin can be explained primarily in 2 pieces. The positive component is a 12 basis points increased contribution from pharmacy gross profit. We had an increase in genetic prescription as a percent of total prescription and reduced inventory costs resulting from purchasing improvement. Pharmacy gross profit strengths continued, even with lower reimbursement rates. Partially offsetting the pharmacy gross profit contribution is an increase in rent expense which reduced gross margin by 10 basis points, the increase in rent expenses caused by the new and relocated stores and the sale-leaseback of 64 stores since the third quarter of last year. As you recall after stores are sold in leaseback we incurred rent expense where as when the stores are owned we incurred depreciation and interest expense. Front-end gross profit was flat. The contribution that is, although front-end sales were higher than last year, the gross margin rate for front-end was down slightly. Consequently front-end contribution to gross profit was flat. Although we did not change our promotion program customers purchased more promotional products. Selling, general and administrative expenses for the quarter increased as a percent of revenues by 93 basis points compared to the prior year. The current quarter included 0.7 million of litigation settlement income in SG&A compared to the prior year’s quarter litigation settlement income of 14.5 million. This 13.8 million decrease in income accounted for 33 basis points of the 93 basis points increase in SG&A. The remaining 60 basis points increase in SG&A was primarily the result of higher salaries and wages and benefit expense, some higher advertising expense and an increase in fees for our accounts receivable securitization facility. All of which support our strategic initiatives. The current quarter also was negatively impacted somewhat by higher energy expense. Non-cash based compensation, stock-based compensation expense is included in our SG&A, it was 6.1 million this quarter versus 5.0 million in the prior year, remember we expense the fair value of stock options branded. Continuing down the operating statements store closing and impairment charges were about the same as last years charge. Interest expense was 66.9 million for the quarter versus 70.7 million in last year’s quarter due to lower cost to borrow. This reduction was primarily due to greater utilization of our accounts receivable securitization and improvement in pricing in our senior secured credit facility which was amended in September of 2005. Cash interest expense was 61.8 million for this quarter versus 65.8 million last year, and non-cash interest expense was 5.1 million versus 4.9 million last year. Loss on debt retirements was 0 on the current quarter but 20.2 million in the last year’s third quarter. Remember last year’s third quarter included the expense related to amending and paying down the senior secured credit facility. Regarding income taxes, the current quarter we had a 1.1 million income tax benefit and that’s because we have a pre-cash loss for this quarter. Last year’s quarter had a 5.4 million income tax expense because the quarter had pretax income. Although we know that the prior year quarter also included a catch-up adjustment related to a change in the estimated annual effective income tax rate. Therefore the prior year’s quarter effective income tax rate is higher than the current year’s quarter effective income tax rate. Net loss for the quarter then was 5.2 million compared to net income for last year’s quarter 8.3 million. The net loss per diluted share was $0.02 for both quarters. Each quarters diluted per share calculation includes the, declared preferred stock dividends. Remember preferred stock dividends are not included in the net loss or net income but they are considered in calculating the earnings or loss per share. Let’s move back to adjusted EBITDA that Mary mentioned earlier. For the quarter it was 141.3 million, or 3.4% of revenue that the decrease of 21.7 million from the prior year. The schedule of cash through press release reconciled our net loss, or net income to our adjusted EBITDA total. That decrease was primarily due to the 60 basis points that I mentioned increased in selling and general administrative expenses. Let’s turn to the cash flow statement; net cash provided by operations for the quarter was 22.9 million this quarter versus 291.4 million last year’s quarter, that 268.5 million decrease, is primarily due to the 280 million decrease in the sale of accounts receivable, under our securitization agreement. The impact on cash provided from, by operation from the decrease in adjusted EBITDA was more than offset by less of a seasonal increase in inventory net of payable. Net cash used in investing activities for this quarter was 76.1 million versus net cash provided by investing activities of 2.8 million for last year’s quarter. The increase was primarily to the result of capital expenditures for this year’s quarter being higher than last year, but closed deeds from sale-leaseback activity is being lower this quarter than compared to last quarter. For this quarter we spent 97.4 million for property, plant, and equipment and an 11.3 million for prescription of our purchases for a total of 108.7 million of CapEx. During the quarter we opened 8 stores, relocated 8 stores, acquired 2 stores, closed 22 which includes the 13 stores closed due to hurricane Katrina that I mentioned earlier. And we remodeled 53 stores. Also during the quarter we completed the sale-leaseback of 9 stores for net proceed to 24.6 million. Approximately 45 new or relocated stores will be opening in our fourth quarter. We are on target to achieve our goal for new and relocated stores and for prescription filed by purchases for the year. Net cash provided by financing activities for this quarter was 68.2 million versus net cash used by financing activities was 605.3 million for last year’s quarter. During this year’s quarter we paid off the term-loan and start-up amending the senior secured credit facility and borrowing under the revolver for seasonal inventory bills and capital expenditures. During the last year’s quarter we established the account receivables securitization agreements and with those proceeds and the use of excess cash we paid down the term-loan as part of the amendment to the senior secured credit agreement. Liquidity contains to be strong; our availability under the revolver at quarter end is over 1.1 billion, at the end of the quarter we had 530 million outstanding under our senior secured credit facility which now consist solely of a 1.75 billion revolver. We also had outstanding at the end of the quarter letter of credit of 110.7 million. At the end of the prior year quarter we had 540 million outstanding under our old senior secured credit facility. But it consisted of two pieces, a 90 million draw down on the old revolver and 450 million outstanding under the old term-loan which we paid off. The 400 million accounts receivable securitization agreement continues to be in excellent source of liquidity at the end of the quarter; we had utilized the securitization agreement for 345 million. To wrap things up then, let’s discuss guidance. We are confirming guidance for fiscal 2006 which will be a 53 week year. We are estimating fiscal 2006 revenues to be in the range of 17.1 billion to 17.4 billion. Revenue guidance is based on same-store sales estimate of a 0.5% to 2.0%. Pharmacy same-store sales will be hot positive in the fourth quarter. We are estimating fiscal 2006 adjusted EBITDA to be in the range of 675 million to 725 million. Although we have three quarters in the year complete, you can see we are guiding you through a strong fourth quarter. Our guidance reflects the fact that the fourth quarter is one of our strongest quarters because of the holidays, and the cough, cold, and flu season and this year includes an extra week. Our guidance also reflects our confidence in continued improvement in both front-end and pharmacy same-store sales. Finally, we’ve included in our guidance estimate of a negative impacts from the new Medicare prescription drug benefit program as they relates to the due eligible participants. As well as the negative impact from increased occupancy and operating expenses of the new and relocated stores. We are estimating our net income to be between 31 million to 62 million, or a loss of $0.01 per diluted share to net income of $0.04 per diluted share. Again short press release has a table that reconciles our adjusted EBITDA guidance to our guidance for a net income. CapEx is estimated within the range of 350 million to 400 million for fiscal year 2006 including approximately 80 new and relocated stores. Now our guidance for net income and diluted lost per, diluted earnings per share did not include at all a possible positive adjustment to our income tax valuation allowances, further CapEx estimates did not reflect proceeds from possible sales and leaseback transaction. This concludes our prepared remarks Len we are now ready to take questions. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_234106

Thank you for standing by and welcome to the Dassault Systemes Q4 FY 2005 Results Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session, at which time if you wish to ask a question, you would need to press "*" "1" on your telephone. I would like to advise you that this conference is being recorded today, Thursday, February 9th, 2006. I would now like to hand the conference over to your first speaker, Ms. Michele Katz. Please go ahead, Ms. Katz. Thank you for joining us for a review and discussion of our financial performance and business progress for the fourth quarter and year ended December 31, 2005. On the conference call are Bernard Charles, President and Chief Executive Officer, and Thibault de Tersant, Executive Vice President and CFO. We completed the acquisition of ABAQUS in early October and have consolidated the company into our results pursuant to U.S. GAAP purchase accounting treatment. In addition to presenting our results under U.S. GAAP, we believe it is helpful to provide you with additional financial information. We will discuss U.S. GAAP as well as non-GAAP financial figures in this call. In particular, non-GAAP financial figures include revenue, operating income, operating margin and EPS before deferred revenue write-downs and excluding acquisition costs. You will find worksheets reconciling these differences with our U.S. GAAP figures in our earnings press release. Our financial report on our website also provides information explaining the impact of currency. I'd like to remind everyone that some of the comments we will make on the call, either as part of the prepared remarks or in response to questions, will contain forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. Information about the factors that could cause actual results to differ materially can be found in item three of our Form 20-F and in today's earnings press release. For your information, you can find our fourth quarter business and financial webcast presentation, which was given earlier today in Paris, on our website. And finally, please note that growth comparisons are year over year unless otherwise stated. I'd now like to turn the call over to Bernard Charles. Thank you, Michele. Dassault Systemes reported record revenues and earnings in 2005. Strong growth in software, service and core margin improvement drove our fourth quarter and full year financial performances. For 2005, our total revenues were $1.2b, representing 19% growth. We extended our leadership in the Product Lifecycle Management market in 2005, gaining 1 percentage point in 2005 to 23%. In the aggregate, we have gained 8 points of market share over the last four years. And we extended our footprint in the design world, with over 72,000 new CATIA and SolidWorks licenses, demonstrating the continuous need for 3D technology across all industries. At the heart of our success is the powerful combination of significant PLM implementations, the competitive advantages of our brands, the strong performance of our distribution channels and the investments we are making to enhance our future performance and long-term opportunities. We continue to focus on enlarging our addressable markets through technological innovation and complementary acquisitions. We made good headway in 2005. We significantly expanded our presence in the simulation market with the acquisition of ABAQUS. And we have made -- and we made further progress pursuing our 3D For All strategy, with the acquisition of Virtools early this year and our continued developments with our 3D XML technology. Moving to 2006, our outlook is for a year of strong revenue and earnings growth. At this point, I would like to turn the call over to Thibault for a detailed discussion of our financial performance and then I will return to discuss our businesses. Thank you, Bernard. Before going into a review of the year, let me begin with a brief explanation of our GAAP and non-GAAP figures. The only adjustments between GAAP and non-GAAP figures are the exclusion of deferred revenue and exclusion of acquisition costs. Non-GAAP revenue as a result is simply total revenue excluded deferred write-downs of approximately Euro 9 million for both the fourth quarter and the 2005 year. Profitability measures, such as operating margin and EPS, are also presented before the deferred revenue write-downs and acquisition costs of about Euro 9 million in the fourth quarter and Euro 10 million for the full year. In the fourth quarter revenue increased 31% and 27% in constant currencies. Reported total revenue of Euro 313.3m, which was above our revenue objective range of Euro 300 to Euro 305m. EPS was equally strong, increasing 29% to Euro 0.67 and coming in above our objective of Euro 0.64 to Euro 0.66. For the full year, revenues increased 18% and 19% in constant currencies. We reported total revenue of Euro 943.6m, with a contribution of Euro 22 million from ABAQUS before deferred revenue write-downs. Looking at our revenue growth before including ABAQUS shows very good results also, with revenues up 16% in constant currencies. Full year earnings, reflecting the overachievement in revenue, came in above our objectives. We reported EPS growth of 17% to Euro 1.59, compared to our objective of Euro 1.56 to Euro 1.58. Our operating margin came in on target at 28.6% for the full year. In comparison to 2004, we have been able to maintain a relatively stable operating margin. We think this is a pretty good achievement in light of our new initiatives. How have we done it? Our operating margin performance reflects the positive underlying trends and improvements in our businesses, which have absorbed in excess of 1 point of dilution from our recent acquisitions as well as currency impacts. Revenue growth in 2005 reflected balanced growth across software and services. Software, accounting for approximately 84% of our total revenue, grew 18% in 2005. Services increased at a similar level, rising 20% for the year. PLM or Process-centric revenue, excluding PDM, was up 17%. CATIA, our largest brand, had a good year. DELMIA, focused on digital manufacturing, had strong revenue growth. PDM revenue increased 20% on a record performance by ENOVIA, our software applications for collaborative lifecycle management. ABAQUS, which is included in our PLM revenues, had a good quarter. SolidWorks performed well throughout 2005, with strong demand around the world. For the full year, SolidWorks revenues increased 25% in U.S. dollars. Our unit growth in 2005 was very good. In total, CATIA and SolidWorks licenses increased 15%. In spite of the competitive environment, we continue to sell on the value of our software solutions bring to customers. As a result, pricing was stable for the full year. Now I'd like to go through the details, starting with revenue growth by region. Revenues in the Americas increased 15% in constant currencies in the fourth quarter, as we expected to see some slowing down from the strong pace of the first nine months. I would like to highlight that DELMIA had a strong quarter in the Americas on activity in aerospace. For the full year, the Americas grew 24% in constant currencies. Asia had very good results with revenue increasing 27% in constant currencies in the fourth quarter. Contributing to the growth in the quarter was strong activity for our CATIA and PDM software applications. For the full year, Asia grew by 13% in constant currencies. From a regional perspective, Europe was the story in the fourth quarter, with revenues up 35%. Europe had a truly phenomenal quarter on strong PLM and 3D design performance. Software and services results were both up sharply in the period. PDM had a record quarter in Europe, followed by DELMIA and SolidWorks, which also had very strong quarterly activity. We benefited from strength in service and other revenue, with good performance in services generally, our CMP activity and the added contribution from contracts originally expected to be completed in the third quarter. For the year, revenues are up 19% in Europe. We were pleased with seat growth and pricing trends for the quarter and the year. Total units increased 14% to 22,484 in the fourth quarter and for the year total new seats licensed increased by 15% to 72,078 seats. CATIA licenses increased 6% in the fourth quarter to 11,416 seats. For the year, CATIA licenses increased 6% to 34,798. CATIA Version 5 end-user revenue per seat was up 3% in constant currencies for the fourth quarter and for the year. SolidWorks new seats licensed in the fourth quarter increased 24% to 11,068. For the full year, SolidWorks had an increase of 25% in new seats licensed to 37,280. SolidWorks average end-user revenue per seat decreased 2% in the fourth quarter, but for the full year increased by 1%. Moving to operating expenses, higher expenses in the fourth quarter generally continued to track closely with headcount growth. Total operating expenses increased 28%, with 11 percentage points from the addition of ABAQUS and 4 percentage points reflecting currency impacts. Netting these two factors brings us to an operating expense increase of 13%, tracking our headcount growth of 15% before including ABAQUS. Looking by function, a large part of the increase in marketing and sales is for our CMP organization. In R&D our efforts are concentrated in PLM, 3D XML and Automation. We have adopted FAS 123(R), share-based payments, as of January 1, 2006. We have estimated full year expenses from share-based compensation granted by December 31, 2005, of Euro 9.2 million. This amount does not include new grants that could occur in 2006. In any event, we would expect that share-based compensation expenses would be significantly less than 10% of net income. Now, let's look at our views on 2006. We are reconfirming our 2006 financial objectives for revenue, operating margin and EPS, which are given excluding deferred revenue write-downs, acquisition costs and share-based compensation expenses. Our objective is to grow total revenues of about 17 to 18% on a constant currency basis. This growth objective assumes approximately 7 points of growth from ABAQUS. This leads to a total revenue range of about Euro 1.105 billion to Euro 1.115 billion before an estimated deferred revenue write-down of Euro 8 to Euro 9 million. Our goal is to maintain a stable operating margin in 2006 in comparison to 2005. Our objective is to grow EPS at about 13 to 14% to Euro 1.79 to Euro 1.81. Looking to the first quarter, our objective is to grow revenue 22 to 25% in constant currencies to about Euro 248 to Euro 253 million, and EPS about Euro 0.31 to Euro 0.32, representing 15 to 19% growth. Our financial objectives for the first quarter and full year 2006 continue to be based upon a U.S. dollar to euro exchange rate of $1.25 per euro. Thank you, Thibault. Let's begin with a review of our PLM activities. We are truly at the beginning of the PLM opportunity, with significant growth in front of us. V5 PLM is in production at many companies, using in various combinations of our CATIA, ENOVIA, SMARTEAM, DELMIA and SIMULIA software application families. We are seeing strong adoption in the aerospace and automotive industries. And we are seeing increasing penetration in target industries including shipbuilding, power, plant, petroleum, with our new contract announcement this morning, as well as in electronics. Our V5 PLM solutions are delivering compelling, measurable benefits for our customers across important categories, with significant value in improving design, engineering and manufacturing, as well as lifecycle support. Our customers have quantified these benefits and are sharing them with us. The magnitude of improvements is startling to them and truly gratifying to us. Customers are seeing 40 to 90% reductions in development time. They are seeing a reduction of engineering changes ranging from 30 to 80%. In manufacturing, NC and tooling costs, as well as process optimization, are being reduced by 35 to 60%, to cite just a few examples. PLM is truly about bringing value to a company at the top and bottom line. With the significant savings achieved, our customers are able to innovate more and design more products in a shorter timeframe. In some cases, increasing new product development by 70%. In summary, these results illustrate the compelling benefits of our PLM strategy and our V5 PLM software solutions. Our objective in PLM, however, is to ensure that we offer the best individual solutions for our customers. They can then decide which combination of our software applications is most appropriate to fit their requirements and objectives. Our goal is not to say “If you like the benefits of PLM overall, then take all our Brands.” Our objective is to bring significant value with each individual brand and its clearly defined mission. First, we have CATIA, our largest brand, for design excellence. SIMULIA, our newest brand, incorporating ABAQUS, provides engineering excellence through virtual testing. DELMIA includes our software applications for production performance. And in the PDM, we have ENOVIA to provide a global collaborative environment and SMARTEAM for Team PDM or project collaboration. With our five PLM brands, we aim at providing the highest possible value to our customers in each of their domains. And when all our brands’ products are associated together, thanks to the V5 common architecture, we deliver to our customers an even higher value. This is what we call PLM excellence. Now, let's move to a review of our PLM software applications. I'd like to start with CATIA V5, which had a very good 2005. Looking at a few numbers, seat growth was good, increasing 6% for the full year. In numbers, that is 34,798 seats. CATIA V5 is now in production at over 95 of our top 100 customers. In some cases, this represents large installations that are moving to V5, and for others it represents the first important steps. CATIA V5 is delivering superior productivity gains. It is offering breakthrough technologies, such as Imagine & Shape, Knowledgeware and Functional modeling. It is winning against the competition in targeted industries, including Nokia, Siemens ICM and BT Industries. And CATIA V5 continues to expand with automotive and aerospace OEMs and their supply chains. We expect that all German automotive manufacturers will standardize on CATIA V5 release 16 in the summer of 2006. Our PDM solutions, with ENOVIA and SMARTEAM, delivered 20% revenue growth in 2005. Our PDM customer base increased significantly, with 40,000 new seats sold and 1,100 new customers in 2005. Our solutions have demonstrated key competitive advantages, which enable them to offer superior solutions for OEM supply chain collaboration. ENOVIA offers a configured design in context over the complete lifecycle and one single desktop for designers working in the context of a global distributed company. SMARTEAM provides both CATIA integration and flexible enterprise integration. And we have a Supply Chain Engineering Exchange to help OEMs on their supply chains collaborate better. Overall, our PDM business continues to make good progress, growing its footprint, revenue base and market position, year in and year out. Interestingly, some believe our PDM growth is off of a small base, which is not the case. In 2005, PDM end-user software revenue grew 25% to $227 million, and total end-user spending increased 21% to $570 million. Looking to the future, we have a sizeable opportunity to grow our PDM business, first by increasing our penetration rate within our current customer base and second, by expanding with new customers. In addition, our PDM software solutions are important levers in driving overall PLM growth. DELMIA made significant progress in 2005, delivering strong revenue growth. DELMIA broadened its customer base, adding 52 new customers. It continues to increase its strong presence in the automotive industry where DELMIA is working closely with Daimler-Chrysler, GM, Nissan and Toyota. DELMIA was recently awarded a new contract with Tata Motors, one of India’s leading car manufacturers. It is also expanding its presence in the aerospace industry, with its work with Airbus and most recently Aermacchi in Italy. In defense, DELMIA is working with Lockheed Martin and DELMIA has been selected as part of the SSP 300 global project. Looking at the market in which DELMIA operates, digital manufacturing is expected to grow to $1 billion by 2009, according to Daratech. In summary, DELMIA is very well-positioned as it moves into 2006 with a strong pipeline of opportunities. And its unique solution, integrating product design and manufacturing, should position DELMIA favorably over the coming years. Turning to simulation, ABAQUS had a very good start as part of DS, posting strong results for the fourth quarter of 2005. ABAQUS performed well in all regions with existing and new customers. The company operates with a direct sales force, working in a consultative capacity with clients. As a result, the opportunity for growth within existing customers is truly quite large. Looking ahead, we see good growth opportunities in the simulation marketplace in general, and in the combination we see even more possibilities. ABAQUS offers a unique nonlinear finite element analysis technology. As part of our broader SIMULIA brand, we are developing an integrated open scientific platform for realistic simulation. In 2006 we will be investing in growing the SIMULIA field organization, which includes sales, customer support and consulting services. We see a substantial opportunity in the simulation market, where industry estimates size of the market at close to $4 billion by 2009. SolidWorks continues to lead the 2D to 3D migration. One, on the basis of revenue results for 2005, it is in the number one position in the mainstream 3D design market. Selling on the strengths of its offerings, pricing has remained stable in 2005, notwithstanding a very competitive environment and a good deal of noise from our competitors in the market. Demand has been remarkably balanced by geographic regions with strong results across Europe, Asia and the Americas in 2005. Looking more closely at the key figures, new customers represented about 65% of total revenues, and more than two-thirds of our new business comes from our competitor's base. SolidWorks has more than 213,500 installed commercial seats, with its total community of users approaching 0.5 million at year-end and probably over that as we speak. SolidWorks’ popularity reflects its ease of use 3D CAD software for designing better products in less time. Several important factors distinguish it. First, SolidWorks is production ready and production tested. Second, its strong usage in production truly speaks to the product robustness, as well as the strength of its distribution channel. Third, SolidWorks delivers significant productivity gains and it offers integrated analysis with CosmosXpress. What also distinguishes SolidWorks is its customers, providing very good references and helping to expand the SolidWorks community of users around the World. Most recently, SolidWorks held its annual international user and exposition conference, where this event set a record for participation with over 3,500 attendees. In summary, the mainstream 3D design market continues to offer significant long-term growth potential for Dassault Systemes, based upon the strength of our SolidWorks’ offerings and the estimated 4 million 2D users. During 2005, we continued to invest in our sales channels, as we have done over the prior two years. During this past year we made major investments to enhance and increase the direct support that we provide to our sales partners. Currently, we have over 2,600 people at Dassault Systemes in our services, sales and marketing teams. These resources have increased by 34% in 2005, of which a large part is related to the ABAQUS. So, clearly a large effort underway. In PLM, DS has taken on the role of channel management provider, or so-called CMP, on behalf of IBM. This model has been designed to provide IBM business partners with a similar type and level of support that we have always been providing to IBM's direct sales force. To give you an update on the specifics, we are now managing about 80 IBM business partners in eight countries. In total, this covers approximately 75% of the combined DS/IBM SMD business in Europe and in the Americas. We have had a successful transition to this model during the second half of 2005. Deployments are on track in all countries where the change is underway. And importantly, business partners welcome this improvement in support to help them address PLM opportunities. IBM PLM has become a part of the IBM software group, moving from the industrial sector group. We believe this is a beneficial move as the software group is naturally positioned to leverage IBM's presence across a broad range of industries. In this morning's announcement, IBM confirmed the strategic nature of our partnership and its willingness to invest further in our PLM solutions to deliver end-to-end enterprise-wide business transformation. And I was delighted to see the comment from Mike Bauman, Head of the IBM software group, reporting about this commitment. We are also increasing channel capacity in several areas. SolidWorks continued to increase its channel capacity in 2005, just as it did in 2004. Moreover, SolidWorks continues to provide strong support to its network of VARS in the areas of education, training and other key domains. We are also strengthening our VAR network in China, focused on PLM opportunities. Looking ahead, 2006 will be a year of continuous transformation for Dassault Systemes. Focusing on new product introductions to expand the power of V5 collaborative environment with PLM. Enlarging our addressable markets with our 3D For All initiatives. Paving the way to change and adopt our channel to create a new distribution model for small and medium-size enterprises, as well as providing full service solutions for large customers in all geographies across all sectors with our long-lasting partnership with IBM. To conclude, what drives us each day at DS is our belief in the power, enormous potential and pervasive applicability of 3D technology to enhance communication and the environment at large, and to accelerate adoption of PLM across all industries and all sectors. With this at the heart of our vision, we are pleased with the significant accomplishments of 2005 and we are confident in our outlook for 2006 and beyond. At this time, Ladies and Gentlemen, if you would like to ask a question, please press "*" "1" on your telephone and wait for your name to be announced. If you would like to withdraw that question, please press "*" "2". Again to ask a question, please press "*" "1". The first question comes from Michael Briest at UBS. Please go ahead. Good afternoon. It's Michael Briest, even. But a couple of questions. Firstly, the CATIA unit growth in 2005, around 6%. Would you expect that to accelerate in 2006, now that you've got more of the reseller channel under direct control? And a similar sort of question, SolidWorks had another very strong quarter. Should we be expecting any deceleration in that business in 2006 or do you think there's still plenty of scope for growth? Yes, Michael. Certainly SolidWorks had a very, very good year in 2005. And SolidWorks is really a model where the capacity increase in the channel is truly driving the unit growth, so we are not expecting to repeat a 25% increase in units in 2006, as we state in our guidance, but to be rather between 15 and 20% increase. And on the CATIA side, we are not expecting to repeat the 6% increase neither in 2006, but rather to be slightly less as an increase in new licenses for a variety of factors, including certainly the good performance in 2005. And another one, if I may? How much of the channel is now directly under your control, if you like? You gave 75% but what proportion of revenues do you think is actually now being led by IB -- Dassault related sales force rather than IBM? In our 2005 revenue, the IBM licenses represent 50% and revenue coming from IBM is going to represent about 60% of our total 2005 revenue. Inside this IBM revenue, we certainly are also contributing quite a lot, both where we are CMP, channel management provider. And we are with CMP covering today about 60% of the SMB revenues and the IBM channels, and we are also of course helping quite a lot the sales to large comps. And can you say if there's any plans to extend the channel management program? Is this as far as it's going to go or are there other territories that may be added in 2006? Yes. Those we have taken up to now, in the last 18 months, is a very pragmatic approach. It's, we look at across countries, the situation, to evaluate how we can improve the business performance and really the cost structure to reach the market. And we have been making the decisions together with IBM based on those parameters. And the situation varies from country to country, depending about how the model was set up. For example, in Japan the IBM PLM team is very, very much oriented for the entire market to involve business partners, not only for SMB but for also large customers. And this is a compelling model, because it provides local support with a lot of knowledge. In other countries we have different situations. So we expect to continue to evolve towards the strategy we have set on the plan we have put in the last 18 months, and this will be on a country-by-country basis. Okay. And then just one final one, and then I'll pass it on. On ABAQUS, I think the revenue looks to be about $19 million before deferred income adjustments. Was the margin around 30% in that business in Q4? It seems high because the cost increases that are attributed to ABAQUS were 11%, which gives me a profit of about 6. Is that right, Thibault? Actually, there are some roundings, so the ABAQUS margin in the fourth quarter was, at least compared to our fourth quarter margin for Dassault Systemes, about 10 points below. For the full year, of course, there is not such an impact. And what we are working is that starting second half of 2006 there will not be dilution any more coming from ABAQUS. Thanks. Good afternoon. Sorry I missed you in Paris this morning, Bernard. I hope you don't mind a couple of questions. First a somewhat technical question perhaps, but I think it's important for understanding how you're thinking about your future PDM growth. Could you talk about the R&D you're doing in PDM, specifically the work you're doing in terms of improving ENOVIA towards what you're calling the Master Model architecture? If you accomplish that as planned in terms of the development work, could that begin to have a commercial or revenue impact by next year, for example? Well, thank you for the question, Jay, and I hope to see you soon in Paris. Clearly, what is interesting in 2005 is to see how ENOVIA was really deploying production in very large scale. ENOVIA has contributed significantly, both in absolute terms and growth terms, as I said a minute ago in the data we shared with you, from the end-user revenue to the Dassault Systemes growth. We are very large sized now, using and leveraging ENOVIA, not as a PDM system but as a true PLM system. In short, it's the entire product process and lifecycle management repository. I can give you one single anecdote. When you look at the 787 program worldwide, they deploy over 187 partners. It is ENOVIA on demand. There is no partner that can contribute to this airplane design program, whether it’s design or manufacturing, without having access to ENOVIA online from Boeing’s computer data center. So I’ve seen some of our competitors making big claims about online things. We are doing on demand. We are doing it already with our customers. And that’s for sure something that can be seen around the world. So it’s working in big scale and even being deployed on previous programs. So using this capacity power for collaboration on previous programs, i.e. with non-V5 product models. So, that’s the trend. I see this ongoing this year and I think it will be part of a very interesting race on the market. The results are really meaningful. And really it’s becoming now a prerequisite for collaborative product development, as well as for collaborative manufacturing development. It’s not often very well-known, but the manufacturing hub which is inside the DELMIA is, in fact, the ENOVIA manufacturing hub. So I think it’s something that will continue to expand. On the SMARTEAM side, we had tremendous success last year within the supply chain of large OEMs, using the combination of CATIA and SMARTEAM for product replication. And I can really explicitly say that most of the Toyota suppliers and small suppliers are really adopting now both CATIA V5 and SMARTEAM to do that function. We will continue to invest to ensure we can scale up, specifically on the SMARTEAM side. And on the ENOVIA side, to expand in the area of what we call service after sales, because that’s part of the lifecycle management. Some of the customers who have already started to deploy massively says we want to use it for web-based application in the service after sales. And of course, the front end will be interesting because we are going to use Virtools technology for that. That gives you an idea about where the R&D is going. Okay. But would you be willing to comment a little bit more in detail with respect to any renovation, or new architectural approaches you might be taking towards ENOVIA and SMART? Well, the ENOVIA architecture is a V5 architecture. And there is, the main evolution that you will see this year is really, there are really two major base that will be done. One is to provide a seamless flow between the manufacturing hub and the engineering hub, because those two words are connected today, but they are not seamlessly integrated. And while this works, customers are telling us that it needs to be better integrated. That’s one direction. And the second direction, as I said, is to continue to scale up the capacity of SMARTEAM, which has been very successful in many, many customer locations, so it can provide enterprise-wide scalability, initially for PDM function. As the product’s structure is becoming common between ENOVIA and SMARTEAM, that provides the supply chain collaboration that I talked to you before. Those updates will be done as part of the Version 5 product rollout. Bernard, with respect to CMP, one of the critical reasons for your doing that, taking on that role, is to improve the productivity of the channel, at least that’s one of the assumptions. Is it too soon to say that the revenue run rates, the productivity of those resellers, has in fact begun to improve and that it is attributable to CMP as compared to IBM? Well, I think both parameters will work. Clearly, as you noticed in the announcement that we did with IBM this morning, I think what is a significant move moving forward with this alliance is the fact that, as the PLM show cases now are becoming so large around the different geographies, it’s becoming a significant value for us together to deliver consulting services on worldwide deployment forces, resources, when it comes to the extensive enterprise deployment. And clearly IBM is the best-positioned company to do that. So that’s a core element of this announcement that was said. It was clear that Mike expressed the fact that he wants to do it for the entire supply chain end to end from customer requirement to product delivery to the consumers. And I think IBM has a big stake in that project, because it drives a lot of middleware businesses too on equity side. So that’s one thing from the fully integrated enterprise business processes. On the CMP side, Channel Management Program, the sales process is still product oriented. We are not there from a process orientation standpoint yet. So we need to focus, as I said previously, on making sure that we increase the CATIA visibility, we increase the DELMIA visibility on the DELMIA direct channel, we increase the, in short, the application visibility in the channel. And step by step, coach the channel to sell business practices on top of that. That’s what CMP will bring, and I think we are building a potential for growth here. The reason why in Thibault’s comments we are cautious is, because we need to put this in operation, in big scale worldwide and the proper infrastructure needs to be there. But I am confident that this will pay off. And lastly, for Thibault. Is it accurate to say, Thibault, that the SolidWorks operating margin is still comfortably above 30%? And if so, are you able to take some of that disproportionate profitability, let’s call it, at the parent company level and reinvest it in some of your other initiatives or do you put it back into SolidWorks? In fact, yes. First of all, you are right that now the SolidWorks operating margin is better than our average operating margin, and will exceed 30% for 2005. The fact is our other existing businesses are also delivering an improvement in margin. And the reason why you don’t see the improvement is simply caused by two factors in 2005, the acquisitions that we have done and some impact coming from, again, depreciation. But if you look, if you exclude acquisitions and the gain impact, you will see that there is more than 1 point improvement in margins actually in 2005. Thank you. Could you give us a bit of an update on the integration of the sales force for ABAQUS, where they are in knowing how to sell it? And can you just give us a bit of an update on what your channel to market is really going to be for this product? The model we have for ABAQUS is very similar to the one we have for DELMIA. Those product lines are at the beginning of their potential, a lot has been done, but as compared as to what could be done, I have given, shared with you some ideas about where we, what we see being the addressable market. So the practical way is going to be we continue to expand the dedicated application sales force in all geographies. It’s clear that for large customers, when we entertain already a very strong customer relationship, progressively it’s going to be a single acquisition contract. But that’s easy to do. The second factor is that progressively we will take advantage of our channel. Our channel for PLM is a powerful channel. Those partners are very strong partners. They know how to sell complex applications. They want to expand in the DELMIA area this year; we started last year. So our sales force for those specialized applications is going to be a mixed model between direct and indirect, and the indirect piece is going to grow in years to come. Today, Mark Goldstein, now running the total business for simulation, has been doing an outstanding job to engage with large companies. And clearly engage on a consultative basis, as opposed to basic sales of software, because customers like that, and they wants to make this work this way. So this gives us a business model where we have, I think, a significant operating margin level as we move forward. And I think we already see it in one quarter of operation, and I think we should leverage it in 2006. So don’t think, don’t conclude from my comments that we are just going to put direct sales force. We are going to leverage consultative selling, as well as total solution selling, as well as indirect model across all the specialized brands. Can I just follow up on that? So if we’re assuming, give or take, Euro 100 million out of ABAQUS this year, which is some but pretty modest growth on where the firm was running before you acquired it, what is, you know, what would you regard a good growth rate for this business on a 2007/2008 basis? Is this better than Group or at Group type level growth business? Well, it should be about 15%. Is the potential higher? Yes. Do we have work to do? Yes. I like when a customer like BMW says I am going to now make all my simulation for crash-worthiness on SIMULIA ABAQUS, because you start with one car program and you grow. So we are going to start with our large customers. I was very pleased to see, between March and September, between the announcement and the closing, several significant customers came back to ABAQUS and said “Our decision is clear, we want to move and grow with You.” So it’s too early to say when this leveraging capacity will really become very strongly visible, but if you want a number it’s going to be about 15%. Hi, good afternoon. My first question is on the service margins in the fourth quarter. Would it be possible to elaborate on what happened there? To which extent is it a result of the consolidation of ABAQUS, and how should we look at that going forward? And the second question is on the growth in Europe in the fourth quarter. Could you mention any specific countries or clients or products that contributed, or could you name one? And then the third question is, could you, the growth rate via IBM’s reselling and via Transcat with the Rand organization, could you elaborate on the differences between them? I mean, the increase in margin is coming from, first of all, our improvement for the full year of about 4 points in gross margin which is coming from truly, you know from us refining our services business model and going to higher-end services, more consulting, essentially. And the other factor was that we did recognize a few million, Euro 5m, about Euro 5 million of services that were actually provided already in the third quarter, but could not be recognized in the third quarter. This is what brought truly the very strong appreciation in margins in Q4. But to have a good reflection on margins in services, look at the full year and you will see that we are now at about 24% gross margin, which is becoming a good measure of our profitability in services. In Europe, well, in Europe we had an excellent growth, you know, and 35% growth, truly, in the fourth quarter. Excluding ABAQUS it was still 28%. Excluding the services bump or positive impact, it was still 25% growth. So it was a fantastic quarter. But it happened after three years of relatively modest growth, if any, in Europe. So we knew that there would be some kind of recovery. And as usual, in Europe our customers tend to wait until the end of the year to see if they can truly, freely, spend their budgets on us. And so the investment decisions have been made in the fourth quarter in Europe and we are used to that process. And so this explains the very nice growth in Europe in the fourth quarter of 2005. And we have a few large wins, but there was no real spectacular customer order in the fourth quarter. It was not a mega order that caused the increase, but a much more well-distributed increase in spending. And the last question, about the TransCAT Rand, I want to make the following comment, Dassault Systemes intends is not to become ourselves a business partner. That’s not the long-term strategy we have. So we are not going to replace our business partners, we are going to strengthen and help them grow. Whether it’s on the SolidWorks side, with VAR channel, or from the PLM business partners. So the acquisitions or the moves -- local moves we did should be put in the perspective of this transformation we are going through. To really leverage the local skill on knowledge, to be prepared to have our own organization, to do the CMP as described and as we have done it in eight countries already. So this process is going on and this is a very, very important one, so redirecting the people to really become indirect salesmen and doing channel animation support. As a matter of fact, we are going to do even more than that, because more and more large customers, as well as mid-tier customers, ask us sometimes to be directly involved. And we have ways to do that now, to support their business transformation. So that’s what this is about. And no, not a strategy to become ourselves a business partner. I think it is. But the most important thing with channel leadership is to really show to the business partners that we can help them to grow, improve their total value selling to the customer and improve the customer satisfaction and capabilities to deploy PLM. This is happening. We have been successful, in each of these eight countries we talked about in the past quarters, to really do this transition, I think. And it’s win, win for everyone. Customer is winning, the business partner is growing and we make the system more leaner and efficient. And the most important thing when clients can position the business partner to not be selling one product brand but being able to sell the total solution, which is important for small/medium-sized businesses. I don’t think this transformation is going to be over in 2006. It will expand. But we truly, truly will be able to leverage that beyond 2006. This is what we are going to continue to do. Yes, yes. Of course, yes. As well as DELMIA. And we are giving now all of them ways to sell the total solution. Hi, guys. Just three very quick questions for Thibault. Firstly, in terms of the Q4 revenues, can you give us just a bit more color on firstly the contribution from Rand, if you can spread that out? Secondly, what the IBM service payment was for on behalf of the CMP program? And finally, some idea of what product development revenues were in the fourth quarter? Okay. Okay. We don’t have them to disclose exactly each small tiny line of our business, and so we don’t do that for Rand. The CMP payment, this I can share with you, was Euro 7 million. And the product development revenue is actually on our P&L and was Euro 6m. Thanks very much. I just have a couple of very quick questions. Thibault, in response to an earlier question with regard to the outlook for the CATIA seats this year, I think the question was should be expect it to be ahead of 6%. In your response you seem to imply that we should expect it to be down from 6%. Can you just clarify whether that was indeed the case and what the reasons were? Yes. The answer is very clearly that today in our guidance we have not taken the next generation in growth of the CATIA seats, and we are targeting somewhere between zero and 6% growth for the CATIA seats. So, first of all, maybe a little bit more modest that than for 2005. Okay. And just a couple of housekeeping questions, as it were. Can you tell us what the cash tax payment was? And can you also dis-aggregate the depreciation in the working capital, the non-cash items in the P&L? I think they were shown as a single item in the reconciliation at the back of the statement. Okay. So I am not sure I remember what was our cash payment for taxes for 2005, so that’s a good question. And if you believe that’s an important question, I would be happy to answer it, but I need some help to answer it because it’s very complex, of course, the reconciliation between what we have to account for in our P&L, and what is effectively paid as a total tax. That’s not……. The depreciation in working capital, I think they were shown as a single item in the back of the statement. Can you tell us what they were separately? Okay. And whilst you are doing that, I just have a quick question for Bernard. I think during your presentation - and it was referred to, I think, earlier on today as well and I just wanted to check I had this correct, you said all German auto manufacturers and suppliers will standardize from the summer of ’06 on these sites. Is that what you said? Yes. Indeed this is what I said just in the call, not this morning. In this current call we are hosting now. There is a lot of coordination in Germany for supply chain coordination between big OEMs, and it’s very well organized and that’s a very good driver for us. So we can take that as sacrosanct that from the middle of this year there will be a standardization program that kicks in Germany on V5 between the suppliers and the manufacturers? Good trials there. Everything’s a challenge, but I think the trends are there to really expand the adoption of V5, yes. Okay. And this is an unfair question and I apologize in advance for asking it, but there obviously have been a number of changes in terms of relationship with IBM over the course of the last 18 months or so. Why do you think IBM have chosen to, at least partially, sponsor Windchill in some of the new emerging markets such as China, and also in some of the as yet under represented verticals for product data management? Well, I think first of all the announcement that was done was not an IBM announcement, but an announcement from Parameter Technology. Of course, as you will notice, IBM was caught it in time. The way I would summarize it, first of all, I don’t think it has any effect on our business. Second, and I quote here Steve Neil, Steve is top leader in the IBM software division, he said there is no one with a sales quota for anything but data system application in IBM. So there is no changes there. I think it’s fair for IBM to do some promotive middleware and infrastructure, as well as services. And I think this has been happening before. And I think the comments made by this competitor might not be exactly aligned with what the field operation will be, so stay tuned. I have the answer to your question on the deprecation. We had a, in the fourth quarter we had a Euro 20 million in depreciation, to be compared to Euro 17 million in the fourth quarter of last year. Hi, guys. Just a couple of quick questions. I wonder if you could just talk about pricing for SolidWorks? Obviously the volume growth is fantastic still. You did say you were expecting it to level off. Is it in line with your expectations? And what do you expect this year in terms of SolidWorks pricing? Are we expecting a flat year rather than maybe a decline? And secondly, just in terms of costs, Thibault, I wonder if you, have you got any plans in terms of what sort of headcount you are expecting to have by the end of 2006, where you are expecting to invest? And if you are, do have a long-term margin goal, I mean, you are saying that there is a break on the margin because of investments you are making. What do you think is the long-term goal, and when should we expect to get that? On the SolidWorks pricing, the, you know, in our expectations today for 2006, we are assuming a stable pricing. So, we are certainly not assuming there will be an erosion. We have, I think, now assessed the fact that we are able to keep the current level of SolidWorks prices. Certainly we would like to see if we can continue to increase it a little bit, but right now in our expectation it is a stable pricing. In terms of costs, we are planning to increase headcount in 2006 to essentially fulfill what we are underlining in our strategy. And so these investments are going to be spread between research and development, marketing and sales. I am not expecting one of the different lines to have a superior investment compared to the others. We are in 2006 investing relatively evenly in the different lines of the P&L. And concerning margin, considering all the investment opportunities we have to expand our market, our addressable market, I am refraining right now from giving you guidance on what our margins could become five years down the road. I am putting a little bit more emphasis on top line growth and EPS growth as well, because we believe that actually with the choices we are making, we are optimizing our current and future EPS growth. Hi, guys. I am just wondering if you could answer a couple of quick questions. First half, Thibault, could you maybe give us an idea of how the Euro 9.2 million of stock-based compensation charge will flow on a quarterly basis? Is it more weighted to the front or how does that pan out? And then also, what would the expected tax effect be, so that we can figure out what the EPS impact of that charge is going to be? And then finally, on the services margins, obviously you’ve done a good job over the last three or four years of bringing those up. Have you reached the level at which they should stabilize or should we expect a little bit more improvement again in 2006? The first question is easy. The Euro 9.2 million is the linear charge. So it’s going to be one-fourth of it in each quarter of 2006. Concerning services, we are expecting to continue to improve a little bit our services margin. I would not specify this number. We would be disappointed if we were not delivering 12.3 in 2006. And I’m sorry, John, your third question? Thank you. Again Ladies and Gentlemen, if you wish to ask a question, please press "*" "1" on your telephone. This question is from James Dawson at Morgan Stanley. Mr. Dawson your line is open. Hi. Sorry. Just another clarification on the tax. Is the amortization coming off the back of the acquisitions, is that tax allowable, Thibault? What’s the best, can you give us some guidance on what we should have in our models for tax next year, for the tax rate? Right. What we are going to effect on tax is not going to be very significantly different from what you see as acquisition cost of Euro 10 million per quarter. It’s not going to be materially different. It’s a little bit less than that. I expect that we are going to be able to effect on taxes about Euro 8 million a quarter instead of the charge of about Euro 10m. Okay. So I think we should conclude now. Just for the sake of being consistent between what we presented this morning at the Analyst Presentation in Paris and on the phone here, I want to make two comments. Number one, we in the presentation this morning we used an Airbus chart to illustrate how the ENOVIA environment was being used for new airplane program. And I think I want everyone to know that, because I was a little bit surprised to see some of the statements from our friendly competitors a few days ago. And in fact, it’s very, it’s speaking for itself; ENOVIA is becoming an important engine for the infrastructure for Airbus. And the second thing we presented, which couldn’t be really presented here at the call, is the long-term commitment for the well-known Toyota Motor Corporation to really continue to expand the entire PLM suite with CATIA, DELMIA, which we are doing today, and on ENOVIA, as it was presented by a Board Member and the CIO of the Toyota Motor Corporation. So we presented the video of his statement, in public that was a very strong statement about how TMC is deploying the PLM suite of products across the board. So that’s just to make sure there is no confusion about marketing statement and reality here. I wanted to add those two comments. Once again, thank you for your participation to this call. And of course, we keep in touch to address any further questions you would have. I will talk to you soon or at least in three months from now. Bye-bye now.

EarningCall_234107

Good day ladies and gentlemen and welcome to the Sony Corporation Third Quarter 2005 Earnings Conference Call. My name is Amery and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session, towards the end of today’s conference if at any time during the call, you require assistance please press “*”followed by “0” and our coordinator will be happy to assist you. I’d now like to turn the presentation over to Mr. Jonathan Bates, with Investor Relations in Tokyo. You may proceed please. Thank you very much for that introduction thank you all for joining us today January 26, 2006, for the discussion of Sony’s results for the third quarter ended December 31, 2006. I am Jonathan Bates with Sony Investor Relations in Tokyo. We are joined this evening by Takao Yuhara, Corporate Executive and SVP, Investor Relations, Sony Corporation and by Robert Wiesenthal, Group Executive, In charge of Corporate Development and M&A, Sony Corporation, EVP and CFO, Sony Corporation of America. Thank you very much for joining us today Mr. Yuhara and Mr. Wiesenthal. In just a few moments I’m going to give brief summary of today’s announcements. Then Mr. Yuhara and Mr. Wiesenthal will be available to answer to your questions. Please be aware that statements made during the following remarks and Q&A session with respect to Sony’s current plans, estimates, strategies and release and other statements that are not historical facts are forward-looking statement about the future performance of Sony. These statements are based on management’s assumption. In light of the information currently available to us and therefore we should not place undue reliance on them. Sony cautions you that the number the important factors could cause actual results to differ materially from those discussed in the forward-looking statements. For additional information at the risks and uncertainties as well as other factors that could cause actual results to differ please refer to today’s press release which can be accessed by choosing Investor Relations at the bottom of the page at www.sony.com. With that, I am now going to turn to our announcements. Thanks to the strong performance of the Electronics and Games segment during the yearend sales season including strong sales of BRAVIA LCD TVs in all region as well as the strong revenue contribution of the financial services segment, Sony achieved record quarterly consolidated sale of ¥2,367.6 billion and recorded quarterly consolidated net income of ¥168.9 billion. Consolidated operating income was ¥202.8 billion, the second highest after the December 1997 quarter, it is ever been. The income before income taxes was ¥225.9 billion, an increase of 51.4% year-over-year. The increase was primarily driven due to a gain of ¥19 billion on the change of interest resulting from the IPO of Sony Communication Network Corporation. Associated net income of affiliated company was ¥19.5 billion, an increase ¥17.2 billion year-on-year. Sony BMG contributed ¥10.3 billion, Sony Ericsson ¥9.8 billion and SLCD ¥1 billion. As a result of this strong quarterly performance, we have revised upward our forecast to the March 2006 fiscal year, the principle reason for this revision who have won a weaker Yen in the December quarter than we had originally anticipated and 2) better-than-expected operating results in the Electronics and Financial Services segment during the third quarter. In Electronics, the TV business performed significantly better than anticipated due to the success of BRAVIA LCD TVs and the PC business was also better than forecasted. On the other hand, the performance of the Pictures segment was lower than expected. Although these factors had a positive effect on operating results during the third quarter, Sony continued to operate in an uncertain global business environment during the fourth quarter. In addition, to this revision, to our, in our forecast Sony today announced a progress report on our structural reform activities which are proceeding according to plan. And these were outlined at our corporate strategy meeting last September. For details of these, please see the slides on our website which can be accessed at www.sony.com. Sales in the Electronics segments increased 4.7% while operating income increased 56% to ¥78.9 billion, mainly to an improvement in the cost of sales ratio associated with strengthened products appeal and cost reduction. Sales of our audio, video TV and information and communication category in aggregates increased 2% while operating income increased ¥21.6 billion. Sales increased primarily due to the strength of BRAVIA, the success that which has propelled Sony to the leading in the worldwide LCD TV market by sales amount based on Sony data. Operating income increased, strong notebook, PC in our, VAIO PC business. The increased sales of DVD and high-definition camcorder models and strong sales of HD broadcast equipments. Sales of semiconductors and components increased 22%, while operating income increased ¥10.1 billion. Both increases are attributable to higher sales of semiconductors, to the Game business, optical heads for the, for PSP, lithium ion batteries for notebook PCs and memory chips. Sales in the Game segment increased 48% year-on-year, reflecting a large increase in sales of both hardware and software. The PS2 continued to perform well and the PSP continued its growth as the fact that penetrating game console in history. Software sales grew to the contribution PSP software, although we continued to invest aggressively in PS3 research and developments and SG&A expenses offer increased primarily due to an increase in marketing expenses, the steady global expansion of the PSP platform and continued strong performance of the PS2 business enabled us to increase operating income, 52% to ¥67.8 billion. Picture segment sales, in Yen, was flat year-on-year that declined 10% on US dollar basis. This decrease in revenue was the result of the significant home entertainment contribution of Spiderman II in the prior year’s third quarter, and the under performance of The Legend of Zorro and the Zathura in the current quarter. An operating loss of ¥0.4 billion was recorded compared to profit in the prior year due to these same factors. Financial Services revenue increased 31% year-on-year, mainly due to an increase in revenue at Sony Life. And operating income for the segment grew ¥33.1 billion, mainly due to improvement in gains and losses on investments in the general accounts at Sony Life, primarily resulting from an improvement and evaluation gains from stock convergence right in convertible bonds. Lastly, the sales in the other segments increased by 8%, as a result of strong sales at several businesses within the segments, revenue at SMEJ which composes 40% of the other segment sales increased year-on-year due to the success of first hit by the Ken Hirai album. Operating income also increased to 14.9 billion as a result of cost reductions at network related businesses within Sony Corporation. And an improved cost of sales ratio and higher sales at SMEJ. This concludes my opening remarks, with that I would now like to turn you over to our operator. Thank you very much. Thank you, sir. Ladies and gentlemen if you wish to ask a question, please press “*” followed by “1” on your touchtone phone. If your question has been answered or you wish to withdraw your question, please press “*” followed by “2”. Again it is “*” “1” if you do wish to ask a question and will pause for a moment as question queue up. Okay, so while we are waiting for few live questions to queue up, why don’t we take a couple of email questions first? The first question is a question about CRT television. How big in value terms are CRT TVs in your TV sales in Q3 2005. For the answer to this question, I would like to go over to Mr. Yuhara Yes, a direct answer to this question. In this, the solid growth, the sales of the TV segment was ¥361 billion and CRT TV is accounting for along 20% of it. Second email question, do you have assumptions for the LCD TV market in 2006, for example, growth rate and market size worldwide in million units? Okay, again, the LCD TV market is very fast growing market and this year, there are about 20 million uniform sales in the worldwide division. And in next year in 2006, it could be increased by another 80% so that’s 3.8 million. So that would be anticipated the LCD TV market in quantity. Yes, hi there, a couple of quick questions could you maybe give some more commentary around the TV operating profits excluding the currency effect, by an in country currency? Well, we do not; disclose particularly, the currency, the exchange, the benefits in the country volume base. But however the, in this solid growth, there was about ¥20 billion relative towards the rest on that, the currency, you guessed that, the based on that, solid quarter through, last quarter. That is a, the benefits from the, on the Ericsson series. Okay, quick question on Financial Services, the benefit into our sales and operating profit this quarter seems to include some one-time effect, but should we expect that to turn, return to normalized levels in future quarters? The, in, this financial services particularly in the Sony Life, there is a burier on profits of the security investment, mainly combats we want. This was the increase, thanks to that Tokyo Stock Exchange, particularly topics. And this was the largely imposed in that, Sony Life profit in second quarter. Good morning, couple of question for you, could you by any chance give us any update on the timing of Playstation 3, what your thoughts are with that that console system. I mean, secondly looking at the Games business, could you give us a breakdown on a geographic basis on hardware and software units for both Playstation 2 and Playstation portable during the December quarter. The, on this possible loan today, the longstanding of PS3, there could be question to this turning stocking strategy of the Sony Computer Entertainment. The SCE will announce those timing, in up look of the time might be. Okay, and I think any ideas to when do you probably time might be? That will hear more about Playstation 3? We just, we are going to answer your question about the geographical breakdown, if you could just hold on a second. Geographical breakdown of the PS2 in the third quarter, the total shipment was, the 5,360,000 with which in the Japan its 1.13 million and in North America 2.21 million and lastly in Europe it is 2.02 million. So that is, the Playstation 2. On PSP, in the third quarter, total shipments quantity was 1.2 million, sorry, this is of course 9 months, 622 seldom period. Asia 6.2 million, in Japan 1.35 million and in North America 1.68 million and in the Europe is 1.2 million. That is a geographical distribution of this, of Playstation portables. Hi there and congratulations on excellent quarter. And I was wondering could we talk about PSP profitability on hardware and software in aggregate, and how your strategy has changed there for example; I know you are, for example, looking to accelerate outsourcing to the lights of Hon Hai (ph) to make the PSP more comfortable. Could you help us understand your profitability strategy within gaming and how you are doing there at the moment? Yes and as you know the, we have transferred timely gross production, in period of time, to just plunge up on to Hon Hai. Then that, as we can see the Playstation portables will make a gross profit from the hardware, from those and we have seen it on the number of software which contributes to the sale of products, so then PSP sales, total shipment is now at least to the 15 million on a worldwide basis and tangible sales is, beginning to increase, now over 2, more than 2 software, the Playstation, PSP. So I believe that the gross prices will be increased, but when the PSP would be, distributed more in the worldwide market. Do you think the tight ratio could go to 3 and also one of the kind of things that’s been positively surprising us being sales at the UMD disks. Are UMD disks is profitable for you as game software? It’s Rob Wiesenthal, speaking. The business model on the UMD disk is absolutely different for the games and the movies, I think we are very pleasantly surprised of the take-up rate on home videos, on UMD early in the process we packaged each PSP with a Spiderman disk and we are enjoying a lot of traction on retail for UMD movies, at price points that are sometimes 50% to 100% more than comparable DVDs, those turning out to be a big part for business and helping position, overall PSP as more of a multimedia device going beyond games and with getting into movies television and music videos. Maybe some on, based on that traders yield, when will I, looked up the PSP time, the traders you’ll need to see, in the linear times, the form of PSP. PS2 then that compared to this, the 2.3 is a little bit slow. However, this is just up at in the, I am not so, the pessimistic on this, the traders here for Playstation Portals. No, just obviously he knows that, it is just wondering to clarify, I think, the model for the games in terms platform business, actually games are more profitable than films. But go ahead with your question. Right, and could we, maybe, quickly just move on to the whole high-definition battle between HD DVD and Blu-ray. And could you help us understand just on the content side, what Sony can bring to there to kind of them get the, get new way to be the winner and how important to PS3 platform is going to be to see the install base? I think they are coupled with MGM Sony distributes over half of the color film ever made, which I think was a very powerful proposition within the community both in terms of the hardware manufacturers and the consumers to really position Blu-ray properly as we kind of continued this kind of period of time before the introduction of the devices, I think PS3 is extremely important in our work towards making Blu-ray that is definitive HD standard, broadly because as you probably anticipate as a game console its ability to be competitive from a price perspective is less challenging that’s than our player, because the business model is different and I think that the hope is that you are not only going to be seeing people buying PS3 as a great game machine and home server but also for the Blu-ray capability as a high-definition DVD player. Super and just one last question on the kind of products that are getting well, and your walkman phones have obviously doing well like the W800 but there has been some capacity constraint there I believe. Could you help us understand where that’s constraint was coming from and what kind of, how you are going to result that over the coming quarters? All right what I understood from, I think it was Taiwanese component manufacturers was that, you could have actually achieved more sale discuss that and you were not able to be supplied with all the components you needed, that’s not the case, is it not? Now, well first, we just saw, 3 million cumulative, since we announced it in July last year and that, yeah, the I have run, this demand is very, very strong and put up a subject, the, the capacity issue on the particular devices but, the if not so serious as you. As a reminder ladies and gentlemen it is “*” “1” if you do wish to ask a question at this time. And again… Good morning, I was just wondering if you could potentially size the global digital camera market for 2006, and specifically on a unit basis where you saw or what your unit numbers are by geography and with that for some of the growth rates around those geographies outstanding. Thank you. You know the in year 2006; see if recently, just to degrees of their focus which is around 65 million unit in the worldwide. This is almost, the flat as in year 2005, the Sony, shipments for 2005, I mean; the current year will be 1.5 million. So 13.5 million, so that’s what we are predicting, and the we have, new model of compact cameras over T9 then that this is quite, exit little sustaining the markets. So in the compact cameras and we have a lot of good, the business of this content side. Both in, the sales and also close to this year, on top of this, the next year, we are going to have special cameras, then this is will be quite sophistic products for the coming year we are very much expected, with this products. Hi, thanks for the question I want to have just follow up on the Playstation 3. Any thoughts on how you plans are rolling out geographically, not necessarily the specific timing but can you confirm it would be a regional launch and also any thoughts at the moment on pricing thanks? Yeah as I mention that and, again that gross, the announcement we have made in, the contracts we’ve signed by Sony Computer Entertainment, and then that’s at this, in this meeting, either I have to be growing to, to this size prices was this year. Thank you very much. Hi there, just talk about and hoping to get another question. Two more quick questions if I may, can you discuss the impact of BRAVIA sales this quarter. You certainly have a max capacity versus where you’re able to produce from SLCD? Can you discuss if you asset capacity in the third quarter and what the impacts on marketing cost for BRAVIA might have been where you are comfortable on that line in the third quarter? Okay, BRAVIA and there are two things in the third quarter, one is, the holiday seasonal sales was, the very much satisfactory, then that the sales amounts of broad LCD TV sales was around 3.2 times more than same period in last year. Then that perhaps we have, the, number one, the brand in terms of amount of this worldwide market then this is sounds to the BRAVIA brand name, known by that the customers very quickly, then that as you we did stay in around US$160 million for this is other formal system comparing to these. Then well, we did the anticipated with those, the LCD TV sales that will be continuously it’s from the, in the marketplace. Thank you very much to the answers and the information on the call. I have two questions first one referring to answers given in the call that you did with at least we did analysts in Japan this morning. First of all on the, on the PC side the, the results were surprisingly good and part of the explanation that we have this morning was some of the, the buyers have, if you like is spoke that been automate these days, can you give some quantification of how large on that business is and what contribution from, the other end the automate buyers is that the big part of the turn around? Yeah, in Japan, the place of soft PC they are truly high compared to other region and as the result to increment that these automate and the customer tend to, the assurance of the, rather the high-ends with stage-on in the sense, so therefore this will give us additional, the, I think the value for regional multiples. So this was quite successful, the things of it and, then, in Japan including this, the conglomerate, the due to our direct sales of the multiple BRAVIA in the least give me a 5%. In December, which is a significant increase such as 6 months, 6 months of voice around helping 14%, so nearly to some extent it would be great, the from this, the on a mid, the sales. Okay thank you very much for that and congratulations on, on that improvement, the other area which again was supposed to surprise, which I’m not sure I understand is the, the walkman side, MD revenues, because I understand that the revenues were flat year-on-year, can you explain the, how do you see, and maintaining business in Walkman? You mean that the Walkman, these are how our A-series to purchase, how this can approximately or the, MD and CD Walkman? This, the, MD or CD walkman in this, particular third quarter, the sales was almost falt compared to the, rest of the year then again that we did make good quarter reduction efforts, the couple of revisions that favor growth, the current situation and then we could increase up the operating profit of this, the walkman compared to the last year. I understand that you introduced new product in, in Japan and Europe but I’m not quite sure, why that it was this popular or I think in the absence of new products one would have expect to the big decline in that area? Mr. Smith, actually within the audio segments, I think sales are more or less flat I don’t have to take them in front of me for the entire segment. But I think quite of that sales have been for CD and MD walkman, quite substantially. They shrunk by about half in fact, since the previous year. We all think… But, of course, they have a pretty dominant share. In the UK, we have gained around 20%. I should also comment that the, the technology that we use in our, in our high definition flash walkman is, they have a very long life time actually about for very long time, they also use organic video screen, which keeps the kind of, the design of the walkman to kind of futuristic kind of sale. Obviously, there was room for improvement but we have got, a small kind of, of that what takes around 20% in the market in, in the UK and Japan, I hope I that helps or answer your question. Hi, I just have one question about the PS2 and PSP should that guidance it looks like you, let the guidance unchanged but if you iterate the first three quarters of PSP shipments you’re roughly 13.9 million units, so I wondered if guidance this year implies that we likely not be shipping these much more units in the last quarter? Yes, we did not change that the result in only our focus, both PS2 and PSP, portable keeps, then, for the first quarter although it is, whether go ahead season and we were still carefully working that, the gardens for sales and production, then that, we will see thing two months back and these portal contribute of it. Sure. I just was curious so, I wanted to have you talk about your inventory situation with PS2 had retail currently. You know the, currently I don’t see that there are any, the issues on the market stock of PS2 and as I said the, the current quarters on shipments in the civil activity very close to hope in the, and then that maybe hopefully for the, the as I repeated to say we were just carefully watching the, high-ends of sales in the production. So we will see the end of March, how many quantities on PS2. Yeah, hi good afternoon gentleman, my question is the following, could we consider that most of the operating loss from the TV segment, from now related to CRT TVs and the dissemination cost of the, the PDP and just a brief, as a brief that of, should we consider that, of the full benefit of the SLCD sourcing, was that come a bit latter on, in 2006? Yes, the, the full quarter, third quarter the, the loss derived from that during the CRT TV and there is very small ocean of PDP or PDP terminals and on behalf of that cost. Then that for, SLCD as you know the currently, they’re continuously hit the, the, with their fullest capacity and also the, the making the, the profit of the model. And obviously, if this production is continued and we are very much expected for SLCD to reduce the atmosphere price of, the LCD channel, you are on this marketplace, that is our expectations. Next you have, may be just another question and maybe for Mr. Wiesenthal that animation movie especially in the US sounds that, US videos are not turning very angry about this market, especially in the, according to Mainichi, Sony Pictures didn’t push that much in that direction except for final strategy about 4, 5 years ago, what, what are your views there and you plan to, invest might be animation movie at some stage? Some of that in, in the US markets now with Pictures and Image Works; they’re not selling other US videos that the market is fair long about these specifications in the film industry. And filming picture didn’t push that much in that direction historically. And the right of views right there, and deal pricing that’s more in animation will be in the coming year. Yes in fact, in fact we have been very active in the animation that CG world, in 2ways #1 we have a company called Sony Pictures Image Works that does a lot of CG for ourselves, they were instrumental obviously in Spiderman and a number of other movies, of it also if Sony Pictures Animation and we will be having our first animated film called Open Season. And Open Season is our first CG film that everybody is extremely excited about and again it is our first entry into this world. And I think that you will see a measured approach of viewing films from Image Works. Obviously having the image work facility allows us to be much more cost effective in developing CG films that if we win some of you, of course an outsourced model. But I don’t think it’s going to be a major part of our slate, but something that will just do again on an opportunistic basis. Thank you very much more for that answer. With that operator, I would like to go to our final call today. Hi there and just 2 very quick questions if I can, Konica has obviously pulled out of additional SLR business and you’ve taken on those assets. Now there is a very strong install base effect for Canon and Nikon because of the lenses within digital SLR, Konica has absolutely pulled out because I think you can differentiate. So what assets or what strengths does Sony have to bring you there that will allow us do a get a decent market share in digital SLR. And secondly, could you help us understand what’s driving the good recovering profitability and within the video category, is that HD camcorder or is it something else? Thank you. Well, we have announced that Konica, as we note that than where we are, we really transport, the type of the assets particularly the SEL products and as we know the Canon and the Nikon with variance in, if there are the market, but this market is again, that the fast two growing market, then that as we know the particularly, with all the cameras. Technologies are quite significant and we are going to, market the growth the SLR cameras with their technologies. And also, and these cameras would be used at, existing, but the refreshment, Thank you very much for that question Conner. I am afraid we going to have the call here today. So thank you very much. Okay, finally I just like to conclude today’s call, by thanking everyone for joining us, and also joining Mr. Yuhara and Mr. Wiesenthal for joining today’s call. Lastly, I’d like to take this opportunity to remind everyone of our Investor Relations contact information. Tokyo Investor Relations can be reached at 813-5448-218. So, with that I would like to conclude today’s call. Thanks everyone for joining us. Thank you, Mr. Yuhara and Mr. Wiesenthal for joining us today. And lastly, I would like to take this opportunity to remind everyone of our Investor Relations contact information. In Tokyo, Investor Relations can be contacted by 813-5448-2180. In New York, Justin Hill and (indiscernible) can be reached at 212-833-6722. And in London, Chris Hohman and Shinji Tomita are available at 44207-449713. Again thank you very much for joining us today that concludes today’s call. Thank you. And ladies and gentlemen thank you so much for your participation in today’s conference. This does conclude the presentation and you may now disconnect. Have a great day.

EarningCall_234108

Good day everyone and welcome to the Estee Lauder Companies Fiscal 2006 Second Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Dennis D'Andrea. Please go ahead, sir. Good morning everyone. On today's call is William Lauder, President and Chief Executive Officer, and Rick Kunes, Executive Vice President and Chief Financial Officer. Also with us today is Patrick Bousquet, Group President responsible for sales and profits in all markets outside of North America. Dan Brestle, our Chief Operating Officer is also here and he will be available for the Q&A session. Since many of our remarks today contains forward-looking statements, let me refer you to our press release where you will find factors that could cause actual results to differ materially from these forward-looking statements. Thank you, Dennis. Good morning everyone and thank you for joining us. I am happy to report that overall the quarter sales came in within our expected range while the bottom line was better than anticipated. We told you we will quickly act at our strategic imperatives and some of the cost containment efforts we started are paying off. I’ll talk in more detail about these actions shortly but first let me recap the holiday season. On the international front where we now derive almost half of our sales and more than half of our profits, the holiday period was strong. Stronger retail sales during the quarter grew double-digits. The U.K had a terrific Christmas. Japan and Korea are starting to rebound and the emerging markets of China and Russia have seller growth. Some of the Western European countries remain challenging due to a relatively weak retail environment and de-stocking by several retailers. But overall the international business was solid. Those of you who follow the U.S. retail sector know that much of the department store traffic materialized just before the holidays. Our sales followed a similar pattern showing strong double-digit gains at retail during the week prior to Christmas. Once again the largest retail sales growth was in specialty department stores like Neiman Marcus in Nordstrom with more temperate increases elsewhere. Estee Lauder’s Annual Blockbuster Promotion grew 11% at retail despite a small price increase. The brands in other holiday sets also proved popular. Nearly 1/3rd of annual segment sales in U.S. department stores take place in the month of December. Estee Lauder Pleasures grew 29% at retail during the quarter. DKNY Be Delicious held flat against its strong prior year launch and Donna Karan Cashmere Mist grew 4% at retail. These positives were offset by declines in Estee Lauder Beyond Paradise and to a lesser extent Clinique Happy. During the quarter we continue to forge ahead on our strategic imperatives. We are in negotiations with potential buyers for Stila and expect to complete the sale by the end of this fiscal year. We are encouraged with the strides we are making with the Estee Lauder brand. The Tom Ford, Amber Nude collection created huge excitement for Estee Lauder both at the counter and in the press. The publicity value was immeasurable with virtually every major franchise fashion and beauty magazine covering our launch. The results were felt immediately. In November and December U.S. sales of the Estee Lauder brand grew an additional 5% points in the limited locations where Amber Nudes were sold compared with locations that didn’t carry the line. Internationally the results were even more startling, for instance in the U.K. only five stores launched the Tom Ford collections, but they saw Estee Lauder sales increased significantly faster than other doors in the country. We are also excited about the consumer response to actress Gwyneth Paltrow as a new face as one of our best selling fragrances, Estee Lauder Pleasures. We saw a measurable impact on U.S. sales when we began running the ads in November and similar starts were seen in the U.K. and Asia. Our Clinique, Lynne Greene is veteran with our company was appointed President of the brand responsible for its worldwide business. Lynne has 25 years of experience in the industry and previously led four of our other brands. Clinique sales continue to grow in the important Japanese market this quarter, even faster than they did in the first quarter. In fact over the past six months we have seen sustained monthly growth giving us confidence that Clinique has turned the corner in Japan. We expect to continue the momentum with the March launch of Vermulite (phonetics) inline of 12 facial products. As we mentioned in earlier calls the brands core product line, the 3-Step Skin Care System represents a significant portion of global sales. Re-launch of 3-Step in Asia and Europe in the second quarter has been very encouraging and we look forward to the U.S. restaging in the fiscal third quarter. During the last three months we also strengthened our product categories. We opened a State-of-the-Art Innovation Institute in Shanghai to help develop advances in skin care. Scientists there will study how genetic affects the skins response to the environment. The company has also established a panel of Chinese dermatologists to advice on research and innovation continuing our long creation of partnering with leading educational medical and research organizations. We expect that studies conducted at the institute will provide us with a better understanding of Asian skin so we can combine ingredients to best meet the needs of consumers in that region. The skin care category was boosted by a number of new products; the Estee Lauder brand is experiencing growth at the high end of the skin care category with its luxury Re-Nutriv Line. The brand added Ultimate Lifting Serum with a suggestive retail price of $200 and Re-Creation Day & Night Creme with a suggested retail price of $900 per set, demand for both were strong. On Origins the new adaptive wire line helps drive skin care growth. The brand was also honored with an industry award for the Best Executed Launch Strategy. In makeup sales of MAC and Bobbi Brown each achieved solid double-digit growth globally this quarter. MAC won five Reader’s Choice award from the Allure Magazine, reflecting its success with consumers. Expansion of our developing brands in new and established countries provides a consistent avenue for growth. I previously shared with you the excitement of that our prospects in China as well as other international opportunities. Patrick Bousquet is here today and he will discuss our foreign business in more detail in a moment. There has been a lot of activity in our distribution channel; we operate in a dynamic market which is evident from the number of consolidations in ownership changes among retailers worldwide. The most significant of these for us is the Federated, May merger and the related store closings. I want to impress upon you the longer-term positive impact we see for our business in this combination as Federated focuses on building two strong national brands Macy's and Bloomingdale. Among other things we will be able to run national television, radio and print advertising which will expand our choice of media outlets and enable us to reach new consumers. As we have said previously a sharp focus on fewer stores should also translate to higher productivity per store. We are also committed to driving growth in our other channels of distribution, our strategic company owned retail stores saw accelerating sales during the quarter up 11% overall led by a strong performance from MAC and improvements in Origins and Aveda. This increase is primarily like to your growth, we haven’t added many new stores this year. Our online business jumped more than 40% in the second quarter driven by both brand specific and retail partner sites. This significantly outpaces the 25% growth reported for total ecommerce sales in the U.S. during the quarter. Now that most of our brands are sold online in the U.S., we are beginning to expand into other top markets. Our Salon business remains healthy, sales were up sharply in the quarter and Aveda continues to migrate it’s business to highly productive concepts salons and has been focusing on stylist training, improved service and consumer retention. It also is accelerating its business overseas, Aveda added 60 salons in Europe and Asia this quarter. In October we marked the first anniversary of Beauty Bank in Kohl’s, our four brands had a successful holiday season. Growth in our American Beauty brand was driven by the introduction of its new fragrance Wonderful represented by its spokeswomen Ashley Judd. All brands had an appealing collection of gift set, those with American Beauty and Grass Roots sold particularly well. Same store sales in the quarter were healthy and we believe the business continue to develop in a steady manner. The travel retail business remains on a growth path with sales rising in the mid-teens for the quarter. I will let Patrick discuss this area in more detail. On the operational front we planned to open more efficient distribution centers. During the next 9 to 12 months we will open locations in Pennsylvania, Japan, China and Spain. Last quarter four new supplier hubs came on line allowing them to ship components to our plant on a just-in-time basis and enabling us to keep lower inventory. We have been increasing production of promotional items in China in line with our five-year plan. We also established an operations team in Shanghai to facilitate in-country purchasing, body assurance and packaging development. Our strategic modernization initiative is moving along. The blueprint phase is complete and we plan to implement SMI at Aveda our private location later this year. We pledged 40 to 45 million in cost saving this year and we expect to achieve the high end of that goal. During the quarter our brands in corporate departments heeded the call for austerity and reduced non-critical spending. As part of this we offered a voluntary separation program for employees in November which enabled us to reduce cost. We expect to realize financial benefits from this program and other budget cuts this year and beyond. We continue to look for savings and indirect procurement in other areas of SG&A. Rick will take you through some of these specifics in a moment. Now, let’s talk about our expectations for the remainder of fiscal 2006. The second half of our fiscal year will continue to be challenged by the transformation of Federated and disruptions at other retailers. However, I believe we have sufficient momentum in other areas of the business to meet our current top line objective. The cost savings we are pursuing should help us to achieve our goals for the bottom-line. Let me give you some details on activities we have planned. The Estee Lauder brand is rolling out the Youth Dew Amber Nude fragrance developed by Tom Ford to broader distribution this month. This will be followed by the Tom Ford Estee Lauder Spring Collection which will feature a more extensive color cosmetic line and will have broader distribution in the initial offerings in the second quarter. Clinique is re-launching its 3-Step System in the U.S. and for the first time is using television advertising. Based on the positive response we’ve seen with 3-Step at foreign market we expected to atleast miss Clinique in the United States. This month Clinique is bringing out extensions to its popular turnaround line with two products designed to improve the skin clarity and smoothness. Two fragrance brands from fashion designers will be introduced in the third quarter. Sean John Unforgivable for men and Missoni for women. Sean John created by music and entertainment icon Sean Combs aims to attract the useful consumer. The Missoni sale for the Italian Fashion House will be launched in Italy, the U.K. and the U.S. Importantly it will give us a stronger strategic presence in Europe. We continue to expect our international business to lead growth, the momentum in China is anticipated to continue, fueled by growth in Prestige Beauty and expansion of our brands. We’re cautiously optimistic about Japan given that Clinique has been able to maintain several months of growth and Aveda is trending of our plans. Korea is showing signs of a turnaround in consumer sentiment and retail excitement. Many other Asian countries are expected to produce sales growth in the mid-to-high single-digits. We believe sales in the European region will rise on travel retail growth and strong retail environments in the Middle East, Russia and Turkey. Western Europe is expected to improve somewhat as destocking abates and we hope the holiday period in the U.K. carries over into spring. The America’s region will likely be driven by growth in our non-traditional channels and the high-end specialty retailers, which we believe will continue their superior performance. We are confident that our strategic direction is sound and the actions we’re taking should drive strong top and bottom-line growth. Earlier this month, we were added to the S&P 500 Index, which affirms our role as an industry leader. Now, I would like to hand it over to Rick Kunes, our Chief Financial Officer to take you through the finical details. Rick? Thank you, William, and good morning, everyone. My discussions today will focus on our results from continuing operations. The Company achieved second-quarter sales of 1.78 billion, a 3% increase over the 1.74 billion in the last year’s second quarter. In local currency sales rose 5%. In today’s earnings release, we added a table of our net sales and operating income by product category and geographic region. As a result, I will not specifically mention those numbers but rather refer you to the press release for details. I’ll just touch on a few keys items. Let me begin by looking at sales by category. In the quarter, Skin Care sales were led by Europe, Middle East and Africa business and continue to benefit from the ongoing success of our La Mer brand. Makeup sales benefited from the continued strong performance from MAC and Bobbi Brown as we’ve mentioned and new and exciting products from other brands also lifted the category. The fragrance business is still challenging with sales declining versus the prior year’s quarter. Fragrance sales were lower in each region, although less sale in Europe where our travel retail business is reported. On a positive note DKNY Be Delicious continues its terrific global success. Christmas sets sold well in the U.S. and several new products were launched in this quarter. Geographically, our overseas business led this quarter’s growth. As you know international continues to be our largest opportunity. Patrick will cover these results but we are particularly pleased with our performance in China. Sales in the Americas came in slightly lower than expected reflecting the mixed retail environment over the holiday season. Once again specialty stores generated solid increases compared with more modest growth in certain key retailers where greater portion of our business is done. We experienced softness in our core brands, our revenue reflecting continued challenges in the fragments category. In the quarter, we made incremental provisions for anticipated sales returns, reflecting dollar estimated impact of announced store closes by certain retailers groups. We also expand; we also continue to be affected by store closes in the Southern U.S. resulting from the hurricanes. Switching to operating income, for the current quarter, we reported a net 8% increase to 250.7 million compared with 232.7 million last year. This reflects an increase in our operating margin of 70 basis points to 14.1%. Our gross margin of 74.3% for the quarter, decreased 10 basis points over the last year. This reflects an increase in obsolescence charges of approximately 40 basis points, proportionate to the change in inventory and unfavorable changes in exchange rate as well as higher travel retail sales which carry a higher cost of sales of approximately 20 basis points. Partially offsetting these increases was the net change in their mix of our business within our geographic regions and product categories. Any effect of a shift in the timing of shipments of promotional groups of approximately 40 basis points. Operating expenses, as a percentage of sales for the quarter decreased 80 basis points to 60.2% from 61% last year. The decrease reflects the Company’s efforts to reduce cost inline with software sales. Aggressive and discipline spending controls relative to marketing and general and administrate activities, as well as a shift of certain spending into the second half of this fiscal year. The improvement was also due to sales growth in businesses with lower operating expenses, combining these improvements represented 220 basis points. Partially offsetting these improvements was a recognition of stock-based compensation, the incremental provision for anticipated retailer returns and the charge related to cost savings initiatives. These items combined amounted to approximately 140 basis points. Looking at operating profits by category, skin care and makeup increased due to higher sales, while fragrance declined reflecting lower sales and to a lesser extent product support spending for the development of new products and brands. In hair care expenses related to a distributor acquisition, customer retention programs and further cost for additional points of distribution resulted in a lower operating income. By region, operating profits in the Americas declined primarily due to cost related to stock-based compensation and the incremental sales return provision I mentioned earlier. In Europe, the Middle East and Africa our travel retail business posted the highest operating income growth with a strong double-digit increase, and certain key markets like France and Germany also posted improvement. Asia Pacific operating income increased primarily due to improved results in some of our larger markets including Korea, China and Japan. I think, I will remind you that our results for both the fiscal second quarter and first half include the negative effect of external factors and business uncertainties which affected our first half sales and operating income by approximately 29 million and 49 million respectively. These factors will continue to affect us throughout the rest of the fiscal year and I will talk about that in a little later on in my outlook. According to our interest cost, we reported net interest expense of 6.9 million this quarter versus 3.3 million last year. The increase is primarily due to outstanding commercial paper during the current quarter. The effective income tax rate for the quarter was 37% versus 37.6% in the prior year. This decrease is primarily because of the tax effect of the Company's foreign operations, a decrease in state and local income tax expense, and an increase in tax credits. At this time we expect our effective tax rate to be 36.7% throughout fiscal 2006. Switching to our financial position, the Company’s cash balance was 370 million at the end of December 2005 versus 578 million last year. For the six months, net cash flows from operating activities improved 28% to 389 million versus 305 million in the prior year period, for the full fiscal year, we expect net cash from operating activities of approximately 550 million. During the first six months, we spent 306 million to repurchase approximately 8.8 million shares of our stock under our share repurchase program. We plan to continue to buy back shares opportunistically, returning excess cash to shareholders. Also, during the quarter, we redeemed remaining 68.4 million of the 2015 deferred stock that was outstanding in that last fiscal year end. We anticipate capital expenditures of approximately 275 million in fiscal ‘06 higher than last year due to our company-wide systems initiative. Regarding our working capital as of December 31, 2005 the inventory was 727 million, an increase of 28 million versus last December. Inventory days were 165 at the end of the quarter, versus 164 last year. A significant improvement compared to the relationship at the end of the first quarter. Our day sales outstanding was 42 days at December 31, 2005 compared to a 43 days a year ago. Let me now update you on a few assumptions for fiscal 2006. We’ve talked about the external factors affecting our business this fiscal year and here is what we have build into our full year forecast and what we have not. Included in our estimates is the following, first as announced by Federated on January 16th, 62 of the 82 doors they planned to close will take place in February. Based on this information, the full-year impact on our sales is expected to be approximately 62 million comprised of both lost sales in the closed doors and in general weakness from the overall business due to uncertainty. This is 12 million higher than our previous estimate. Second, about a 11 million of lost sales due to the hurricanes in the first half of the fiscal year. And third, there will be approximately a 35 million impact to our full-year operating income because of expensing stock-based compensation. But not built into our forecast at this time is 1) the remaining 20 Federated store closures and 2) the divestiture of Federated 55 more retailer stores, where we do approximately $49 million in sales. At this time, we believe these will occur in fiscal 2007. When further announcements regarding these events unknown we may have to adjust our expectations. As we said before we believe the retail consolidation in our sector in the long-term results from better productivity and improved profitability. Our forecast also includes a positive factor that is in our control, our cost savings initiative. We had finalized plans to realize about 45 million incremental cost savings this fiscal year which translates to approximately 75 million annually in the future years, they will come from these major areas. Organizational restructuring which is supported by our voluntary separation program affecting approximately 500 positions will result in current year savings of 24 million and a future annual benefit of approximately 47 million. Annual reductions in the area overhead will total approximately 12 million. This initiative is expected to generate about 20 million in annual savings and advertising and promotion efficiencies of about 9 million. In connection with these savings initiatives we expect to report a one-time charge of approximately 88.5 million in the second half of this fiscal year. And majority of this charge will likely occur in the third quarter. We will continue to be very aggressive in pursuing cost saving and a further reductions are identified that provide a reasonable pay back we will not hesitate to ask. For the full fiscal year, we now anticipate sales growth of approximately 3% in constant currency, and we expect foreign currency translation to negatively impact reported sales by approximately 1.5%. We expect gross margin to decrease slightly with supply change savings offset by the impact of the unfavorable gift program in the first quarter, pressures on our cost resulting from higher energy prices and negative foreign exchange. We now anticipate a significant increase in operating expenses. The one-time charge will affect our operating expenses by approximately 140 basis points. Operating expense margins will also include the effect of lower sales growth and approximately 50 basis points negative impact from stock-based compensation expense. This will be partially offset by the positive effect of our set up cost savings. As a result, a full-year reported operating margin is expected to decline substantially. Our results this year would be stronger if it were not for the one-time charge which would provide benefit from the future periods, any unusual external factors. A reported diluted EPS from continuing operations is now expected to be between $1.61 and $1.68, this range includes approximately $0.12 per share impact from expensing stock-based compensation, $0.13 attributable to the impact of Federated/May. $0.03 related to the hurricanes and $0.26 related to the one-time cost associated with our savings initiatives. These are partially offset by our positive $0.13 from our additional cost savings. Regarding the fiscal ‘06 second half, we expect sales to grow approximately 4% in constant currency, anticipate 2.5% negatively impact of foreign exchange. We expect gross margin to decrease slightly and operating expenses to increase significantly, which will also include the one-time charge, with previously mentioned external factors in our cost savings. As a result, our second half operating margin is expected to decline. Diluted earnings per share from continuing operations for the second half are expected to be between $0.64 and $0.71. This will include approximately $0.40 for the combined impact on the Federated/May merger, hurricanes, stock-based compensation and one-time charge. While we do not give exclusive quarterly guidance, our fiscal third quarter profit in particular is expected to be impacted by the one-time charges, the shift of some of our advertising and promotional spending from the second quarter into the third, store closing and our business disruptions related to retailer consolidation as well as our originally planned marketing spend. As a result, our fiscal third quarter net earnings from continuing operations are expected to be significantly below last year’s third quarter. Therefore, we believe our fourth quarter will increase significantly. Let me emphasize that all of our second half profitability growth is expected to occur in our fiscal fourth quarter. Please remember that we run our business on an annual basis and we experience volatility in our quarterly results. That concludes my comments for today and I will turn the call over to Cedric Prouve. Thank you Rick and good morning everyone. Let me start by saying our goals for international division are in sync with the global strategy imperatives established by William for the company. Our focus has been and remains centered on the following five goals. Our first goal is to gain market share of our core brands in the most important countries. We look at key markets in terms of their size and strategic importance, critical market for our industry outside the U.S. are the U.K, France, Japan and now China. They are key innovation centers, trend-setting areas and of course possibilities for global competition. We have been successful in our market share acquisition strategies in all of these countries. Japan has been more challenging for a number of years but recent results have shown renewed sales and share gains for our portfolio brand in purchase distribution. Our second goal is to accelerate the roll out of newer brand. Estee Lauder, Clinique and Aramis operate in roughly 30 markets around the world. Followed by MAC which is in 64 markets, La Mer in 41 and Bobbi Brown in 34. While this appears to be a straight forward profit, we usually decide whether to enter a country based on specific criteria including the assurance that we have a clear business model, the ability of the local organization to take on a new brand and the long-term liability of the distribution channel. Generally most of our newer brands open 2 to 3 new markets a year. Our third goal is to act aggressively in key developing markets, the believed countries are at the center of these objectives, where we have focused the most attention and efforts during the past three years. Central Europe, Turkey and Vietnam are the next area that interest in our emerging market strategy. In addition, we are much more focused on Latin America which has produced significant returns in the past several years. Our fourth goal is to accelerate our business initiatives in areas that exhibit great growth potential and have shown strong financial performance. Those are mainly the travel retailing channel and medium. For these two entities acceleration means increased investments that can be regrouped rapidly, it also translates into putting our newer brands into more locations around the world faster. Our fifth goal is to explore and develop new channel such as e-commerce, home shopping, European pharmacies and presenting stores. This also includes increased investment in our customer relationship management initiatives, allowing us to understand our consumer better and to communicate with them more directly. We are particularly successful with our new e-commerce enabled site in the U.K., Korea and Japan. Let me elaborate on our international results. We operate in a complex environment and we cover a wide array of regions, markets and channels of distribution. Our growth rates range from quite low right low in major consent of European market, which is spectacularly high in China, with many stages in between. From the brand perspective, our core brand Estee Lauder and Clinique are growing in the low single-digit. Our Aramis and designer fragrances division is performing extremely well right now led by the enormous success of DKNY Be Delicious in virtually every market. This performance is especially pleasing given the difficulties the overall fragrance category is experiencing. Our Makeup costume brands are also doing so well across the board and exceed our goals for the year-to-date. MAC continues to reach new consumer or customers. It launched in Cyprus during the second quarter and Cyprus is the fourth new country it entered this fiscal year. MAC added 19 new points of distribution internationally in the second quarter bringing the total number of doors outside North America to more than 350. We are embarking on an international rollout of Jo Malone and it is running of our expectation. Most recently we introduced our Bobbi Brown brand in Australia, France, Germany, Greece and Thailand. Let me give you a few more details on our performance by region highlighting the main challenges and opportunities. Much of the performance of our key categories, we have seen a better performance in retail sales and in wholesale in many major market including the U.K., France and Japan. This is due to general destocking and an effort by some of our key retailers to place more emphasis on inventory control. Still Here we are focusing our efforts on retail sales growth since this is a better parameter of business success and market share improvement. In Europe, we’re growing at a slower pace than originally expected. Yet, two starkly different pictures emerged. Beside regional market U.K., Spain, Germany, France and Italy have been challenging with a particularly difficult business this year in France, although Germany showing encouraging sign. Part of the show point trends resulted from the logistical issues addressed last quarter. On the positive side, the rest of Europe Middle East and Africa are well ahead of our budgets and growing at double-digit rate with the best earnings coming from Eastern Europe and the Middle Eastern countries. Our Asia Pacific region is showing healthy growth. China is having an increasingly significant impact. Hong Kong continues to benefit from the strong interest of Mainland tourism and aggressive development in Macau. China remains a key market for growth and sales continue to increase dramatically. Our business is evolving advance to our new cities and expand traditional retailers. The Estee Lauder and Clinique brands currently are in 66 stores compared to 41 a year ago. Overall this fiscal year these brands have seen high double-digit like total growth. Estee Lauder and Clinique remained the two fastest growing prestige brands among the top five in the Chinese market today. Estee Lauder had nearly a 100% sell through on its Christmas offering were Clinique continues to build on its core future franchise in the region. We currently sell 8 brands in China, with new entries La Mer, MAC, Bobbie Brown, Aramis, Tommy Hilfiger and Donna Karan gaining tremendous spread and word of mouth. As you know we have been in an investment mood in China to build our business, we expect to start making a modest profit there next fiscal year, well ahead of our earlier forecast. Korea is finally showing signs of the turn around, as exhibited by positive consumer sentiment and important move by our retail partners. I am referring more specifically to the recently announced public offering of Lotte Department Store which could mean increased capital investments in the Korean (indiscernible) sector. It also appears that the consumer credit issue experienced for the past two to three years are behind them. Consumer spending appears to be on an upward claim in Southeast Asia as well. Australia has been a more challenging market, our business there is erratic at the moment because of a very difficult fragrance category overall and the announced sale of our largest customer Myers. Nonetheless we still enjoy terrific market shares in that region. The news from Japan is relatively bullish and we are cautiously optimistic. We expect low-single digit growth for the full-year led by a solid performance from Clinique, the standardization (phonetics) of our Estee Lauder business and solid gains from most of our all other brands. Department store sales projections are also improving and Beauty remains one of their best performing categories. Although Latin America is a fairly small percentage of our international business we continue to experience great results in top and bottom line growth and particularly in prestige market share. The reason is of increasing importance because of the growing clouds and larger number of Latin customers in North America. Sales overseas are also taking place online, we have established ecommerce site in the U.K. for Estee Lauder, Clinique and Jo Malone. Our products are sold on Google (phonetics) and (indiscernible) website as well. And after that we are assigning selling on local site in Korea and (indiscernible) in Europe. MAC and Origins we launched e-commerce sites in the U.K. in March. Finally our travel retailing division which operates in a traditionally volatile environment continues to perform extremely well and is projected to exceed our expectations again this year. Total retail incomes to follow the trends that we see geographically and by category. As a result key European market under fragrance category except again for the overwhelming success of DKNY Be Delicious are more challenging areas. The outlook for growth remains positive for the channel, thanks to increasing passenger traffic and ever-expanding airport capacity worldwide. To conclude, we believe that international business will contribute a larger share of the Estee Lauder company sales this year and as mentioned by William we’ll get as closer to the 60% mark which we aim to surpass very soon. Question on the, if you could help us out in the quarter, the advertising promotion, how much was it down, how much had -- you shifted into the back half and how much will it be down on the full year? That was the first part of it, and also how much on the overhead cost, how much of the 45 million on the full-year is already been realized in this quarter if any? Our year-to-date basis Bill, our A&P spending as a percentage of sales is below last year, so that gives you an indication for the full-year obviously be in line. So, it gives you an indication of the amount of spending that shifted into the third quarter. Regarding our 45 million, there’s very little of it in the second quarter, just a few million dollars that had been achieved, and looking at the second half of the year the bulk of that savings are actually going to come into the fourth quarter which is another reason why our fourth quarter profitability is so high. If you would have split the remaining savings for the rest of the year it’s about 1/3rd in the third quarter and 2/3rds of that savings in the fourth quarter. And then just on the advertising promotion, I know there is efficiencies you’re looking at but, as you’re trying to turnaround the core brands and improve your marketing campaigns, what gives you the confident you can do that and improve the top line while you are, starting or holding back on the advertising promotion? And then another part is just on the Federated/May I wanted to follow-up, you know move that up to $0.13 impact of few stores closing in this fiscal year only 62 of the 82, so how much were the provisions in the second quarter. And why did you pump that up to $0.13? Well, we pumped it up because they announced, I think it was the second week of January that rather then close the 43 doors that we had previously been announced that in February that they were going to change that number to be 62. So, we can only provide based on the information that we have. And when they change their guidance we obviously had to change, change the provision that we made, so that was the reason for the change. Regarding the A&P spending, you have to remember that some of our fastest growing brands used a different marketing vehicle to drive their business. So, we are spending buying the core brands, we are increasing spending buying those core brands but just the percentage relationship changes as some of those newer faster growing brands are a bigger percentage of our business. Okay. Maybe you could just clarify for me how much of the $0.13 wound-up in the provision in the second quarter on the Federated/May store closing? Year-to-date through the first half, if you just give me a second I will let you know. About $0.06 of the total year’s impact we anticipate has happened through the first half of the year. Hi, my first question has to do with your discussion of, a couple of new distribution centers to be opened over the next year. I think, that’s kind of makes the itch because I remember in the first quarter one of the big things that went wrong was some execution issues in opening up the DC in Belgium, so are there -- things are going to do differently this time to make sure there isn’t sort of the same level of business disruption? Wendy, I am -- this is Dan Brestle, I am sorry you are itching. We’re not, the mistakes and problems we had in the regional distribution center in Belgium with just one, one issue, -- one particular group of issues. We’ve successively opened up a PADC with most of our brands in Pennsylvania. We just opened up a new distribution center in U.K., we have one, we had just opened up in the same timeframe one in Canada for MAC. So we know how to open distribution centers, we had in one half issue that we think we’re in the process of straightening up. So nothing funny that we need to anticipate on the balance sheet in terms of higher inventory levels or anything like that? Okay. And then just a quick follow-up, can you give us a sense of how big China is expected to be this year in dollar terms? Can you, I guess just following up on this A&P. Rick, can you just give us the exact number that of A&P that was shifted from the second quarter into the third quarter? Amy, our plans always call for spending more A&P in the third quarter; I mean we have three things going on in the third quarter that we’ve known about for the whole year. We have the launch of Missioni, we have the launch of Sean John and we have the television advertising which is the first time that Clinique has ever done that supporting 3-Step. So those activities were always planned. But we do have control in essence of short-term marketing activities and we clamped down very hard on those in the second quarter until we establish our savings program, because we want to make sure that we achieved the $45 million that we committed to. Now that we that, we are releasing some of those controls if you will, and so some of that spending is moved into the third quarter. But, we are not really going to get into this quarterly, what happen what didn’t happen, I mean we run our business as you know on an annual basis and, we really try to avoid just this type of discussion which is explaining one quarter to another quarter. Okay and just on the Europe and the U.K., I’m a little bit confused about the U.K. because I spot that William said it was strong but then Patrick indicated that it was weaker. Can you just give us an overall comment about the U.K. in the second quarter? And then I believe you said in the press release that Europe would be the strongest growing of all your regions in the second half, but again that didn’t sound to be consistent with them with Cedric’s comments. Yes, I am going to -- Patrick again, I didn’t want to confuse you actually, I was talking about the five largest markets in Europe. And U.K. clearly is the best performing of all of them, what I meant is, I meant to say that the U.K. has slowed down compared to the historical growth we’d experience. We’re still growing mid-single digit right now at MAC and wholesale and the retail is actually outperforming that number. Okay so do you, do you still expect that Europe is going to be the slowest growing region and why given the strong second quarter performance? When you say Europe we have to, we have to define because we are, the slowest growth is going to be in the, lets say the larger continental market. And I think let’s not, let’s make sure we understand, embedded in our European number that you see regionally is also travel retail, is also the more effect the faster growing, emerging parts of Europe, Central and Eastern Europe and Russia as well as the Middle East. The big issue which is what Patrick talked about is the five largest most established markets in Western Europe do not have the same retail strength that these other markets decidedly. Okay and last but not least, just can you tell me whether third quarter earnings excluding the charges will be down? I think you are going down Europe thing, but can you just breakdown the sales in Europe by travel retail which just saw western European sort of developed countries and then emerging Europe and Middle East? You know we’re not going to, Bill, break it down by the three elements but we did mention that TRD was up mid double-digits in the second quarter, for the year we are anticipating TRD to be up high single-digit. So the second half growth rate of TRD business a little bit slower than it was so far year-to-date. And Cedric did mentioned that the bigger markets within Western Europe are slower growing than Eastern Europe and the Middle East. So, hopefully that gives you a picture of what they, what it is going to look like. Yeah, I mean just because I think you are meaning my models wrong, but I think those countries you decided are about 65% of European sales. So to understand how in the quarter Europe could have been up a 11% when you had effectively flat sales in the five largest countries. So something in its travel retail grew double-digit, there must have been absolutely amazing growth in Central and Eastern Europe and the Middle East is that a good assumption? Well we don’t have flat sales in all five big market, we have positive sales growth in Spain and U.K. and yes we have a very strong growth in Russia and Central Europe and in Italy. Last year in the second quarter Europe growth was relatively flat so we are up against a very easy comp in the second quarter in Europe. Okay great that’s fair. All right, okay just on the Stila discontinued operations charge setting up 69 million. What kind of, while into that math, I know there is an impairment there, but I want to know the impression that Stila sales were, quite less than $100 million? Well, I mean going into the math and you read it in the Q, actually doubled that sales, anticipating loss on sale, I mean there was, we had a purchase price that were in there, we also had ongoing investments in this Stila business were we grounded and then we’re comparing that investment in its totality eventual -- we anticipate to going from the sale of the business. Okay, great. I am sorry, I apologize if almost done but just one last one if I could, as a percentage of sales going forward, I know the old model was that, do you going to increase that and kind of funded with lower other G&A cost. Is that still a safe assumption? You know, we said that our A&P spending as a percentage of sales would start to flatten out because of the growth of the brands that grow much faster and don’t spend as much in A&P spending. So we actually said that our A&P percentage will begin to flatten out but that we will continue to invest in A&P behind our core brands more or less equal with the sales growth that we anticipate. In other words, the absolute value of investment in A&P and the key brands that use the A&P particularly as a vehicle will continue to grow. Because of the mix of our business and the growth of brands which use a lower portion of A&P in total you will see a percentage change. Thank you, could you give a little bit more color on Japan because I think you said Clinique was up, you had all of Japan was down in the quarter. So what was down? The Estee Lauder brand was still down but we, we still minus one to zero growth in December, so we are very encouraged by the stabilization of the Lauder brand. As William said Clinique has been growing for six consecutive months now so that is a very good performance for us. And our other brands, the makeup brand like MAC, Bobbi Brown are growing very high double-digit and Origins is a bit down right down. Okay, and then you have said, yeah that MAC and Bobbi Brown were up double-digit globally, can you give some indication how they were in the Americas? Okay so then, I mean I would assume that the core Estee Lauder and Clinique brands were down in the Americas in the quarter, was one of them kind of down more than the other? I think you can refer to the MPD data for something that maybe pretty specific. It is suffice to say that the brand, both of those brands did not perform up to our expectation and in fact we are very concerned about whether or not they can continue to gain share at the rate we are expecting them to perform. But we see both brands having tremendous potential to write their direction, and we’ve seen some recent trends which yielded results. Okay, and then so can you just explain a little more than why the Americas will go to being the highest growth region in the second half versus the lowest in the second quarter? I don’t think we said the highest and I think it’s actually probably going to be the second fastest growth out of the three and really not by a great deal more than we are anticipating the growth in Europe. Okay, and were the Kohl’s sales up in the quarter versus prior year when you had sales in the prior year? Okay and then finally, in terms of your store openings, do you have a target for that globally for FY’06 versus FY’05? If you are talking about our own retail store openings, no we don’t, we are opportunistic and strategic and looking for location, but we do not take into our plans any expected number of stores. Okay, I thought, could you say you opened something like a couple of hundred or something that’s or did I misunderstand? Then we make reference to doors which may be either our own doors and or with partnered locations with department stores at Perfumery. Yes good morning everyone. A couple of accounting questions actually; first of just for my own notification. Travel retail from a segment standpoint, is my understanding was that was flowing through the fragrance segment or is that simply fragrance and travel retail flows through there, can you clarify that? Sure, it flows through whatever segments, whatever categories the sales are in and I think where the confusion you might have trying to set, we always say that 60% to 65% of the overall travel retail business is fragrance related, it’s less of our percentage from our business but the overall travel reach out is a high waiting towards fragrances. Okay so then to follow-up on that is, are your fragrance trend, I am assuming your fragrance trend in travel retail are dramatically better than your overall fragrance trend is that a fair assumption to make? Okay and then one other accounting question which is, obviously with the shift in spending we are seeing pretty decent amount of volatility surrounding your advertising and promotional spending and including for lot of earnings volatility. And I am wondering have you considered, using more of a sales curve type of accounting system where your marketing spending gets allocated across your, based on revenues as oppose to on a cash basis, lot of consumer companies do this and it tends to limit some of the quarter-to-quarter volatility is this something you thought about? I think John that my, I think I understand what you’re asking and let me just sort of give you response to what I believe you’re asking. The problem you have is, is to match it up against our sales, you realize that our sales, our net sales in shipments in any given period lead the actual sales through to the consumer while the advertising and promotional spend comes for closer to the time period associated with the consumer sale. So to match those up will be very difficult in actually driving the business through to the consumer. This is an example, if you restart building inventories in the late spring and early summer where the holiday shipments would come in the later part of the first quarter and the early part of the second quarter for advertising that comes in the later half of the second quarter. That’s just an example of the flows and usage of the cash and then distributions and the retail sell through. So while we, while report you the health of our retail business sell through from the retailers in the fourth quarter that is actually reflective of the sell through of inventories shifting to them in net sales booked in the latter half to the first quarter and the second quarter. Yes, the spend associated with that comes later in the quarter. Not sure, I think, I’ll try to follow-up with that offline, but and I guess the question is you guys are expensing your advertising promotions on a cash basis, right went it goes out the door as oppose to trying to match up spending with revenue, if you did 24% of your revenue in the second quarter you book 24% of the A&P that’s not how you do it right? We do John, we do match it up, but we don’t match it up as a percentage of our shipments, we do match up our spending, but I think the real basic issue is the fact that, the market and the business environment that we are in now is, it changes daily, weekly, monthly and we have to change our business plan based on what we see competition doing and what we see as opportunities, what we see that we have to cut back spending. So, when we say is there more volatility, I think the answer is yes, but I think that the, the world in sense is more volatile because the world reacts more quickly to changes that we are going on. Hi, my question is try to travel retail as well, are your margins on travel retailing, they are much higher than the corporate level, are they even higher than the average for the year in the December quarter for seasonal reasons? No, the one, they are fairly consistent on a period-over-period basis but they -- you are correct, they are much higher which is one of the reasons that our profitability was pretty strong in the second quarter. Okay and this is adding to questions that were asked earlier, which category through driving growth in travel retail, most in which brands, in other words was Makeup, it grows into travel retail faster than fragrance growth? Hi, I had one question just on the shift in A&P spend. I guess where your margins came here much strongly both, in the International market and that I would have thought that the most of the shift in A&P spend would have been in the U.S. between quarters, so can you confirm that over there in International? No, your assumption is wrong about the U.S. versus International. I mean when we made a decision to control expenses, we just didn’t control them here in the U.S. but we tightened up on a worldwide basis. So, there is a certain amount of flexibility that we have with our spending, and there was a certain amount of that spending that we held off on a worldwide basis in the second quarter which shifted in to the third. Okay, and then I had one another question just in terms of, the corporate downsizing that you are undertaking, and I guess as you gone through the process of finalizing the details, have you found that maybe the opportunities extends beyond just 2000 and fiscal 2006 and that maybe their further opportunities to streamline the organizational structure, not just from the supply chain perspective but from a fixed comp perspective as well? Okay, so it’s not just a question of when you are being really top in sales you look for the opportunity that reduce that cost, this is something maybe that could happen beyond fiscal 2006. Hi, how fast does the Estee Lauder and Clinique brands together have to grow in the Americas in a longer-term, do you guys to be at a total company top line rate that you’re comfortable with? Well, no growth is too high it’s the best way to put in and obviously with these two big core brands representing a significant portion of our total business. These brands need to grow at the mid to low single-digit on a reasonable basis in order to provide a solid base for the faster growing brands to pull the total along at a healthy cliff. On a global, so I mean would it be fair to expect obviously U.S. to correct that I mean, so you might only need 1 to 3 into that? Given the environment, given the retail environment in North America as well as the penetrations of these brands to the total, our expectations are that we will continue to see lot faster growth for these brands internationally that we’ll see in North America. Yeah, yeah also then one other, actually one other kind of silly question when you can say mid double-digit, so that mean mid way between double-digits and triple-digits? I just wanted to follow-up William on the comment you made about Estee Lauder and Clinique and being quote very concerned whether they can gain share at the rate that you currently expect. Number one, was that a global comment or worldwide comment or just the U.S. comment? And number two, what do you expect to do about it, I mean what are you guys thinking about this in your strategic plan, what, how you’re moving forward on that? Amy, I’ll refer you the last answer to my question which is the high penetration of both the Clinique and Estee Lauder brands and share in the North American market, you’ll realize that in many of the, at the part -- the largest departmental store markets for us in the world, with Clinique as the number one brand and Estee Lauder as the number two brand. MAC is rapidly approaching in each of its points of distribution of being the number one, two or three brand. So we have very significant share as of the market in all of these locations. The real key question is can these brand continue to grow, we must make sure these brands continue to grow at or above the department average trend, so that atleast maintain if not continue to expand their share. We’re not particularly comfortable nor happy in allowing brands other than our own brands to grow at a faster cliff than the department. So our goal is to make sure that these brands continue to grow at a reasonable amount of fair cliff, number one, to support our plans and expectations you refer the other comment on the 3% to 5% growth that we’re looking for. And number two, to make sure as they continue to expand and expand their share, those are the key core concerns and obviously anyone given moment when the price for foreign exchange they’re well are very pleased when the brands so performance well. We get concerned and we say okay guys what you’re going to do to make sure you can continue to expand your share. We are seeing very healthy share expansion for Clinique brand particular as well as the Estee Lauder brand in many of our international markets and we’re very pleased with their share in the key core categories such as Makeup and treatment in Europe as well as the U.K. as well as the continued growth for Clinique we mentioned there were historic growth for Clinique in Japan and a continued growth for the Estee Lauder and Clinique brands in Asia. All of these factors go into the success of the total brand. And as we talked about before our long-term goal is that our share of the total business especially for Clinique and Lauder the more mature developed brands in North America will grow to faster cliff internationally and we hope as the U.S grows at a nice cliff, international grows at a healthier cliff, and that we expect in the long-term the 60% plus of our sales for these brands will come from outside of North America. Right and so the question is William you’re concerned because kind of on an overall basis these brands to stop, what do you plan to do to get them going? With the number of different efforts I think we talked about a number of them in the call not only the initial efforts both for the repositioning of the Estee Lauder brand using Tom Ford as an example as well recreation and reach a neutral going after the higher end business which as you see are growing at a far faster cliff, and we’re doing, we’re taking these efforts around the world in a more aggressive manner. We talked about the 3-Step efforts with Clinique we are first in Europe and Asia we were looking at restaging of 3-Step as well as the use of TV and other vehicles to drive this key core segment of the total Clinique business and now bringing into North America. There are number of other different efforts, that both brands are making in key category, and one of the key efforts just to continue to make sure that locally, regionally as well as globally these brands both on a category basis in overall continue to be relevant and in demand by the consumer in a strong basis. Good morning everyone, I have a quick question with regards to something that we notice recently, we had seen some of your products in Cosco basically Estee Lauder product, Origins products. I would imagine that this is not that you guys are piloting channel diversification this way, is this diverted product do you sell, well actually that these kind of the control given the reasons with brand equity. Yes your assumption is correct these are diverted goods we are making every effort to find the source of these goods and we will close them down. Good morning. Just quicker questions on your over all global fragrance business with sales down and profits down 35% can you just remind us if had a major fragrance launch in your prior year quarter and if not was it mainly just declining department store traffic and I guess coupled with weaker, into overall international sales just in fragrance, wouldn’t there another problem? It actually all of the above, some others factors, there is a number of factors that go into the overall global fragrance performance trend right now. Specifically we are looking at a shipping of the spend from one brand to another in the Estee Lauder brand in particular, or the Estee Lauder brand had a significant spend last year against it’s Beyond Paradise fragrance and they shifted this spend from a predominate spend of Beyond Paradise into the Pleasures brand which we share with you as experience some great results, and as the result go, the Beyond Paradise segment has been falling off. So in addition we cannot ignore the fact that one of our other key fragrance brands, our Tommy Hilfiger brand continues to show extraordinary weakness in North America and it is dropping at a rapid rate and unfortunately we are doing all we can is to support the brand but the overall health of the brand is the concern to us. In additional of course let me reiterate these strategic importance especially they are not channel, just the channel for distribution of the overall fragrance sector and the efforts we are making into it sort of up the performance in the total sector. We believe that the fragrance sector is very important in our key strategic markets, and we will continue to be, but I will remind you that the best analogy I can draw about the fragrance business is the movie business. There is lots of launches going on all the time ahead with the successful in it, and its not added its on to the net direct quickly, the consumers attention is that way, the retailers is attention is that way, and we will continue to find ways to make sure we can make this sector and make a contribution to the total efforts of the company. I want to, just leave you with a few final thoughts about our company, we have a uniquely powerful global franchisee that provides us with abundant avenues for growth, these avenues include the launch of innovated products and new brands, expansion in new and existing markets and particularly emerging markets and the development of other channels of distribution, distribution are underway in each of these areas and are positioning us to continue our 59 year record of uninterrupted annual sales growth. By maintaining our rigorous expansion discipline I assure you that this is going to help us grow and give our benefits to the bottom-line. I am very excited about our company, and with the future goals. And I want to thank you very much for joining us this morning and for your very challenging question, thank you very much. That does conclude today’s question and answer session. If you were unable to join the entire call, a playback will be available between 12:30 Eastern Time today through February 2nd. To hear a recording of the call, please dial toll free 888-203-1112, and the passcode for that replay is 3278543. That conclude today’s Estee Lauder conference call, I would like to thank you all for your participation, and wish you all good day.

EarningCall_234109

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EarningCall_234110

Here’s the entire text of the prepared remarks from Sabre Holdings’ (ticker: TSG) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Welcome to the Sabre Holdings Third-Quarter Earnings Conference Call. At this point we do have all of your phone lines muted or in a listen only mode. However after the executive team’s presentation today there will be opportunities for your question. Those instructions will be given at that time. And just as a note you should require any assistance during the third quarter earnings call you may reach in AT&T operator by pressing “*”, then “0” on your phone keypad. As a reminder, ladies and gentlemen, today’s conference is being recorded for replay purposes and that information will be announced at the conclusion of our call. So with that being said, let’s get right to today’s agenda. Here with our opening remarks is Vice President of Investor Relations for Sabre Holdings, Ms. Karen Fugate. Please go ahead, ma’am. Thanks Bret (ph). Hello everyone, thank you for joining us today. I’m here with Sam Gilliland, our CEO; Jeff Jackson, our Chief Financial Officer; Michelle Peluso, CEO of Travelocity. Sam will review highlights for the quarter; Jeff will review our results in more detail; and Michelle will provide an update on Travelocity. But before we get started I would like to remind all of you that some of our comments on matters such as our forecasted revenues, earnings, transactions, operating margins, and cash flow, contracts or business and trend information would constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ materially from our expectations. Those factors are described in the risk factor section of the Company’s most recent Form 10-Q filing with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided a detailed explanation and reconciliations of the adjusting items and non-GAAP financial measures in our earnings press release and on our website. Now I’d like to turn the call over to Sam. Thank you, Karen and thanks everybody for joining us. Our third quarter results were excellent with a healthy operating margin for the company and with solid profitability and growth at all three business units. At Travelocity we had strong operating income, strong growth in our domestic business, and we made significant progress integrating lastminute.com into the Company. At our airline solutions business we reaped the benefits of our turnaround there for the fourth quarter in a row. And at SabreTravel Network we increased both revenues and volumes while making progress in key expense categories. These businesses all performed well, on their own but as I’ll explain later they are also performing well together. First, though, let’s take a look at some of the highlights for each business. At Travelocity we continue to see excellent revenue growth and share gains, thanks to our progress with differentiation, a thriving merchant program, marketing effectiveness and a growing distribution business. It was our seventh quarter in a row with revenue growth greater than 25%. In the six months since Travelocity announced its differentiation strategy, centered on customer championship, we’ve interacted with hundreds of thousands of customers through this program. Each time that happens, Travelocity’s brand gets stronger. Meanwhile, ever smarter media spending continued to give Travelocity greater marketing effectiveness. New features such as multiple room booking and the total trip savings calculator are helping boost merchant revenue. And Travelocity Partner Network, which redistributes content through third party sites, continued its success by adding Continental Airlines and more recently AirTran Airways to its growing list of affiliates. Finally, since our call in September, we’ve continued to make very good progress integrating lastminute.com into Travelocity, Michelle will touch on all of this in a few minutes. At our Sabre Airlines Solutions business our performance continues to be impressive. Our operating income nearly quadrupled year-over-year to $11 million and we had strong growth in all areas of the unit. In particular, we saw a success in key growth segments, China, the Middle East, and India. As an example we provided a number of new products, including our SabreSonic web check-in tool and our airline e-ticketing hub to Jet Airways, the fastest growing airline in India. At Sabre Travel Network we saw transaction and revenue improvements and we reduced cost growth in key areas. Our 8% increase in international transactions was driven in particular by new relationships in Latin America and the Middle East. In Hotels, we had a 33% revenue jump, thanks to strong organic growth, merchandising efforts, hotel spotlight and Sabre Surround and through SynXis. Together current hotel revenue at Travel Network grew 25%. On the cost side we slowed the growth of agency incentives and data processing, results driven by several initiatives in recent years. Focused on incentive costs and building cost effective open systems technology. We also implemented new policies that stop those who use other technologies from tapping into our services without paying for them. We continued our work with the largest US Carriers on long-term distribution agreements and those talks are encouraging and productive. Regardless of what you might hear otherwise, these airlines have made it clear to us that the GDS channel is an important part of their distribution plans going forward. We continue to focus our efforts on reaching long-term full content agreements that enable our agency customers to provide the broadest range of services to travelers and corporations. We will use our leadership position and our global reach to find collaborative solutions that can be adopted by airlines and travel agents alike. We continue to be patient, because we want our, want to reach agreements that will deliver excellent and unique value to all of our customers. That value proposition was validated last month when we announced a comprehensive distribution agreement with AirTran Airways a low cost carrier. It’s a five year deal with good economic terms. It gives all of our agencies full content on AirTran, the same goes for Travelocity, plus it grows the Travelocity Partner Network which will redistribute hotel rooms, cruises, and packages through AirTran’s website. And it provides a great illustration of the strength of our offering across the portfolio. With this new agreement, we can now serve our agency customers and consumers even better than before, all while delivering more to AirTran. Our businesses are working together like this all over the world at hotel groups, cruise lines, and airlines. It puts us in a unique position deliver more for our agency customers and for consumers. That in turn provides scale for suppliers everywhere and all of it ultimately benefits our shareholders. So this quarter we focused on our strategic initiatives through the successful execution of our plans and will continue that focus moving forward. Finally, I want to mention that earlier this week we announced our quarterly dividend at $0.09 per share; we are pleased to continue to enhance shareholder returns in this way. And with that, let’s go to Jeff for details on the financials. Jeff. Thanks, Sam. This morning I will cover our third quarter results, followed by fourth quarter and full year outlook and I’ll start with consolidated results. Total company revenue was 700 million, growth of 29% including the addition lastminute.com on July 20. Revenue growth excluding lastminute.com was 20, or 10%. Total company operating income in margin on an adjusted basis was 112 million, a 16% margin, and on a GAAP basis operating income was 100 million, a 14% margin. Total company adjusted EBITDA was 138 million, and GAAP net income was 58 million. Adjusted net income was 65 million. Earnings per share excluding adjusting items were $0.50 compared to $0.41 in the year-ago quarter. Earnings per share on a GAAP basis were $0.45 compared to $0.49 in the year-ago quarter, which last year included an accrued tax reversal of 18 million. Free cash flow was 62 million, and cash provided by operating activities was 84 million. Now moving to business unit performance for the third quarter, starting with SabreTravel Network. Revenue was 403 million, year-over-year growth of 4%. Total transactions also grew 4%. Operating income for the quarter on an adjusted basis was 59 million, a margin of 15%, and on a GAAP basis was 56 million, a margin of 14%. Our margin is in line with our expectations and we are on track to meet our full-year goal of mid-teens. We continue to invest for the long term in emerging retail initiatives, while at the same time looking for opportunities to take out costs to maintain mid-teen margins for the long term. We’ve seen progress this year in reducing the rate of growth in two important expense categories, incentives and data processing. On the offline incentive per booking front year-over-year growth is in the mid-single digits, about half of 2004’s run rate. In data processing, we are realizing savings on a per transaction basis, as a result of moving 100% of North American agency customers to lower cost open systems. Adjusted EBITDA for Travel Network was 70 million. Moving to Sabre Airline Solutions third quarter results, revenue was 67 million, an increase of 11%. Operating income on an adjusted basis was 11 million, a 16% margin, and 10 million on a GAAP basis, a 15% margin. Adjusted EBITDA for the Airline Solutions business was 16 million. Now moving on to Travelocity. Before I get to the financials, I want to highlight a couple of reporting changes starting this quarter. First, lastminute.com is included in our financial metrics, starting on July 20. Second, we will provide a geographic breakout of Travelocity’s results in two categories, Europe and North America. Our Asian joint venture Zuji will be included in the North America results for the time being. We will consider breaking out Asia when it becomes a larger portion of our business. And as a reminder, our joint ventures such as Zuji are accounted for under the equity method and any equity income or loss is reported in revenue. So with that let’s get to results starting with gross travel booked. Total gross travel booked for the quarter including lastminute.com was approximately 2.1 billion, growth of 76%, and without lastminute.com growth of 34%. Breaking that down geographically, North America gross travel booked was 1.6 billion, robust growth of 30%. And European gross travel booked was 564 million. Moving on to Travelocity revenue. Total global revenue in the quarter was 276 million, growth of 98%. Excluding lastminute.com, which contributed revenue of 100 million, revenue growth was over 26%, and without a one-time catch up of 7 million reported in the year-ago quarter, revenue growth would have been a very strong 32%. Breaking revenue down geographically, North America revenue was 169 million; growth of 17%, and again without the one-time catch up in the third quarter of 2004, growth would have been 23%. Revenue from our European operations was 107 million. Breaking down global revenue even further, standalone air revenue grew 40% while non-air revenue grew over 130%. Packaging and hotel revenue continued to drive transaction revenue. Global packaging revenue grew 120%, in total global room nights sold across the Travelocity network were 4.6 million, growth of 94%. Travelocity operating results were strong in every respect. Total global adjusted operating income was 43 million, with a margin of 15%, and 31 million on a GAAP basis, with a margin of 11%. North America ended the quarter with a very nice operating income of 27 million, 16% margin on an adjusted basis, and 25 million with a margin of 15% on a GAAP basis. Our European business was also profitable and ended the quarter with adjusted operating income of 16 million with a margin of 15% and GAAP operating income of 6 million, and a margin of 6%. And lastly Travelocity generated adjusted EBITDA of 50 million, growth of over 250%, 31 million of adjusted EBITDA for North America, growth of over 70%, and 19 million for Europe. Before I get to outlook I’d like to comment on our recently announced agreement with low cost carrier AirTran. As Sam mentioned earlier we signed a five year agreement for both Travel Network and Travelocity with AirTran. We expect this deal to be accretive to our consolidated earnings and even more accretive longer term if their volumes continue to grow at their current pace. This agreement is a good example of how we can leverage our broad Sabre assets to strike deals with airlines. It is our goal based on continued improvements in our cost structure and leveraging all assets in the Sabre portfolio that the economics of these new airline contracts will be neutral to earnings over a multiyear period. Now turning to total company outlook for the fourth quarter. For the fourth quarter we expect total company revenue to be in the range of 619 to 638 million. Adjusted EBITDA is anticipated to be approximately 75 million, with GAAP net income of 12 million, and adjusted net income of 23 million. We expect earnings per share excluding adjusting items to be in the range of $0.16 to $0.19 and on a GAAP basis to be in the range of $0.07 to $0.10. This EPS range includes the expected dilutive effect of the lastminute.com transaction of approximately $0.10 to $0.12 on an adjusted basis, and $0.17 to $0.19 on a GAAP basis, primarily driven by the seasonality in the European business and acquisition and integration costs. Now turning to full year outlook where many of our full year metrics have changed due to the addition of lastminute.com. Our full-year revenue growth is now approximately 18% year-over-year. On September 28, we refreshed our earnings per share guidance to reflect the addition of lastminute.com. We are maintaining that guidance and expect full year earnings per share of $1.45 to $1.50 on an adjusted basis and now expect GAAP earnings per share to be $1.31 to $1.36. The addition of lastminute.com changed our guidance and assumptions for other key financial metrics, including total company adjusted EBITDA and free cash flow. We now expect total company adjusted EBITDA to be approximately 420 million, with GAAP net income of around 175 million versus our previous expectations of 390 million adjusted EBITDA and GAAP net income of 180 million. Our cash flow from operations is expected to be approximately 235 million, and our free cash flow guidance is now approximately 150 million for the year, down from our previous guidance of approximately 200 million. This revision is driven by the timing of the close of the acquisition and the collection and sales cycle of lastminute.com merchant content. When we closed on July 20, lastminute.com had more in cash than we had anticipated. At that point, they had collected cash from customers from many of the trips to be consumed in the peak travel months of July and August. The reduction of free cash flow reflects the burn off of this previously collected cash. 2006, however, will be a very different story. We expect a significant increase from 2005’s lastminute.com run rate of 200 million. This increase is driven largely from cash flow growth in Travelocity, both in North America and Europe. We will provide more detail on our 2006 outlook call in early December. Our capital expenditures for full year 2005 are projected to be 85 to 90 million, versus previous guidance of 90 to 100 million. Turning to Travelocity’s full year, we now expect Travelocity revenue growth to be greater than 65% versus our original projection of 25 to 30%. This increase is driven by robust growth in the domestic business, and the addition of lastminute.com. Operating income on an adjusted basis will be approximately 35 million and on a GAAP basis approximately 6 million. Adjusted EBITDA is now projected to be 60 million, almost doubling last year’s level. Due to the seasonality of the European operations, we expect Travelocity Europe to have an operating loss in the fourth quarter while North America will be profitable. Overall total Travelocity expected to be approximately breakeven on adjusted basis and a loss on a GAAP basis. Our full year revenue and operating margin assumptions for Travel Network and Airline Solutions remain on track with our original expectations. And now I’d like to turn it over to Michelle. Thanks, Jeff. We have had another very strong quarter at Travelocity. We continue to focus on both the fundamentals in our core North American business and on the growth strategies that we have identified as key. And we are seeing solid traction on both fronts. We said that we would continue to register top line growth at or above the pace of our competitors and we have done so again this quarter. We also said we would deliver improved earnings performance and I’m happy to report that we have achieved this goal again this quarter. As Jeff mentioned both our third quarter EBITDA and our third quarter operating margin are at historic highs. In addition to the financial details that I’ll walk you through I’ll also outline how we will maintain the momentum that we have at Travelocity. We’ll view this both through core business innovation that supports our differentiated customer championship positioning and through our focus on new growth segments in the US and globally. Let’s start with the financials. As Jeff mentioned, during the quarter total revenue including lastminute.com was up 98% versus prior year, to 276 million, on a base of gross travel booked of 2.1 billion or 76% growth year-over-year. And adjusted for the one time revenue catch-up from the third quarter of 2004 and taking out lastminute.com, revenue is up a very strong 32%. Equally important, we delivered strong earnings improvement at Travelocity. Adjusted EBITDA, which we reported for the first time last quarter, came in at 50 million. Operating income was $43 million on an adjusted basis, and 31 million on a GAAP basis. And our adjusted operating margin was 15%. All of these numbers are record highs for Travelocity. Driving this overall performance were strong results in hotel room night growth and packaging revenue. Total Travelocity hotel room nights sold were up 94% and total package revenue was up 120% year-over-year. Both packaging and hotel room nights were up significantly in our North American business. As a result of this growth, we believe that Travelocity has gained substantial share versus our online agency competitors in 2005. While these competitors have reported weakness in bookings and yield in North America this year, we simply haven’t seen it. In fact, this year we have registered one of our strongest North American growth rates in company history. As we said last quarter, we have not achieved our share gains by outspending our competitors, but rather by a combination of smart spending and consumer differentiation. Last quarter I outlined four key paths that we are pursuing in our differentiation strategy. First, is our effort to drive deeper into the travel experience, here we’ve launched new capabilities to drive higher value sales. An example of this is our launch of multiple room booking functionality on the hotel and total trip tasks. The enhancement allows consumers to not only book up to four rooms in a single reservation but to mix and match different room types for each party in their group. We are also doing more with our partners to drive deeper into certain destinations. One example of this is our recent partner funded Las Vegas promotion where we introduced a ground presence by having our customers go directly to a Travelocity Show Tickets booth to pick up redeemable certificates for Las Vegas activities. Second, we continue to make great strides in the personalization and relevance category. And here we have a shining example in Site59’s introduction of the meet me in travel pool, a patent pending product that enables family and friends to easily connect by traveling from two different departure cities to a common destination for the convenient travel package and a calculation that allows them to maximize their time together. Also on the personalization front we have continued to roll out customized versions of our most popular CRM campaign and we’re now bringing many of these to our website itself by providing more tailored offerings to consumers based on their origin city, their interests, and their recent shopping behavior, we’re seeing sizeable improvements in click through and buy rates for these campaigns. Third on the list is our improved brand advertising and the continued support of our Gnome campaign. The campaign won a 2005 Effie Award one of the most coveted advertising awards in the industry alongside such other apples as Apple iPod, Campbell’s Soup and Johnny Walker Scotch. The EFFIE is awarded not only for creative ingenuity but for documented business impact. And we think the proof points on our ad effectiveness are clear. Year-to-date we have seen North American revenue grow more than five times the rate of advertising spend growth. We also continue to see outstanding improvement in all of our key brand metrics, progress that began almost two years ago with the launch of the Gnome campaign and that continues to build. Fourth and finally customer championship and the Travelocity guarantee remain central to our momentum and our differentiation. For us it’s not about paying lip service to customer service, rather it’s been about overhauling every aspect of our business, to deliver upon the promise that Travelocity will make sure you have the great trip you booked. And after almost two years of focused investment we’re now seeing strong results. Customer satisfaction is on the rise, and we’ve just received two very prestigious awards for our work. Budget Travel’s 2005 Extra Mile award, and Fast Company’s second annual Customer First award. An award given by Fast Company for the 15 best customer centered companies across all industries. Moving on to our key growth channels, Europe, Asia, the Travelocity Partner Network and Corporate. On the European front we finished the quarter in line with the expectations we communicated on our lastminute.com integration call on September 28. As we mentioned the quarter was impacted by currency movements and by the world events in London and Egypt, having said that, we have seen encouraging transaction growth across Europe in October. Our hotel business has been particularly strong; we broke several all-time single-day hotel records during the month, helped in part by the strength of the new Travelocity merchant product, and a core merchant relationship which launched on September 6. Additionally we continue to make steady strides in our integration efforts. Last quarter, and again during our lastminute.com call, we detailed the specific actions we would undertake and the timelines associated with each. We have been executing on or ahead of schedule and can check the box on several important initiatives. US merchant hotels have launched successfully on lastminute.com, we’ve lowered our advertising investment and significantly improved our customer acquisition costs on Travelocity.co.uk as we make the lastminute.com the lead brand across Europe, lastminute.com holidays were implemented on Travelocity.co.uk. We fully consolidated technical platforms and content in both France and Scandinavia using the best capabilities from each brand. And we rolled out lastminute.com in the US, using Site59 and WCT technology and content. We are very pleased with our progress towards synergy realization and with our integration timeline for lastminute.com. In Asia, our Zuji business continues to gain traction and recognition. We are seeing strong growth in our merchant hotel sales powered by Travelocity and we’re very pleased with the announcement that Zuji won best online travel agent in Asia at the 16th annual PTG travel awards. And as a reminder a put option exists which allows our airline partners to sell us the remaining stake in Zuji in the next quarter of next year. At Travelocity Partner Network Travelocity’s private label booking business we continue to see very robust growth, and we announced that we have been selected by AirTran and Continental to power portions of their websites. We are also seeing encouraging trends in our corporate businesses. GetThere signed renewals with several top customers representing $320 million in aggregate air travel spending. GetThere’s corporate bookings in Europe are up 65% from the year ago quarter, fortifying our leadership position in the international corporate on-line marketplace. The Department of Education signed with GetThere to become the 15th government agency using this system, positioning it as a leading online booking solution in the Federal sector. Travelocity business had several important wins during the quarter, and successfully rolled out major clients, including McKesson Corporation. We also announced a supplier deal with Hyatt for special corporate rates for Travelocity business travelers. In summary, we are continuing our path of differentiation and share gain in the North American marketplace, driving more earnings in our business and meeting our plans in our growth arenas. All that appears it has been another very strong quarter for us at Travelocity and we are pleased that we have demonstrated that strength in the most tangible form possible, earnings. With that I’ll turn it back to Sam. Thanks, Michelle. Before we go to Q&A I’d just like to make a few summary comments. Three quarters of the way through the year it’s clear that we’ve done what we said we would do. We have invested in global growth and retailing initiatives in the scale of our business and our technology strength. Our purchase of lastminute.com will create benefits for us in Europe and beyond, both in retail and in what we can offer through the travel agency channel. All the while we’ve maintained the scale that provides an efficient marketplace for suppliers, agencies, and travelers. So we remain on track and we will continue our work to stay on course for the remainder of the year and well into the future. We’ll talk with you about our 2006 outlook on a call plan for early December, when we’ll add our objectives for 2006 and how we plan to address the opportunities and challenges we see ahead. And with that, we’ll go to Q&A. 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Here’s the entire text of the Q&A from Medimmune’s (ticker: MEDI) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. If you allow, I thanks for taking my question. Just a question on that inventory, How do you plan to manage inventory allow wholesalers transition to the liquid similar? Should we expect any write-downs for the life like products? Yeah, this is Armando, we are actually working very closely with wholesalers distributors right now and taking a look at their inventory and trying to work down the line, by authorized material is, rapidly as you can get out to physicians offices and hospitals and as that starts going down, we will start back filling in with the liquid product and that should be occurring sometime probably over the next few weeks. My question is about FluMist. It looks as though the cost of goods is about 100% there and I just wondered if you could tell little about the future first of all David, if you could not expand the labels for 0 to 5 year old, would you terminate the product or out-licensing or selling it, and if that occurred, could you talk a little about how about would effect SG&A and other expenses going forward? Thanks. Yes Jeff, this is Dave, we’ve pretty consistently said that our strategy with FluMist CAIV-T is to develop it as a differentiated Flu Vaccine. Particularly one preferred by Pediatricians, our hope is that, we can demonstrate that in the head-to-head comparative study that we planned, to un-blind sometime in the fourth quarter of this year. If it merely ended up being a nose spray Flu Vaccine with no other differentiation then that frankly is less strategically interesting in our portfolio and while we’ve said, over the past conference call and we discuss this is it, If that were the outcomes and we would out licensing or selling the asset. You asked, today whether if we couldn’t expand the label to include kids under five, whether we would also considered that, the answer to that would be, yes we would, and we’ve also in the past indicated that the estimate that we have to a spending something on the order over $100 million a year right now to support the Flu infrastructure that in our manufacturing activities as well as the commercial activities in that business, so where we to exit it, you could do the calculations on that. Thanks for taking my question, the rest of the Synagis, is that a fewer fluctuations in stocking or does it tell you a stronger in RSV season in a south hemisphere and if so, would that be the indicator for the stronger season in the domestic market? This Armando Lee and actually we don’t sell that much in the southern hemisphere, this particular point our Abbott international does not sell, it’s actually primarily that they are improving their inventories in anticipation of continued strong growth in the rest of the world, where they are. Hi thanks, I have the question for load on that $360 million intangible asset, can you just tell over again the amortizations schedule specifically in how many years, could you significant amount hope on that? I am sure we have suggested that we would anticipate the launch of Numax for the 2008, 2009 season. And I suspect that launch to be probably a little bit similar to the launch of liquid Synagis this year and that we would ensure that we had a, well I would call the soft launch and so we would expect have may be some Synagis sales in that season and as I mentioned before we has set our amortization schedule such that, until we actively stop, actively marketing and selling Synagis that’s, we estimated our amortization to run over that time period, so we basically up to sometime during that 2008, 2009 season. Good morning, I mean you clearly have to be much more obnoxious because (4640). A question on the CAIV-T, phase III trial, have you told us what differences in effectiveness to study with power detect overall in the study from Matched strains and for mismatched, I can’t understand, will you? Yeah this Ed, the primary end point for the trail is comparison of CAIV-T and TIV full match strength, the secondary endpoint look at mismatch strains. And we are looking at, it depends on what the sample size assumptions that review to generate, those assumptions, look at ranges of improvement around 34%, so we look at a bunch of different ranges and pick a size that is going approximately give a reasonable cover to look at differences that occurred in previous trials. Obliviously that’s also depended on what the actual rates are, and influence in any of the age of the treating groups. But, obliviously we are overall better than 90% effectiveness between the two groups on average, so I mean that difference kind of 70 versus 90 is that kind of how you are going to be thinking about it? 70% effectiveness in the TIV on 90% in the CAIV-T, which would roughly get you there? While just the way we look at it is, given our experience with Placebo control trials with FluMist and CAIV-T where we’ve seen between 80 and 95% efficacy, that’s where our assumption is and then back down from their 30% better then CAIV-T and you can start to see where we are expecting the results to come out. Hi thank you to take my question, just on to dig a clarification given the stocking that’s occurred, via Abbott for international market, how should we be thinking about the fourth quarter than if you are doing the stocking now has the potential impact on their buying patterns for the fourth quarter and then if you can just comment on what the CAIV-T cost of goods, would be relative to implement? I surely all I will try to help you with both of those questions, I think with respect to the stocking, I think the difference between last year and this year is a really a second quarter, third quarter, climbing and as for as we know we would expect this fourth quarter to be somewhat comparable to last year. So, I think it’s really if we try to describe it in the second quarter as well as now, it’s just a year-over-year comparisons between those two quarters, with respect to the CAIV-T cost of goods sold, obliviously, we continue to work towards making manufacturing improvements that we will reduce our cost of good sold, I think we even articulated that we had some impact that even in this season. But, what we historically said is that, we do believe that there would be, our fixed production cost would remain basically the same as they are today but our variable cost might rush it up just may be a $1 or so those of CAIV-T. But again we continue try to, reduce the overall cost to goods sold for Flumist or CAIV-T. Hi every body thanks for taking my question. Just enough to one more question on CAIV-T on the trial, could you help us understand as it related to prior question, can you help us understand when you are making your sort of go, no go decision whether or not you move forward in the CAIV-T and when you look at that the result from the trial period to find differentiated for us? I mean I can take a shot at, what I think is, obliviously what we have been looking at in the trial, as I mentioned before in the sample price calculations are based on a bunch of ranges down flow about 30% to above 30% and the sample size in the trial we believe, we will cover that appropriate range of showing that there is a medically important difference overall in benefit now we seen before in the two previous CAIV-T trails that why has it done. Ranges of benefit against match strength that were in the range of 30% to 50%. So, that obliviously the percent that show us what we might be able to see in these kinds of study. Yeah, I think is that, well we calculated everything on were based on the match strength, it is obliviously that scientifically powerful both logical primary endpoints. So, obliviously from a practitioner perspective, it’s the overall benefits of vaccination one vaccine over another that’s an ultimately drive the use of vaccine I think. So, we enter in both of those of things were important from a technical trial perspective, match strength of the primary endpoint from a practical perspective is the overall benefit of vaccination can be afford to that. I think we’ve to be careful when you said miss the primary influence with match strain, because the trial have certainly covered and the initial analysis for non-periodic, which we fully well to be extremely powered to be able to show, 99% power to show that. So, the question is that I think if we hit that non-periodic then, we will look at the mismatch data and if you see significant superiority there, is that formula for a differentiated product. Good morning and thanks for taking my talk. staphylococcal molecule I want you to give us some ideas in terms of time line and development goals and that one of you know précised to data and what your overall development goals for those molecule?. Now, I think the process now are obliviously doing with get transfer and associated with molecule and information that coming from GSK and previously from buyers were excess that, I think the next step for us to make from material for clinical trial and then to begin to look in phase II at optimal growth because of lot studies are with us so for obliviously provides some information about that but we need to go back and understand the optimal those thing for the molecule, and I don’t have, you may comment more about those?. For expectation is that will be in a position to make additional supply in 2006 and then be in a position to run the phase II trial. So hopefully we can get thru that and be in a position to follow on with the selection of the dose and moving into Phase III. And then how about the I think is your previous phase II a trial that was on going we didn’t see data from that? The SGS, GSK already completed one phase II study when they look it several different doses and I think we need to refine that based on the Parma genetic data we obtained in that study. That data is currently being analyzed right now for final analysis, been underway to GSK, the transparent that data to us which final study reports to be done. And after that we would anticipate remaining to relevant needing for publication of those results probably sometime next year. There is you see a lot of end license activity obliviously, a really stage drugs and you have a phase 3 activities that is coming to us next year, do you expect see any phase Q3 in licensing and what area did you target and how much that would cost? Going forward. Sure Steve its Dave, as it is serious has rather run before corporate development assumptions. So, we are not going to spend that properly comment on that. We as you know have been pretty consistent in our message that we are prepared to be patients and long-term in our focus, we are pretty and lyrical about how we evaluate these segment in this market place and frankly over the last several years we had found most later stage programs to be from our perspective over price, when they are available and we look at pretty much everything that moves on the horizon and put in the proposals on many of them, but if they over priced we prepare let them go and that’s why the majority of ours had been relatively early stage, we did acquire the Phase 2 program from GSK which we think as the essential move relatively quickly and we are currently looking at additional Phase 2 which and even later programs that are out there. But, they really have to be thanked that we were convinced our NTD positive and not over priced in the market place. So, we will keep poking around, looking for the things, we are prepared to be patient and analytical, our view is that we have a great commercial base in place now with our four marketing products, we are excited about the opportunity to re-launch any further formulation and expanded label and differentiated CAIV-T in the follow of ‘07, very optimistic that we could be in a position to launch Numax in ‘08 and then we’ve a number of Phase II programs now, with Vitaxin with the GSK molecule the IL-9 program moving forward. But, even frankly some earlier kind of program it could be quite the like the Interferon program that give us a number of shots on goal for the ‘09 or ‘10 or ‘11 windows to introduce some new products and then with in back filling beyond those with a dramatic increase in our earlier stage pipelines. I think in the last 12-months, we’ve licensing required a 11 new validated targets, for products development. Almost all of those being antibiotic targets and probably, half been oncology and then the remainder being flip between infectious disease and inflammatory disease. So, I think at this point over the last couple of years we really created a very balanced portfolio with the commercial product that late stage, R&D portfolio several mid stage product and our ability to hit that thru ‘09 to ‘11 kind of window and then a burdening portfolio to earlier stage opportunity. So, we don’t feel like we need to see over aggressive and over pay for late stage programs. Hi, the question about CAIV-T and let’s assume that, in your study it turns out that indeed 30% or so better than the traditional vaccine, what are you thinking in terms of pricing strategy, in view of the improvement as well as the increasing prices of the traditional vaccine and tied to that question is how many doses you need to sell in order to break event? May-Kin this is Armando, I think that the 30% plus in improvement and efficacy comparable in terms of safety balance to safety, will allow us to maintain the price differential that we currently have at this particular point and we will hopefully, continue to see the growth in the price TIV pricing and with that we will continue to increase our price. You will remember making our strategies from the time we made the decision to bring this back from the way up and take a shot of ticking the product profile was to, initially doing during the CAIV-T developmental stage during the price down to that $16 a dose level and then gradually bring it up over time to level and we thought was the right place to be commercial when we had am improved product profile and that in the mid 20’s. And we are currently just under 20 years, we are moving towards that objective of bringing to back up there. So, we are right on that plans and we don’t see any meaningful change in if any CAIV-T is moved up to little faster then we expected which might give us little more upward potential there. It’s in the depending on exactly high or low cost and all that in this 6 to 8 million dose range 6.5 to 8 million doses. May-Kin has pointed that the actual calculated sample size as we when look at the trials and relative rate. Targeted at about 30% and we will look at everything up for about 50% the actual 7,000 patients would give us about a 95% powers are located attack rate, the attack rate was 4% and if the 40% with the rate of two different. So that gives you estimated current were we ended up with the numbers of total trial. Let me wait and see, and go on to do some primary research when we have the actual product profile and then make decision off of data instead off conjuncture, I think that we’ve seen that movie before. Good morning thanks for taking my question another question CAIV-T said in your prepared remarks, you reference to what that the regulatory bodies would think in determining whether you going to keep CAIV-T or license it. We take from that you would be to secure superiority level for CAIV-T in order to consider differentiated product and what have you discussion with the regulatory bodies suggest this necessary data to secure superiority in level? Thanks. No we have actually made a quite clear all the way the along that we don’t expect that we would end up with a superior larger claim in the labeling for the product, that is sort of anti-public health message to actually efficient to declare products superior to the other products. Our expectation is that we be able to say that it was shown to be effective against these range and would actually had an economical trial section of our label, the data which would show that in this particular study is the superior against these strains, hopefully we will also have the data from the 5.14 and 5.15 studies conducted by YF, which also showed that was statistically and clinically superior to the vaccine and then in that body in evidence will enable recommending bodies which is obvious to decide what they think of the overall product profile. But, we do not expect actually had a label that would some stage that is superior versus the injectable vaccine. In fact the FDA told as that. You will get a superiority claim, in the label. So, would you need a superiority or differentiated recommendation from the ACIC. It is one I am struggling with this market doesn’t seem to be very data drive its is really consumer and a general practice in the market. So I am hesitant to think anyone would actually read the label too closely? Well I think correctly Connor like make some comment about that what will you with pricing this 50% better. I think it really understand how could can we proceed and what kind of statements from health authorities and like to go to be required to drive the demand. We need to have a clearer idea of what product profile is and were hopefully not more than just a few weeks away from understanding that with the 8,500 patient head to head prepare about this study. So lets get that take a look at it. See how powerful it is and from that we will have a much better ability to hypothesis how pubic health authorities recommending bodies and doctors going to make prescribe decision. Why don’t we make run over time a bit earlier one of we takes one more question and then we rap it up for today. Hi guys I was just wondering in the 600 cases of flu that you know you saw that the trials. Do you know yet, how much was influenza A and how influenza B and if you don’t know that, do you know just during the season in the locations were the study was done, which was the predominant cause of disease? That we actually, the way that study was setup, over 250 clinical centers set nasal swabs to four central laboratories, they then test results swabs for the present influenza and that’s were the 600 number comes from they then also screen for A & B and it turned out that they were probably little over half islets were B, other little under half were A. So, we do know that at this point we had not we don’t really know the distribution of H1, H3 within the A and don’t know the match miss matched ratio yet. Okay well terrific, we know that the we had a awful lot comments today in the call. So, we’ve gone little over with that frankly, because we have been awfully busy here in the Company over the last quarter and so far in 2005 and we are frankly very, very pleased with the diligent in execution of our employees year over the course this year and I want to thank them for the extraordinary efforts in driving forward on achieving our business plan and we were pleased to get continue support from you all shareholders and we see that plan come together. So, thanks for this time we look forward to talking as we have a further events for the rest of the year. I have a great morning. Ladies and Gentleman thank you so much for the participation in today’s conference and does thus concludes our presentation. You may now disconnect, have a great day. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_234112

Here’s the entire text of the prepared remarks from Biogen Idec’s (ticker: BIIB) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Good afternoon. My name is Ramona, and I will be your conference facilitator. At this time I would like to welcome everyone to the Biogen Idec Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. OPERATOR INSTRUCTIONS. I would now like to turn the call over to Ms. Elizabeth Woo, Vice President of Investor Relations. Thank you, Ramona. Welcome to Biogen Idec's earning conference call for the third quarter 2005. Before we begin I'd urge everyone to go to the Investor Relations section of our Web site, www.biogenidec.com and printout the press release and accompanying tables. This will make it easier to follow along when our CFO, Peter Kellogg, reviews the financial results and the reconciliation to non-GAAP financial measures discussed today. I'll start with the Safe Harbor statement. Comments made on this conference call include forward-looking statements regarding the Company's expectations regarding future financial results including the financial objectives of our recent restructuring, the potential for TYSABRI, the short and long-term growth of the Company, plans for the Company's commercial and pipeline products, and plans for external growth and pipeline growth. Such statements are based on management's current expectations and are subject to risks and uncertainties, which could cause actual results to differ materially. In particular, careful consideration should be given to the risks and uncertainties that are described in our earning release and in the periodic reports Biogen Idec has filed with the Securities and Exchange Commission. The Company does not undertake any obligation to publicly update any forward-looking statements. Today on the call I'm joined by Jim Mullen, CEO of Biogen Idec; Burt Adelman, Executive Vice President for Development; Peter Kellogg, CFO and Executive Vice President, Finance; and Bill Rastetter, Executive Chairman. I now will turn the call over to Jim Mullen. Thank you, Elizabeth. Good afternoon, everyone. And thank you for joining us. We previously announced our strategic plan to reduce operating expenses to fund increased business development activities in order to accelerate long-term growth. During the quarter, we have progressed against these goals by accomplishing the restructuring and by signing the partnership with PDL to jointly develop and commercialize three phase II antibodies. Additionally, we achieved several key near term milestones, including completion of the extensive safety evaluation of TYSABRI, the submission of TYSABRI's regulatory filings for multiple sclerosis in the U.S. and Europe, and the submission of RITUXAN's regulatory filings for rheumatoid arthritis in the U.S. Let me take this opportunity to focus a little more on the details of this restructuring. We believe these initiatives will position the Company for long-term growth and enable us to deliver more for patients, shareholders and employees. Over the years, Biogen Idec has enjoyed many accomplishments. We have pioneered exciting new therapies that have helped paints suffering from MS, cancer, psoriasis, and in the near future, rheumatoid arthritis. We've established an impressive global footprint with strengths in clinical trial design and execution, protein sciences and manufacturing. We built a world-class commercial organization that can compete and win in specialty markets across the globe, against some of the biggest names in the industry. And we project a solid balance sheet and cash flow over the next few years. In the near term, our core business is strong led by sales of RITUXAN and AVONEX. In addition, our immediate growth prospects are promising, including RITUXAN in RA, TYSABRI in MS, and BG12 for psoriasis in Germany. So again we've accomplished a great deal over the years and our near term fundamentals are strong. We're moving forward more than a dozen candidates in the immunology portfolio and several programs in our oncology pipeline. As good as we've been in the past and may have been, may be over the next few years, we recognize the need to increase our long-term growth prospects by significantly augmenting the number of programs in our mid- to late-stage pipeline. Over the last few months, we took an extensive look at the state of our business and made several important decisions. We announced in early September Biogen Idec's long-term external growth strategy for the future. The plan builds upon our near term strengths while driving growth in the midterm and beyond the current decade. The central elements of this initiative are, first, the economic flexibility and more financial discipline, with the purpose, secondly, of reinvesting these savings for accelerated growth through external opportunities. I'll add some detail around both of these points. So firstly, economic flexibility and more financial discipline. The starting point here is to get leaner and more disciplined. We looked at every activity in the Company and the likelihood that it would create value in the future. What could be consolidated either functionally or geographically, what could be reduced, eliminated, outsourced, or divested. This analysis resulted in a work force reduction of 17% of our employees worldwide and the planned divestiture of our psoriasis product AMEVIVE, both tough discussions indeed, but these savings will allow for reinvestment in new opportunities. Resizing our work force was the most difficult step, and one we wish we did not have to take. But ultimately it's the right decision if we are to build for the future of our patients, shareholders, and our remaining employees. Secondly, a decision to accelerate growth through external opportunities. The purpose is to take the money we will save from restructuring and invest in our future by significantly enhancing our pipeline through external collaboration. We expect to be able to earmark approximately $200 million a year for business development and external research opportunities starting in 2006, compared to approximately $50 million earmarked for business development in 2005. Internally this statement brings much greater focus and urgency to accomplishing our business development goals. Externally this is a strong signal to potential partners that we are motivated and have the capacity to execute on opportunities. We feel that we've begun to execute on this external growth strategy in the third quarter as evidenced by the collaboration we closed with Protein Design Labs that encompass the joint development and joint commercialization of three phase II antibodies. This partnership will expand our oncology presence in solid tumor, while potentially strengthening our position as the leader in the multiple sclerosis research and development. This alliance enables both companies to share costs and risks of developing the products that may address large market opportunities, while leveraging our respective development, manufacturing and commercial strength. It's our belief that this long-term growth strategy will reposition Biogen Idec to continue to deliver innovative and breakthrough products that will benefit patients as well as billed long-term shareholder value. I'll now turn the call over to Burt Adelman, head of development, Burt? Thank you, Jim. Good afternoon, everybody. I'm going to take you through a quick trip of our pipeline, starting from our most advanced products with a brief look at some of our earlier products. So let's of course begin with TYSABRI. As I know you are all aware, we at Biogen Idec and our colleagues at Elan have now completed a rigorous safety evaluation of the majority of the patients who have been exposed to TYSABRI during the development of the product in MS, Crohn's and RA and during the brief period of time it was in the commercial space. Although focused on the incidence of PML, progressive Multifocal Leukoencephalopathy, and other potential complications of immunosuppression, our study was intended to be comprehensive. Today I can say with confidence that we have achieved this objective. Now in summary, we found no new cases of PML, other than those previously reported and no other previously unrecognized pattern of adverse events. These results apply to all patients from all studies, MS, Crohn's and RA. Now as part of the safety review we assembled an independent adjudication committee sometimes referred to as the IAC, to help us evaluate clinical MRI and laboratory data, and we followed an evaluation protocol that we developed in collaboration with regulatory authorities both in the United States and Europe. Very importantly, we collaborated with the National Institute of Health and the scientists there who have been instrumental in the conduct and interpretation of the JC virus assessments required for these evaluations. We are uniquely indebted to our colleagues at the NIH, as we are indebted to many other colleagues who have helped over the period of time since we started this evaluation. And we look forward to continued work, both with our colleagues at the NIH and around the world, in continuing to understand the relationship between immunosuppression and the potential risk of PML and other related disorders. Now the complete evaluation, the complete report on these evaluations will be made available, I'm sure, in the near future in the scientific and medical literature. Now as you also know, the encouraging results of these investigations have enabled us to submit to the FDA on September 26 an sBLA for TYSABRI use in MS. Now a comment on why is this an sBLA rather than simply a request to go back into the commercial space? And it's a very important distinction. This is an sBLA because it contains the final two-year data from the phase III affirmed monotherapy trial. And the SENTINEL add-on trial, in which we compared AVONEX to AVONEX plus TYSABRI. The results of these trials support a request for inclusion of the effect of TYSABRI on the progression of disability. So in fact we are asking in this sBLA for an expanded label than that which we originally had, so we now want to include the important effects of TYSABRI on preventing the progression of disability in patients with relapsing forms of MS. Also in this sBLA, obviously, is the integrated safety assessment of the patients who were evaluated in this, during this period of time that we've been out of the clinic and a revised label and risk management plan. Now briefly, the purpose of the risk management plan is to ensure, first, that patients and physicians understand the benefits and risks of TYSABRI treatment for MS, and then to ensure that we have a process in place for rapid recognition of any new important safety signals once the product reenters the commercial space. Now we expect to be informed about the acceptance of the file and whether or not we'll be granted priority review within 60 days after filing, which in this case will bring us towards the end of November. So we await that information from the FDA. At the same time, we are in active conversation with the FDA and European regulatory authorities to initiate redosing of patients with TYSABRI who have MS. And that process is moving along and we should have additional information about that in the not too distant future. Now just as importantly as our renewed interactions with the FDA with respect to the sBLA, now that we've completed the comprehensive safety evaluation we are again actively working with the CPMP in Europe to continue the review process of TYSABRI there, and things are moving along nicely. Now from TYSABRI, I'll move to RITUXAN in particular the, actually let me back up for one second, excuse me, and just add one comment on the RA results of TYSABRI. As many of you know we were running a phase II trial with TYSABRI and RA. Although that trial was stopped prematurely, we do believe that enough patients were treated and they were treated for a long enough time for they have to be sufficient data to evaluate the results. And we have concluded that the efficacy results of TYSABRI in RA are inadequate at this time to warrant continued development. So we will present these results in detail at a future medical meeting, but we have made the decision not to continue development of TYSABRI in RA. Briefly on AVONEX, we are very pleased to see in the July issue of Neurology three important articles in editorial that discuss the importance of neutralizing antibodies in the treatment of patients with MS receiving interferons. Basically the conclusion of these articles in editorial is that neutralizing antibodies are important, that antibody levels tend to remain over time and that patients who have neutralizing antibodies appear to have significantly worse outcomes than those patients without neutralizing antibodies. Now to move on to RITUXAN, RITUXAN in RA, many of your aware of the successful outcome of the of the REFLEX trial which was the phase III trial of RITUXAN for patients with rheumatoid arthritis who are inadequate responders to anti-TNF therapy. As a result of that trial outcome we did file an sBLA for RITUXAN in this patient population. We filed the sBLA at the end of August, and we'll be awaiting action of the FDA on that. The phase III REFLEX trial results will be presented, I believe, at a plenary session of the American College of Rheumatology in San Diego, I believe on Wednesday, November 16, and we and our colleagues at Genentech will conduct an analyst meeting and conference call at the ACR following the oral presentation of the REFLEX results. So we hope to talk to all of you about that at that time. The DANCER study, which was the phase IIB study for Demart inadequate responders. As many of you know, it was also successful and we along with our colleagues at Roche and Genentech are preparing to initiate a study program investigating RA, investigating RITUXAN in RA patients who are inadequate responders to Demart therapy. This trial program will be a global program and hopefully will be initiated toward the end of this year or early in 2006. And we continue to be excited about the value of RITUXAN broadly in autoimmune indications and are investigating its use in lupus. There's some clinical trial activities there, and multiple sclerosis and other areas. Now RITUXAN in oncology, some important news there. We have filed an sBLA for the front, for use of RITUXAN in front line aggressive non-Hodgkin's lymphoma. We filed that in August, the FDA has granted priority review status. We are obviously pleased by that because the assignment of priority review status demonstrates to us that the FDA recognizes the significant improvement in survival RITUXAN may offer patients with aggressive forms of lymphoma. We also anticipate filing the combined RITUXAN indolent frontline and maintenance sBLA in the first half of '06. Also on RITUXAN in oncology, our colleagues at Roche recently announced important new maintenance data in indolent non-Hodgkin's lymphoma from the European Organization For Research and Treatment of Cancer study. I'm not going to go through the results here, but I will tell you that they have been accepted for presentation at the American Society of Hematology meeting this December, which I guess has been moved from New Orleans to Atlanta, so we all look forward to hearing those results there. Not too long from now. We're continuing our efforts in chronic Lymphocytic Leukemia with RITUXAN in U.S. and Europe. A quick note on ZEVALIN, we have submitted to the FDA our protocol for incorporating ZEVALIN into the treatment of patients with diffuse large B-cells lymphoma, high-grade lymphoma, and we hope to initiate that study early in 2006. That study is being conducted around the world in collaboration with our ZEVALIN partner, Schering AG. The fumarate program, BG12, PANACLAR, as we've said in the past we have submitted that product to the German regulatory authorities for use, approval for use in psoriasis. It is under review. And we hope to hear sometime early in '06. Similarly, we are completing a comprehensive phase II MS study, and we'll have a view on the further development of PANACLAR in MS also some time early in '06. So stay tuned, we're obviously very excited about the BG12 program and the upcoming results. With respect to our early pipeline, we've continued to move programs ahead in neurology, autoimmune disease and oncology. We filed an IND in the third quarter for Lymphotoxin beta inhibition in rheumatoid arthritis in Demart inadequate responders. We expect to initiate phase II by year-end. Our small molecule phase II program in Parkinson's disease with our colleagues at Vernalis should be, begin accruing patients early until '06. A number of our oncology programs are moving along in phase I trials. Our anti-Lymphotoxin beta receptor program, CB11, is accruing patients. Our gene therapy adenovirus delivery of interferon beta is ongoing in an IV infusion study for patients with colorectal cancer, and we have a exciting collaborative study with investigators at the University of Pennsylvania looking at the use of that agent in patients with metastatic pleural effusions. And internally, we are assessing our development plans for our anti-CD23 program in chronic lymphocytic leukemia and for the possibility of moving our anti-CD80 program forward into phase III in patients with non-Hodgkin's lymphoma. Just to emphasize the point that Jim has already made, we are very excited about our collaboration with PDL. It is certainly one of the more exciting recent collaborations in biotechnology. It covers a spectrum of products in autoimmune and oncology areas, areas of great interest and expertise of both Biogen and PDL, and we are moving forward with all of these programs, Daclizumab, the antibody to IL2 is ongoing in multiple sclerosis. The M200 antibody, an anti-angiogenic agent, is moving forward in a number of solid tumor indications, and the HuZAF, humanized antibody that targets gamma interferons, is being investigated across a number of potential autoimmune indications. So we hope that this multi-product relationship with PDL will be the first of a number of similar programs that we are able to conclude in the next year through our very active BD efforts. So thanks for your attention, and I'll now hand the call over to Peter. Thank you, Burt. Before I move on to the financials let me remind everyone that since the Biogen Idec merger in the fourth quarter of 2003, we have provided table three on our earning release as a reconciliation of the GAAP to non-GAAP financial results. As I view the P&L operating performance of Biogen Idec, the bridging items that reconcile GAAP versus non-GAAP are listed in this table three, and these will allow you to follow the non-GAAP performance. The main items excluded from operating non-GAAP this quarter are purchase accounting charges, as usual, of $88 million due to the quarterly purchase accounting impact on cost of sales and amortization of intangibles. Secondly, severance and restructuring charges of $27 million due to the reduction in force and strategic changes announced in September. And thirdly, impairment and loss on the sale of assets of $21 million driven primarily by the classifications of our NICO clinical manufacturing plant as an asset held for sale and marked down to its appraised value. And additionally some related residual costs from the sale of the NIMO manufacturing plant. Now because staff restructuring and asset disposals are non-operating, we have adjusted these charges from our non-GAAP P&L along with other normal purchase accounting elements. Accordingly our non-GAAP EPS was $0.36 per share for the Q3. We have included a number of charges in our non-GAAP P&L this quarter since they are operational in nature. Included in the non-GAAP P&L this quarter are the following charges. $50 million in R&D associated with a $40 million up front payment to PDL, as well as $10 million in future payments; a $25 million operating charge due to ZEVALIN intangibles and inventory impairment which is broken out between cost of sales and SG&A which a I'll discuss later. This is based on our annual long-range plan reevaluation of ZEVALIN expectations; and lastly, a $5 million write down of securities associated with Sunesis. Now I'd like to walk through the P&L line, beginning with our third quarter total revenue, which was $596 million, a 10% revenue growth over the same period last year. Now some of you may notice that revenue was down quarter-over-quarter, and I'd like to point out that Q3 revenue was higher than all previous quarters except for Q2 and we feel that Q2 was simply an exceptional quarter all around. And the main driver for the drop in revenue quarter-over-quarter was AVONEX International, which I will address in more detail in a minute. However, as you will see, the underlying business trends across the line are positive and very solid. Now going through our product revenues beginning with AVONEX, the number one MS product worldwide, our third quarter worldwide product sales were $375 million, an 8% increase year-over-year. In the U.S., the third quarter product sales for AVONEX were $235 million, up 5%. And the U.S. AVONEX remains the market leader with about 40% market share in the MS market. On the international front, AVONEX in the third quarter had product sales of $140 million, up 15% versus prior year. Now on a year-over-year basis, AVONEX's Q3 sales growth in local currency was 13%. The foreign exchange impact in Q3 was roughly $3 million, or contributed about two points of growth. Now on a quarter-over-quarter basis, as I mentioned earlier, a few unusual items affected sequential quarterly growth. First, Germany, our largest market, had a softer quarter, in part due to some stronger Q2 sales that we now believe may have been driven by a price increase taken in May. Secondly, as you are aware, the Euro actually softened in Q3 versus the dollar causing a $5 million down side based on currency versus the prior quarter. Now remember, although ForEx helped on a year-over-year basis, on a quarter-over-quarter basis the impact was negative. Finally our business model in Italy changed from a distributor to a consolidated joint venture. Which changes revenue recognition from a sell-in structure to a sell-through model. This results in a delay of revenue recognition on a one-time basis for certain units held by the distributor until they've been sold through the distributor to the market, creating a one-time softening of reported sales. However, stepping back from all of this, perhaps the most important message throughout is that AVONEX continues to be the most used international MS therapy based on patient share. We estimate our worldwide market share to be in the low 30s with Rebif and Betaseron following closely behind. In addition, we continue to gain market share internationally and are growing slightly faster than the total MS market, which indicates clearly that the business is very strong and doing quite well. Now moving down the P&L, in the third quarter, AMEVIVE product sales were $12 million. In the third quarter ZEVALIN product sales were $5 million. And royalties in the third quarter were $23 million. Our RITUXAN collaboration revenues come next, which is titled revenue from unconsolidated joint business. And that was $182 million, an increase of 14% year-over-year. As we always discuss, this number has several elements. First we receive our share of the U.S. RITUXAN profits. U.S. RITUXAN sales were $456 million in the third quarter, and our Q3 profit share from that business was $129 million, up 9% versus prior year. In Q3, although U.S. RITUXAN revenue was up 16% year-over-year, this was somewhat offset by increased costs for regulatory filings and initial build up of the collaboration's R&D commercial infrastructure. Now secondly, we receive royalty revenue on sales of Rituximab outside the U.S. and in Q3 this was $42 million, up 28% versus prior year driven by the impressive growth of MabThera internationally. And third, we were reimbursed for selling and development costs incurred related to RITUXAN. This was $11 million in Q3. Now turning to the expense lines on the P&L, in Q3 our adjusted cost of sales were $78 million, and that's about 13% of revenues. Now the reason why cost of sales are slightly higher in Q3 is because of some ZEVALIN impairment charges that I mentioned earlier. Let's discuss this. Each year, our long-range plan reevaluates our portfolio of products. This year's analysis resulted in near term reduced expectations for ZEVALIN, resulting in a $25 million charge due to the impairment of ZEVALIN inventory and intangibles. This charge is split between cost of sales and SG&A. There'll be about $12 million charge if its imbedded in the numbers for cost of sales and about $13 million charge imbedded in the numbers for SG&A. I would like to point out, however, that although ZEVALIN's growth expectations in the near future have declined, we are still interested in ZEVALIN's long-term potential as a consolidation therapy in the diffuse large B-cell lymphoma market, as Burt mentioned earlier, which is a longer term future growth driver, perhaps, for the Company. In the third quarter, R&D was $207 million, 35% of revenue. Now the R&D charges in Q3 did include the $50 million due to the PDL collaboration. And as I mentioned earlier, this includes the up-front of $40 million and future payment liabilities totaling $10 million that were booked in Q3 because of the future certainty of these payments. I'd also like to note that we had $10 million of TYSABRI high titre development and production expenses in Q3. Now, only 1 million of this amount was for normal TYSABRI production. 9 million was related to high titre development work that would normally be charged to R&D anyway, so this is not really an unusual charge for Q3 in any way. Our third quarter SG&A was $154 million, 26% of revenue, and as I just finished mentioning, that includes $13 million of the impairment of ZEVALIN intangibles. The Q3 OIE was $11 million, and this includes a $5 million write down of marketable securities for Sunesis stock. Our third quarter tax rate was 27%. Now, on a tax basis the significant charges incurred for the PDL deal and restructuring caused our income in the U.S. to be much lower, driving our worldwide tax rate down for the quarter. This brings our year-to-date tax rate to approximately 30%, which is the rate we anticipate for the full year. These tax rate impacts are temporary for 2005, and we expect the tax rate in 2006 to return to the low 30s in terms of percent. In the third quarter, diluted share outstanding that we use for non-GAAP EPS calculations were 344 million shares. So this brings us to our Q3 adjusted EPS of $0.36 per share. Now, I'd like to touch on a couple of final topics. Clearly, this has been a year full of events that created numerous accounting impacts. Given all these events, however, we thought it was important to remind you that we expect 2006 will be quite different. As we look ahead to 2006, we expect and have modeled that first TYSABRI will be reintroduced in the U.S. in mid 2006 and launched in the EU in the second half of 2006. We are assuming TYSABRI will be a modest contributor to 2006 revenue. Remember, the U.S. revenue per unit for Biogen Idec is based on the transfer price to Elan while the EU revenue per unit is at market. Also, we do not expect to have any cost of sales in 2006 based on the inventory write off taken in 2005. This will improve the overall Biogen Idec gross margin in 2006. Now secondly, we've assumed that RITUXAN in RA will be approved and launched by mid 2006 as well. All other lines in the P&L are expected to remain consistent with current trends and that leads us to having operating expense that we would expect to be in the range of $1.4 billion to $1.5 billion, which includes $200 million allocated to business development as well as flow through expenses from the PDL deal. Biogen Idec intends to spend the full $200 million in 2006 on BD activities, but, of course, it is hard to predict the timing of that spend. Fourthly, we expect our tax rate to remain approximately in the low 30% range, as I mentioned earlier, and finally, as a result of these assumptions we are estimating 2006 EPS to be in the range of $1.95 to $2.10. We are not giving detailed line by line guidance due to the number of moving parts in 2006, which I'm sure you can all well appreciate. Please note that these estimates do not include the impact of FAS 123 R because we are still evaluating our long-term incentive program. I will provide an update on this during our fourth quarter earnings call. Also, we anticipate capital spending in 2006 to be much lower than this year. We expect it to be in the range of $200 million to $275 million. So in summary, Q3 was a complex quarter where the Company has taken several bold decisions to redirect our future. These actions triggered a number of charges from a financial standpoint, but we feel that our decisions position us well to achieve our 2006 goals and beyond. The core businesses of Biogen Idec, AVONEX and RITUXAN, are strong. We expect TYSABRI to be a future contributor to our growth as well, as we build the next stage of the Company. Now I'd like to hand off to Bill Rastetter for his closing comments, Bill? Thanks, Peter. Before we go to your questions I'd like to close on behalf of the entire team at Biogen Idec. The thrust of our restructuring initiative is to plan for the future by reinvesting the money we will save to expand our pipeline, capitalizing both on internal and external opportunities. What does success look like several years out, say in the 2010 to 2012 time frame? Let me walk you through a brief glimpse of where we hope to go. We expect to continue to be a global leader in neurology in general and MS in particular. We expect that TYSABRI, with its strong efficacy profile, will be available as an important treatment option for patients. We also hope to be on the brink of delivering a broad range of MS therapies to patients, including RITUXAN, Daclizumab, which you will recall we recently partnered as a part of the PDL deal, and the oral product, BG12. Further backing development, we hope to have made considerable progress on the Nogo program for nerve regeneration, and the LINGO program for remyelination. Both of these proteins offer significant promise to patients in potentially reversing the course of their disease. In addition to MS, we hope to have made considerable progress in other areas of neurology. There is considerable unmet need in Parkinson's disease, Alzheimer's disease, stroke and neuropathic pain. In oncology, we see a market crowded with significant competition, but also one in which the unmet need for patients is truly staggering. It is our goal to make the leap from being a top U.S. company in hematologic tumors to being viewed as a true global leader in oncology across the board from discovery to development to commercialization. Oncology is an outstanding test for our culture of collaboration. While success here involves moving our internal programs along, we must also grow and build through external partnerships. A focus for '06 will be expanding our oncology R&D efforts, attracting top talent, developing early stage partnerships with academic centers, entering R&D collaborations with other companies, building opportunities in the solid tumor market and expanding our pipeline to include small molecules. We will remain open as well to expanding into other major therapeutic areas. Here, we'll stay focused on discovering, developing and commercializing significant products against high unmet medical need for global specialty markets. These may include rheumatoid arthritis. This is certainly an area where we hope to be a player. We're obviously making good strides with RITUXAN, lupus, Crohn's disease and ulcerative colitis. As a result of our efforts to collaborate at all levels of our pipeline, we will expect to see a doubling of products progressing through our pipeline in the 2010 to 2012 time frame, a vast network of research collaborations, what we call collaborative inquiring with top academic, government, teaching hospital, and bio tech and pharmaceutical companies, both in the U.S. and across Europe. Our restructuring initiative was a first step towards achieving this vision for the 2010, 2012 period. Now I'll turn the floor back to Elizabeth for your questions. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_234113

Here’s the entire text of the prepared remarks from Estee Lauder’s (ticker: EL) Q1 2006 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Good day, everyone, and welcome to The Estee Lauder Companies Fiscal 2006 First Quarter Conference Call. Just as a reminder, today's call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Dennis D'Andrea. Please go ahead, sir. Good morning, everyone. We have on today's call William Lauder, President and Chief Executive Officer, and Rick Kunes, Executive Vice President and Chief Financial Officer. Also with us today is Dan Brestle, our Chief Operating Officer, and he will be available for the Q&A session. Since many of our remarks today contain forward-looking statements, let me refer to our press release today, where you will find factors that could cause actual results to differ materially from these forward-looking statements. Thank you, Dennis. Good morning, and thank you for joining us. Today, I will highlight our first-quarter results, and more importantly focus on the factors that will drive our business for the next nine months and beyond. As you have seen from our press release this morning, this quarter's results were below prior year, and I am disappointed with that performance. While we are faced both internal and external challenges, we are quickly taking aggressive action on the strategic imperatives that we discussed on our last conference call. As a result, we expect to show some meaningful improvements in our performance this fiscal year and beyond. I'll talk about those actions shortly, but first, let me briefly recap this quarter's results. For the first quarter, we reported net sales of $1.5 billion, flat with last year's first quarter, when we grew 12%. Excluding foreign currency, net sales for the quarter decreased slightly. Our sales in the Americas were affected by the planned timing of product launches, weaker store traffic with several key retailers, a lower-than-expected response to our gift-with-purchase promotions, and the impact of store closures in the areas hit by the unusually strong hurricane season. On the International side, our businesses experienced softness in certain key International markets, coupled with start-up issues at our new European inventory center, and a tough comparison with double-digit growth last year. Our results this quarter reflect the flat sales growth, increased investment spending, spending for our strategic modernization initiatives, and incremental expenses related to stock-based compensation. Net earnings from continuing operations for the quarter were $61.8 million, compared with 95.7 million in the prior year's quarter, and diluted earnings per share of $0.28 compared to $0.41 in the prior year's period. Let me now discuss the quarter's product category results. In Skin Care, reported sales were flat with the prior year, coming in at $523.4 million, and declined 1% in constant dollars. Last year, Skin Care sales grew 13% in the quarter, strong sales were generated from recently launch products such as Perfectionist CP+ by Estee Lauder, and Super Defense Triple Action Moisturizers from Clinique, offset by lower sales in existing products. Makeup sales of $604.9 million increased 3% in dollars, and also in local currency. This category grew 23% in the prior year period. Our MAC, brand generated strong growth while new and existing products from other brands also benefited the category. The Fragrance category continues to be challenging. Sales decreased 6% to $293.2 million on both a reported basis, and excluding currency. While the current quarter benefited from the excellent growth of DKNY Be Delicious, and the recent launch of American Beauty Wonderful, they were up against stronger fragrance launches in the prior year. Hair Care sales rose 12% this quarter to $70.4 million on a reported basis, and grew 11% in local currency. Sales benefited from the new salon distribution and growth in existing salons, as well as new and existing products. Geographically, sales in the Americas were relatively unchanged from the prior year's quarter at $881 million. There were several factors behind these results. On the positive side, new and recently launched products were well-accepted in most major product categories, especially makeup and hair care, and most developing brands along with our Internet business, reported sales increases. Offsetting these positives, was timing of planned product launches which this year are skewed more heavily to upcoming quarters. Additionally, our fragrance category posted lower sales in this region. While sales growth at high-end specialty stores was solid, overall our sales reflect the weakness in certain key retailers, where a greater portion of our business is done. Additionally, our Fall gift programs from the Estee Lauder and Clinique brands, did not perform to expectations. We have responded rapidly and proactively, and both Estee Lauder and Clinique are redesigning and re-promoting their gifts to recoup some of the lost sales. Toward the end of the first quarter, it became clear that retail weakness and the soft gift programs, would negatively impact our planned sales by approximately $35 million and was the major reason we previously lowered our first half expectations. To a lesser extent, we also felt the effects of store closures in the hurricane-affected southern region of the U.S. Approximately 25 stores were affected, and 11 stores remain closed. The loss of sales from these stores in the quarter including returns, was approximately $5 million. We also believe sales are reflecting lower foot traffic, due to consumer reaction to higher energy prices. In Europe, the Middle East, and Africa, sales decreased 1% over the prior year's quarter to $417.5 million, and declined 1% on a local currency basis. In local currency, sales were weaker in Spain, the U.K., Italy and Austria. This region of sales grew 29% in the prior year's quarter. Our northern European inventory center came online during the first quarter; however, the start-up was slower and more problematic than anticipated which caused a backlog in shipments. We are now shipping to our normal business profile, and we expect them to be operating as originally planned by the end of our fiscal second quarter. Partially offsetting these results were higher sales in Germany, and the Company's travel retail and distributor businesses. In Asia-Pacific, sales this quarter grew 5% over the prior year quarter to $198.6 million. In local currency, sales this quarter were up 2%. Our business in China continued its momentum, once again generating high double-digit growth. The local currency increase also reflects double-digit growth in Hong Kong, and good growth in Taiwan. Now, let's talk about our expectations for the remainder of fiscal 2006. We have a lot of activity to fuel growth, including a full slate of terrific product launches throughout our brands. We are excited about the opportunities that emerging markets and expanded geographic penetration presents, along with leveraging our business in alternative distribution channels. Let me give you some details. In the Americas region for the full year, we have taken up our forecast for the Tom Ford Estee Lauder collection, due to strong buyer demand. We expect the buzz generated by the launch will fuel excitement for the Estee Lauder brand. We will continue to develop our new brands in Kohl's, adding stores as Kohl's expands throughout the year, and executing our first full-fledged holiday program. Additionally, our other channels, freestanding stores, salons, and the Internet are performing quite well. We are likely to see a continuation of faster growth at the high-end specialty retailers, which make up about 20% of our U.S. department store business, while prestige department stores may be more challenged for the reasons cited earlier. However, since our press release of September 19, the consumer spending environment in the U.S. has deteriorated, and we also now believe that Federated will move more quickly on their planned post-merger store closures. We had previously expected closures to begin in March, and take place over time with only a handful of closings this fiscal year. Our assumption now is that Federated will simultaneously close in early calendar 2006 more than half of the 82 announced stores. This will affect our full-year sales, as we will take inventory returns for all of the stores, and lose a considerable portion of their sales for the remainder of our fiscal year. The good news is, that we should get approximately half of the pain out of the way, and see less of a pinch in fiscal 2007. While we have had on-going discussions with our largest customer to attempt to mitigate the disruptions at some stores, Federated has stated that they expect disruptions and weakness to continue for some period of time. The estimated impact of these closures and potential disruption in fiscal 2006 full-year sales is a reduction of $50 million, which equates to approximately 80 basis points of growth. As we have said before, store closures should be a long-term positive, as less disruption equates to more productivity per mall, and therefore higher profitability. In addition to Federated store closures, our revised outlook considers stores in the Gulf Coast region that remain closed. We also expect to take returns of damaged goods. The combination of store closures and returns are expected to adversely impact full-year sales by about 20 to 25 million. Additionally, higher energy costs are starting to be felt beyond the gas pump, and many consumer products and services companies are passing on their higher costs to their consumers, which is reflected in the steep drop in the consumer confidence index. The internal and external factors that I have discussed in the aggregate, are negatively impacting our full-year sales by over $100 million. In Asia-Pacific, we expect to see a continuation of exceptional growth in China, fueled by growth in prestige beauty, and expansion of our brands. In Japan, Clinique is starting to see a pickup, driven in part by a focus on locally-relevant product introductions. And Aveda is developing its salon business. Korea is beginning to show signs of life, despite weak consumer confidence, while the rest of the Asian countries, are expected to produce sales growth in the mid to high single digits. The European region is expected to rise on travel retail growth, on middle Eastern business, and the expansion of our emerging business in India, which has gotten off to an impressive start, and is trending well above our plan. From a product category perspective, in Makeup, Clinique started off the year with several strong launches, and we have high expectations that those products, along with new Colour Surge eye shadow extensions, will generate continuous repeat business. The Estee Lauder brand is launching new lip products under its Double Wear and Pure Color lines. MAC has a robust holiday program, along with the Catherine Deneuve collection, and Bobbi Brown has a very strong Spring program. In skin care, Clinique is undertaking a major Spring relaunch of its 3-Step program which by comparison is larger than many cosmetic brands. For the first time the brand is supporting the launch with television ads. Resilient Lift by Estee Lauder is the #1 lifting moisturizer in U.S. prestige distribution, and the brand is launching Resilience Lift Extreme this December. Origins is in the process of launching its first products under Dr. Andrew Weil umbrella. You may have seen Dr. Weil on the cover of Time magaziner's October 17 edition, where he expounded on his secrets for Aging Well. In fragrance, we are supporting the 10-year anniversary of Pleasures, with new advertising featuring Gwyneth Paltrow, in both print and TV. We are excited that Tom Ford has reinterpreted the Youth Dew fragrance, as part of the new Amber Nude collection for holiday. We are looking forward to the December launch of Unforgivable from Sean John, as well as the Spring launch of Missoni products. In hair care, continued comp store growth as well as select new points of distribution for Aveda and Bumble & bumble, are expected to boost sales. While our efforts to drive sales growth are critical to the health of our business, we are aggressively moving to improve our bottom line. The first action behind our strategic imperative of portfolio management is the disposition of the Stila brand. Our portfolio currently contained two top makeup artist brands, MAC and Bobbi Brown, which are both fast-growing and highly profitable. It makes more sense for us to focus corporate resources behind brands, categories and regions which provide a superior return, while finding a buyer for Stila that can continue the brand's growth path. We are also accelerating some actions behind the strategic imperative of operational and cost excellence. Specifically we are driving two significant incremental cost reduction programs this fiscal year. First, we are implementing value analysis reviews of our processes and organizations, and second, we are accelerating indirect purchasing and noncritical spending savings. We are tackling overhead costs by streamlining the organization and processes to match our portfolio objectives in both the support functions and within the brands. We have initiated an intensive pilot around several corporate support functions and underperforming brands. In the support functions, we look for activities that are not contributing significantly to growth, or to the effective management of our operations. In the brands, we will seek to optimize performance by better understanding the economics of its various components, including sales and marketing functions and product lines to allocate investment to those activities with the highest returns. Additionally, we are going to accelerate our efforts to reduce our indirect purchasing costs, beyond the initiative we announced in August. We are starting with a review of our spending with our top 20 vendors by brand and by corporate department, to ensure we are properly leveraging the breadth of our business in negotiations. We will also be examining the organizational model for indirect purchasing, including looking for opportunities to create a more centralized structure and greater coordination between the brands. Coupled with this, we have undertaken some serious belt tightening by aggressively identifying projects and costs that do not critically need to take place this fiscal year. We will re-evaluate the need for these projects in our fiscal 2007 budgets. We have a fundamental commitment to cost reduction for both the near term and the long term. These initiatives are expected to deliver between 40 million and $45 million in incremental savings this fiscal year, and improve our profitability going forward. To summarize my discussion and put it into focus, for the full year, we now expect sales growth to be between 3 and 4% in constant currency. Foreign currency translation is estimated to negatively impact full-year sales by approximately 1.5%. Our EPS from continuing operations is now expected to be $1.87 to $1.94. We are confident that our business fundamentals, strategic direction, and the actions we discussed with you in August and today, should create a lot of opportunities to enhance our top and bottom-line growth. We are committed to taking the appropriate steps to foster healthy sales growth while keeping a keen eye on the bottom line. Now I would like to hand it over to Rick Kunes, our Chief Financial Officer, to take you through the financial details. Thank you, William, and good morning, everyone. My discussions today will also focus on our results from continuing operations. The Company achieved first-quarter operating income of $105.1 million compared with $156.3 million last year. This reflects a decrease in operating margin of 350 basis points to 7%, primarily due to flat sales during the quarter. Our gross margin of 72% for the quarter decreased 60 basis points over last year's 72.6%, reflecting an increase in obsolescence charges of approximately 60 basis points, proportionate to the change in inventory, as well as unfavorable changes in exchange rates and promotional activities of approximately 50 basis points. Partially offsetting these increases was the net change in the mix of our business within geographic regions and product categories of approximately 50 basis points. Operating expenses as a percentage of sales for the quarter increased 290 basis points to 65% from 62.1% last year. The increase reflects the absence of sales growth leverage during the quarter. Operating expenses also increased approximately 90 basis points, due to the recognition of stock-based compensation of about 20 basis points, and about 20 basis points for costs related to our strategic modernization initiatives. Looking at operating profits by category, skin care decreased $26 million to $38.8 million, due to soft sales, particularly in Europe, while our spending to support this business continued. Makeup was down $5.3 million to $60.5 million, as slightly higher sales were more than offset by increased investment spending. We also anniversaried the prior year shipments of our Beauty Bank brand, where makeup represents a large portion of the product mix. Fragrance fell $23.3 million to a loss of $1 million, due to the lower sales, which reflect the continued difficult fragrance business in the U.S., coupled with higher product support spending. In hair care, operating income increased $2.5 million to $5.3 million, primarily reflecting improved results domestically, as well as result of comp store growth and expanded points of distribution. By region, operating profits in the Americas declined $28.1 million to $80.4 million, due to the sales weakness William described, and cost related to stock-based compensation, and our strategic modernization initiative. In Europe, Middle East and Africa, operating results decreased $19.6 million to $22.4 million. Global results were experienced in certain key markets like Spain, the U.K., our travel retail and distributor businesses, and Italy. The shortfall on product shipments in certain continental and European countries, that occurred as a result of this start-up of our new regional inventory center, also negatively impacted our operating results. Improved results were posted in France and Germany. Asia-Pacific operating income decreased 3.5 million to 2.3 million, reflecting lower results in Hong Kong, Taiwan, Malaysia, and Thailand. China's results were also down, as we continued to investment in infrastructure in China to support future business opportunities. Solid improvement in Australia, and a modest increase in Japan, partially offset these results. Regarding our interest cost. Net interest expense of $5.6 million this quarter versus $4.1 million last year. The increase is primarily due to outstanding Commercial paper during the current quarter. The effective income tax rate for the quarter was 36% versus 37% in the prior year. This decrease is primarily because of the tax effect of the Company's foreign operations, a decrease in state and local income tax expense, and an increase in tax credits. At this time, we expect our effective tax rate will be approximately 36% throughout fiscal 2006. For the fiscal first quarter, net earnings from continuing operations was $61.8 million, compared with $95.7 million last year, while diluted earnings per share were $0.28 versus $0.41 for the three months of last year. Switching to our financial position, the Company's cash balance was $390 million at September 30, 2005, which was comparable to last year. For the quarter, net cash flow is used for operating activities, were $62 million versus 98 million in the prior year period. These outflows reflect seasonal working capital levels, and should improve in the coming quarters. For the full fiscal year, we expect net cash flow from operating activities of approximately 600 to 625 million, reflecting lower sales, but expected improvements from our savings initiatives, and working capital over the next nine months. Our higher inventory level, primarily reflects lower-than-expected sales growth, the safety stock in our new regional inventory center in Europe, and increased sourcing from the Far East. During the quarter, we aggressively repurchased 1.9 million shares of stock for a total of $71 million. This brought the total shares repurchased under our program to approximately 29 million shares, and to-date we have returned over $1 billion in cash back to stockholders. We continue to buy an additional 3.7 million shares during the first week of October. We anticipate capital expenditures of approximately $300 million in fiscal '06, increasing versus fiscal '05 due to our company-wide systems initiative. Let me briefly update you on our working capital. September 30, 2005, inventory was 815 million, an increase of 102 million versus last September. Inventory days were 186 at the end of the quarter versus 171 days last year. This increase includes 7, 4, and 4 days respectively, attributable to the sales shortfall, the new European distribution center backlogs, and business building activities. Regarding receivables, our DSOs of 55 days at September 30, 2005 were relatively unchanged compared to a year ago. Let me now update you on a few assumptions for fiscal 2006, which includes the accounting rule change regarding expensing of stock-based compensation, the revised potential impact of the Federated/May merger, and the impact of our incremental cost savings initiatives. For the full year, as William said, we anticipate sales growth of approximately 3 to 4% in constant currency. And we expect foreign currency translations to negatively impact reported results by approximately 1.5%. We expect gross margin to decrease slightly for the fiscal year, with supply chain savings offset by the impact of the unfavorable gift program, pressure on our costs resulting from higher energy prices, negative foreign exchange, and potentially higher obsolescence cost. Combined, the expensing of options and Federated/May merger will have a minimal negative impact on our gross margin. Regarding expensing of stock-based compensation, as a result of the changes in our stock price and our equity-based compensation plan, the expected impact to our full-year operating income is now approximately $35 million. This translates into a EPS impact of $0.12 compared to the slightly more than $0.14 we have previously forecasted. The impact on our first quarter was $0.04, and we expect $0.07 for the half. Additionally, we now expect the Federated/May merger impact in fiscal 2006 will reduce our reported EPS by $0.09 to $0.10. Earlier William described some incremental cost savings opportunities we have identified this fiscal year. We are pursuing these savings with vigor, but expect to realize the majority of the savings in the second half of our fiscal year. Associated with these projected savings may be certain yet to be determined one-time costs, that we will record as incurred, which we expect will benefit the current and future fiscal years. We now anticipate operating expenses to increase 20 to 40 basis points, excluding any one-time charges. This will include the positive effect of our stepped-up cost savings, offset by lower sales growth, and approximately 50 basis point negative impact of stock-based compensation expense. Operating expenses also include approximately $23 million of spending related to our SMI project. As a result, our operating margin is expected to range between a 20 to 60 basis point decline. Therefore, our reported diluted EPS from continuing operations is now expected to be between $1.87 and $1.94, which again, includes approximately $0.22 per share impact from expensing stock-based compensation, and potential impact of Federated/May. Our expectations also include the effect of the additional cost savings of approximately $0.12, but does not include any one-time costs associated with these savings initiatives. Separately, subject to the final negotiated sales price, we may report a gain or loss on disposal of Stila, which would be included as a component of discontinued operations. Regarding the fiscal '06 first half, we expect sales to grow between 3 and 4% in constant currency, and anticipate approximately 1% negative impact of foreign exchange. We expect a gross margin decrease of 90 to 110 basis points. Operating expenses are expected to increase 130 to 150 basis points, primarily as a result of slower sales growth, and stock-based compensation expenses. Diluted earnings per share from continuing operations for the first half are expected to be between $0.83 and $0.88. We expect the effect of the Federated/May merger to impact our first-half results by $0.04. Let me remind you that we run our business on an annual basis, and we experience volatility in our quarterly results. In particular, this year we will be impacted by the expensing of stock-based compensation, the timing of product launches and investment spending, implementation of our cost-savings initiatives, and the pace and implementation of retailer consolidation activities. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Here’s the entire text of the Q&A from Xilinx’s (ticker: XLNX) Q2 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha. Thank you very much. Could you give us some idea of the consumer space in terms of demand, firstly reminding us what are the major areas in consumer that you supply into, and also whether this is a normal seasonal pattern in terms of your guidance or slightly less than normal? Yes, David. First of all, the key applications that we are serving in the consumer space are, first of all, the network premises equipment. You know, set-top boxes, things like that. Secondly, or I should say primarily, flat-panel displays, flat-panel TV technology, advanced slide projectors. But also we have a growing business in the wireless side in the cellphones. If you just look at the pure consumer part of the consumer automotive sector, consumer business grew in double-digit rates this quarter. Next question, please. It is Jeff Loff for Michael. Just quickly on revenue being down this quarter, can you talk about whether you saw any issues stemming from the merger of your distributors, and if so, when that could be resolved? You know, Jeff, it is difficult to say. You know, there are clearly, any merger creates some disturbances. But we expect that if there is any shore back, it will be more on the long-term. Most of our revenue comes from manufacturing business, and that is pretty much independent of distributor. Customers order the parts they need for their manufacturing, so I would expect that or my belief is that this quarter would have a very minimal impact. Next question, please. Yes, good afternoon. I was wondering about the expense side of the equation. When you talk about a, I look at the big drop really was concentrated in R&D. When do you think R&D will be bothering out I guess those some types of takeouts and when do they start going up again? Well, there's two things going on here, David. There is, first off, our new initiative investment in our DSP and embedded areas, so that is growing a business in a market segment that expands business for us in total. So that is an ongoing set of expenses going forward. The second area is kind of the second part of it is the total R&D number in total. The other big thing that impacts that is the timing for when we go through our development cycles specifically as we start to engage with 65 nanometer and then move forward. There is some very, there is some low, I will say low-level spending going on in that area right now. I would not expect any significant impact to the R&D number for a couple of more quarters in total. So in general we're trying to take a posture to restrain ourselves on spending growth right now given that we missed revenue, and we're trying to gauge what the next couple of quarters growth rate is until we get back on our investment track. Just with respect to your guidance now for the comm area to be up, could you give us any color on what you have seen in terms of the areas where you saw some softness, i.e. wireless and networking and wireline in terms of how you see that? Sure. You know clearly one of the things we did was to talk to these handful of customers like I said, and you all know who they are, the big wireless customers who have their inputs, and it seems that things were mainly delayed by one quarter and that they are expecting business to grow in this coming quarter. Of course, outside events, you know, could delay that further. But at the moment our customers are perceiving across the board a pretty healthy business for the next three months. Next question, please. One business question and one housekeeping question. The business question, is there any reassessment of how you may be dealing with in particular some of your OEMs being as it looks like you are kind of back into an inventory situation here pretty quickly? And then the housekeeping question, in terms of the FAS 123 run-rate, should we think about that for those of us who are going to be ramping expenses into our out year number as maybe 20 million a quarter? So let me answer the first question, and then I will leave the question to Jon. Well, the problem with inventory is that it is a division between two numbers. So when business is down, your own inventory goes up, and then the revenue goes down. So you have kind of a double whammy. And then on top of that, you had very good yields in 90 nanometer, which although it impacts our inventory is really a good thing because it lowers our overall expenses. So unfortunately we can not, wafer orders have to be put in several months ahead of time, so really pretty much the loading for our fab is done for the rest of this quarter. So the first we can impact it is next quarter, the March quarter. But, you know, it all depends, of course, on the business in December, and if that business is stronger or weaker, that will impact it further how much we have to cut back or even increase in March depending on the business level. Jon? Yes, Joe, it is a little too early for me to give you a forecast on the stock option expensing other than what you might see in the footnote. You know, we are a March quarter ending fiscal year, so we don't implement it until April, and I would hesitate to get locked into any different number sets until we've done a little more work on our end. I was just wondering if you could give us a little more color on some of the specific product lines, the new product lines? Could you maybe characterize your Virtex-II-Pro revenues versus like last quarter? Was it maybe flat, or how much was it down, and how do your Spartan-3E revenues compare to last quarter? Well, we don't give specific numbers like you know. But my Virtex-II-Pro was down because one customer thing, and we expected it to be up again next quarter. As far as Spartan-3 and Virtex-4 is concerned, both combined doubled this quarter like I forecasted as Spartan-3 is a better bigger product line, so it is a little bit less of doubling, and Virtex-4 is a smaller product line that did much more than doubling. But overall both with very very healthy growth, and although we don't expect it to double this quarter, we expect it to grow at substantial levels for the foreseeable future. Next question, please. I was curious about your comments on the backlog, specifically your commentary that you think that the returns been lower in the December quarter because you think people are ordering through the tightness on the back-end. Is that based on your actual conversations with customers, or is this based on some speculation on your part? Could you help us clarify that. Sure. It is really based on actual conversation with customers and on looking back to historical numbers. You know, our backlog is at, I don't say an all-time high, but at a very high-level. I mean when you go back to other quarters where we had that level of backlog, then we saw turns coming down. In talking to customers, clearly they were worried about the shortage that are coming up, especially in the back-end, and the piece parts for packages. And so when our customers hear about shortages, they order with, they put orders in place to make sure they get their parts when they need them. But the orders they put in place for next quarter, obviously they don't need that much turns next quarter. So it is a pretty natural phenomenon. There is nothing specific about it. Typically when we enter a quarter, high backlog turns are slower. When we enter the quarter with low backlog, turns always have to be higher in order to make the numbers. But it's based on hard facts. It is not speculation. It is based on hard facts both from customers and from previous history. The next question, please. Hi thanks. I just wanted to in terms of the operating expenses for next quarter, you are guiding down 1%. How should I think about that between R&D and SG&A? Because this quarter the SG&A crept up a little bit. And if you could discuss that a little bit, that would be great. Sure. We are down 1%, and it is actually pretty evenly spread, with the exception of there was one larger one-time spending item outside of the R&D and SG&A area with respect to a legal contingency reserve. But in general it is a kind of across the board, let's hold the line type of a message we have here. This is Steve Ellis For Tom Thornhill. Gross margins now they are going up, they went up last quarter, they are going up this quarter. Should we expect this trend to continue where gross margins have the opportunity to drift up, or should we see it going back down towards your longer-term goal? And if you could update, give us an update on your long-term gross margin goal, that would be great. Sure. Our corporate goal is to be 61 to 63% range. So we are still, we were this quarter, we were last quarter at the low end of that range, and this coming quarter we are projecting to be between 62 and 63, so we are moving up in that range. And the reason for that is the improved yields on 90 nanometer products. The yields we believe will continue to improve in the coming quarters, which should lead to lower cost of sales. Now the mitigating factor in all that is the mix of the product. So mix and yields are the two biggest levers to that. So depending on our mix, could you see, could I see increased margins over the next several quarters? Sure, I can see that, but I'm not ready to forecast that yet. Could you give us a little color on the orders that got pushed into the fourth quarter? Does your guidance encompass that those orders may get pushed began? Is that why the guidance range is so wide? Maybe just a little color on that if you would please. Sure, Jeff. The orders that were pushed into next quarter were like I have mentioned mainly in the Virtex family and in the networking space. You know, obviously at the beginning of the quarter, we always come back to our customers to see how they are doing, what they see happening in the market and so on. So we believe that like I mentioned before that customers are worried about shortages in back-end, and that is why they are putting orders a little bit earlier. But these are solid orders. We did a very careful calculation because the danger that happens is that some of these things could be double bookings or things like that, and we really found nothing of that kind. So we believe that these orders are solid orders. And unless something happens in the general economic sense, I believe that these products will be delivered. I'm very careful because there is clearly uncertainty, you know, with high energy prices and things like that, the Chinese government trying to reduce the growth rate in China. There are uncertainties that are difficult for me to predict. The reason why we have a little bit broader guidance is that the December quarter is always front-end loaded. So the big uncertainties in the month of December. And my experience is that customers are doing well. They work through the December holidays. If they don't do well, they close the factories. And that has a big swing factor, and that is why we are a little bit more cautious of predicting where we will end up in the end of this quarter. That is why we have broadened the guidance, although it's the same as last quarter, 4 points between the low and the high. A follow-up question on the gross margin commentary you just gave. When you look at some of the, you mentioned product mix as being a component in the gross margin target that you have of 61 to 63%. When you look at a segment like Consumer and Automotive growing as percentage of revenues, does that affect the gross margins, and will that affect that longer-term goal? Well, at this time I don't think we are going to change the goal. I think we're still pretty comfortable with the mix of products that we have at the high-end and midrange and low-end. The Consumer and Automotive is a little bit bifurcated in terms of the margin in those products. On the consumer space, sure there is always price pressure on consumers, and they may tend to be more towards the lower end of the model or maybe even a little bit below. The automotive space has kind of a broad range depending on the application. So as that segment grows, there will be I would say maybe a very small amount of downward pressure, but I would not call it big enough to change our corporate model at this time. Maybe one additional comment I can make is that these orders are much higher volume, and higher volume allows us to work faster through the learning curve and, in fact, lowers our cost for everybody. So it has to some degree a positive effect on the overall costs of 90 nanometer products. A question for Jon Olson I guess. Now you have been at Xilinx for a few months. Have you got any views on the long-term financials of the Company, anything that you are going to be particularly focusing on and working. And secondly, I'm not sure if it is Jon or Wim, but what are, although you don't want to quantify it, can you give us an idea of your general attitude to stock options costs? Will you be moving down these expensive over time going forward, or do you expect a first or that they all stay roughly as they are? First, David, I had my hands full this quarter with the revenue forecast apparently. So maybe I ought to do a little focus or have a little focus on revenue forecasting. That aside, I think there are a couple of areas that I'm putting some focus on. One is in the gross margin area around our cost focus in the Company. So there are some initiatives around that. And the second one is return on investment from our development project. So there are two things that some of which was in motion when I got here, and I'm trying to kick start that even more and try to work through some of the potential ROI options and see if there are some things we ought to do differently. Right now I don't have any hard suggestions to give you on different strategies, but those are the areas that I am focusing on and looking at. Yes, on the stock options, let me give you the kind of direction we're following. At the moment we have not decided to change our plan for our stock option yet. We are giving out a smaller number of shares than we have done in the past, but we keep a broadly based stock option plan in the books. However, we will keep track of what our investors think about this, and we have several options or plans that we are looking at that we can implement when we believe these are better in line with our investor expectations. I was just wondering if you can give us any color on how you had seen the areas of comm that weren't wireless perform and how you see them going forward? Yes, this quarter wireless performed, well, it did not grow very much, but there was some growth, low single digit growth in the wireline. Wireline did some work. In the wireless, you know, it is kind of, I think there are several things that came together because it was really very broad-based. You know, when you take up, all the wireless customers declined significantly. So it must be broad-based, so the push-out in China is just one element. There were just some slowdowns also in North America. For instance, Cingular I think pushed out some deployment. You know, it is difficult to say why this happened. It seems to be a one quarter event that people are just either because they are maybe not ready, maybe because, plus, you know, some anxiety around the hurricanes and the energy prices, heating in North America. There are probably different factors around the world that just came together this quarter. Because like I said, every single wireless customer declined significantly, and it was really based just on the wireless side. The wireline was reasonably healthy for a vacation quarter. This is John Quarles for Glen Yeung. I was just curious to know under the strength in the automotive sector that we saw this quarter if you guys can describe kind of the dynamics and why you see it being strong next quarter, and that would be kind of helpful. Sure. You know, if you look at the automotive, what we call consumer automotive consists of three parts. Audiovideo broadcasting, which is we classified as consumer is one segment. The second segment is pure consumer, and I have described on an earlier question what that means. And then the third part is automotive. The only segment that was down was the audiovideo and broadcasting. The other two sectors were up quite strongly in this group. The automotive, what is really driving it, is that it is mainly involved in the high-end cars where there is a lot of electronic features like automatic speed control or advanced high-quality audio equipment and so on and so on, and that's where we see the market opportunity. What is happening is that the automotive industry realizes that more and more of the innovations in cars now comes from electronics. These electronics were priorly done by subcontractors, but now they take more of the architecture in their own hands, and they believe that programmable technology is an ideal technology for them because it allows them to very quickly change to new standards. The basis for that really when you look at it is the same as in the consumer space. You know, the additional consumer areas where different industries or separate industries are now coming together. You know, entertainment, networking, computing. Well the same thing happens in the automotive sector. You want your car to have the same things as you have in your home. You know, your connection to the outside world, update of your GPS system, good quality audio and video for the backseat and so on and so on. But each of these areas has different standards, and that makes programs an ideal field for automotive electronics like it does for high-end consumer electronics. Just two follow-up questions. Can you detail the tax resolution and the income, what those final totals were? And then can you provide details in terms of the outlook on comms in terms of the end market segments, what you expect there? So with respect to the tax, the tax number, it was $0.03 a share in our $0.24 of GAAP EPS. So that is the basis for it. There are several subparts of this. So part of the benefit came from a release of reserves we built up associated with the Tax Court case that we had with the IRS. Some of the benefits came from an interest coming from in our other income line, interest based on a tax refund that we are entitled to because we had paid the IRS some money in advance to cut off future charges of interest and those kinds of things. And then the third component is that affects the ongoing rate is a reduction in accumulation of any of those additional reserves given the case is now resolved. So in the current period, the first two apply, meaning reversal of reserves, so that is a reduction to the tax provision line. The other income was up a couple million dollars with respect to this interest component from the refund. And then the third component, as I said, had to do with why the forward-looking rate is slightly lower than we previously had been running. So the outlook from communications, if you look at the two components, wireless and wireline, wireless we expect it to be up again, or up after the decline of this quarter, and that is based on actual customer interviews. The wireline business we expect to be flat to slightly up, pretty consistent with where we are in the year. You know, the wireline equipment includes data communications which is driven by companies and, of course, driven by capital spending. And in general we see a very strong capital spending in the first half of the year and then weaker capital spending in the second half of the year when the budgets get depleted. So that is consistent with that thing. So overall we expect communications to be up in this December quarter. Well, you know, you can say I give you the numbers 51% was Virtex and 24% was Spartan. So 75% is from these product lines, and you add the older product line, it comes down to 55%. So 9% is CPLDs and the rest is software and things like that. Yes, I was curious about two things. Number one is, when we had a lot of problems with 90 nanometer yields per liter, and now it is miraculously somebody has flipped the switch, suddenly yields are good again. What is this due to and how sustainable is this improvement? And the other one I was wondering is, maybe a question for Jon, is when do we have the foot off the break? Is it a ratio of pre-tax operating margin you're looking for, or it is a revenue level or degree of acceleration in revenue that you're looking for? Let me answer the first one on 90 nanometer yields, and, you know, anytime we introduce a new technology, we are early in the learning curve, and yields are not very good. And then when volume runs up, you work your way down the learning curve and yields improve. We had with 90 nanometer, we had a hiccup like in the transfer from the research part of EMC to their 12 inch production fab that set us back. So we had kind of a double view effect where yields were going down in the research fab, and then we moved to the 12 inch fab, they went back up because new equipment and delays and getting the thing done. And now we're seeing the full impact of the learning curve, and we feel very good that it is sustainable. It has been very consistent moving down and we are at excellent levels, and in fact we are slightly ahead of where we thought we were going to be. That explains why it came a little as a surprise. I think the new equipment in 12 inch fab is providing us with better yields than we even anticipated that we were able to achieve. Also, we made a little progress in technology core design for manufacturability, which allows you to have better yields even with more complex technology. So our belief is that these advanced technologies will get to the same yields as we have achieved on the 130 and 180 and 250 nanometer technology. You know, the same level of defect rate over time. So there is still a way to go, but we have made very good progress, and it is sustainable, and it will continue to improve over time. The question on spending and revenue and our growth in operating margin, it is not one thing or the other, but in general we are looking for improved revenue growth. We do have a corporate target around operating margin that we are below. Obviously if we got more revenue and we controlled spending, our operating margin will increase. And so we are looking at both things. So if revenue would continue to grow at a reasonable rate, I probably would take my foot off the break a little bit and allow some additional spending. But we still would be muted and focused because we're not at our operating margin percentage goals yet, which is you know roughly 28% plus or minus a couple of percentage. I just had a clarification. On the inventory, did you say that heading into December total inventories would be flat or it would be flat on a days basis for your expectations? Inventory will be flat on a days basis in the December quarter versus the September quarter. That is what I said. That is what I intended to say. Can you give a little bit, you've done some good clarity for us on the $0.03 benefit from the taxes and the other income. How should we be looking at those two line items for longer-term modeling? Should we be taking our tax rates down? Normally you have guided us to about 23%, but it looks like it is below that. And also where do you think other income is going to come in for the next 12 to 18 months, if you would? Well, I'm not going to give a long-term other income growth rate percentage right now. I think if you look at our history, we have been right around $10 million, you know, plus or minus depending on individual onetime items because it is an other income category. Other than the rise in interest rates, the rest of it is not particularly forecastable down two or three quarters from now. So since its interest and income, interest rates look like they are on the rise. They have been on the rise. So if history repeats itself or continues, you will see a gradual increase of the interest income component of that. With respect to the tax rate, there is a lot of things that are going to go on in the future of the tax rate, not to mention the implementation of 123R stock option expensing. That is going to create some change and variations over time in our long-term rate. Our underlying rate as we forecasted for the next two quarters each at 21 to 22% is a reasonable approximation of where we are. I am today sitting here unaware of anything in the underlying base business that's going to dramatically change that, other than a host of onetime items that are out there that are changing the tax code all the time. So that's why I am not going to say use 21 or 22 beyond this right now with all the rules and regulations. It is Jeff Loff again. If you look at the December and March quarters, can you talk about what drives typical seasonality from, either in end market or geography perspective? And then is that still in check as you go out to the current environment, or are there certain dynamics that would change that, for example, leadtimes or inventory? Yes, Jeff, there is change happening. I mean really one way of looking at our business is that about 85% of our business goes to capital equipment spending. The other 15% goes to consumer electronics. Both of these are very different seasonality. Now capital spending typically is stronger in the first half of the year and weaker in the second half, and that is why typically we have a very good March quarter. The new budgets get build out and people order equipment. Later in the year the budget gets depleted or business conditions change, and budgets get cut and things like that. The consumer, of course, is totally opposite. The consumer is weak in the first quarter and typically also in the second quarter, but is stronger in the third and fourth quarter when the consumer industries are ramping up for the holiday season. And I think so the dynamics of our business change a little bit. I think in the future you will probably see more a leveling effect, especially where the consumer part of our business continues to grow relative to the other part. You will see more of a leveling I expect, which is one of the reasons that I think that this diversification is good. It will give us more of a stronger back-end second-half and maybe a slightly weaker first-half. But at the moment, 85% of our business is still capital equipment related, so this trend will be very strongly in that sense. Okay? I was wondering if I can have an update on how the manufacturing ramp is going at Toshiba and in particular a clarification that it is going to hit volume at 65 nanometers, right, and when should we begin to see those wafers coming out? Yes, you know, the fact that we paid the APA agreement means that Toshiba delivered on all the acceptance criteria. You know, at the moment, they are doing, part of the Virtex-4 family of businesses is manufactured at Toshiba. In the longer-term, we plan to take out our 65 nanometer products on both Toshiba and EMC and cannot divide the business depending on yields and depending on wafer prices that they give us and things like that. Overall the 65 nanometer business will not have a significant impact until I would say the latter part of next year in 2007. Yes, have you said how much of the inventory was at Xilinx and how much was at DSP, and then can you also talk about the composition of the inventory and how concerned you might be about the current levels? So the days of the components of our 146 days there's approximately 28 days at our distributors and 118 days in Xilinx facilities. And so we are up about $17 million quarter to quarter, and the analysis of what percentage of that was missed revenue and what was better yields. Obviously you can calculate the revenue mess portion if you want. But by and large, we are not overly alarmed, but we are not comfortable either. We would like to get that number of days and the absolute dollar balance down, and if we have typical growth in the second half of the year, we should be just fine. Usually we get into a longer-term discussion, I know you're a little resonant doing that, but I was wondering if you can just comment on where foresee you past this quarter with a return to some sort of longer-term growth rate where you maybe see that turning out to being? Is it still 20% plus and above the overall semiconductor industry growth rates? Just some thoughts on that qualitatively if you could. Sure. You know, there is several parts to your question, of course. One is the growth is a traditional program logic space, and the other one is the overall growth rate in other new areas of revenue we are investing in. And clearly on the traditional FPGA space, I think that the growth rate has been low in the last couple of years for the double whammy that the 99 nanometer plus the transition to 300 millimeter is created. You know, when you look at growth rates in dollars, it really is growth rates in units times the ASP. ASPs have come down quite rapidly, and it is driven not by price wars, but simply by manufacturing improvements, lower costs per die, and the lower cost per die is driven by I guess the two components, 90 nanometer, and of course, that comes back every two years called Moore's Law. The other one is the transition from 200 millimeter to 300 millimeter wafers, which added another 40% or so cost reduction on top of the 90 nanometer cost reduction, and that comes only about every 10 years. So, you know, when we look at the projection and at the consumption of logic sells very much like the memory business looks at the conception of megabytes, our logical consumption is more than 50%, growth at more than 50% per year. It is pretty stable. It is around 50 to 60%. Except when we have significant downturns like in 2001, it's pretty stable around 50 to 60%. So everything then comes down to cost. Well, this whole transition to 90 nanometer and 300 millimeter wafers is pretty much behind us now. So I think that this drag on growth, this accelerated cost reduction is behind us. At the same time, 90 nanometers makes us much more competitive against ASICs, and you know we see now regularly orders for 50, 100,000 units per month from consumer customers that typically would have gone to ASICs before. So I think that with the transition behind us, we will see some better growth in the pure FPGAs part of our business. And then, of course, you know there are some initiatives to enter additional markets in the area of digital single processing and embedded processors. And our expectation is that that segment, that that part of our business will go much faster because we really are starting from small numbers. So overall or combined and, of course, if you eliminate economic recessions and things like that, I still believe that 20% growth rate is achievable. You know maybe, you know, being driven by I would say the new businesses, which have been very well accepted by our customers, our growth, for interest in base stations, which we are in a very very strong position, is due to our strength in digital single processing, for instance. Okay? So that gives you kind of a view. But on top of that, of course, you have all the economic factors, and that, of course, we cannot control, and then you have traditional cycles in the semiconductor industry of overcapacity undercapacity, which we don't control either. So that is what makes difficult to project exactly where we are at a given point in time. Last question, please. If we look at 90 nanometer for a second and the yields continue to improve sequentially every quarter and gross margin correspondingly, do you have a sense when in the future we would hit ideal or what we might call the peak yield on 90 nanometer? Then I would assume then peak gross margins? Jeff, probably for, you know, it's a typical learning curve. So you have very strong improvements at the beginning, and that is what we are seeing here. And then, of course, with time, the improvement goes smaller and smaller, and you continue to improve. We used to be improving on 130 and 180 nanometer as we speak. So there is really not a point where it starts to peak. Of course, what we are then doing is there is some new cycle starting with 65 nanometer which will start next year. So next year we will be introducing our first 65 nanometer products, and then the whole thing repeats itself. Here the 90 nanometer has been a little bit more difficult because we had a hiccup in our transition to 12 inch wafers. It got delayed, this phase, and of course, once we got the situation in control, it moved quicker. So I said it's kind of a W effect. We were moving down, and then we moved to the 12 inch fab and moved back up again, and now we're moving down much more rapidly because of all the experience we have gained. I hope that 65 nanometer will be a little smoother, but my experience is that advanced technology is tricky, and it takes time to wring out these problems that we are facing. So my answer to you is that we will see or continue to see good yield improvement, but weaker and weaker by quarter for at least a couple of more years in 90 nanometer. Okay. Thank you, everyone, for joining us today. We have a playback of this call beginning at 5:00 PM Pacific time, 8:00 PM Eastern. The instant replay will run for 48 hours. For a copy of our earnings release, please visit our IR website. To reiterate our guidance update for the December quarter, it will be posted after the market on December 7. Our next earnings release date for the third quarter of FY '06 will be Thursday, January 19 after market close. This quarter Xilinx will be participating in two investments conferences, the Deutsche Bank and Lehman conferences. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

EarningCall_234115

Good day, everyone, and welcome to the Netflix fourth quarter 2005 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn call over to Deborah Crawford, Director of Investor Relations. Please go ahead, ma'am. Thank you and good afternoon. Welcome to Netflix's fourth quarter 2005 earnings call. Before turning the call over to Reed Hastings, the Company's co-founder and Chief Executive Officer, I will dispense with the customary cautionary language, and comment about the webcast for this earnings call. We released earnings for the fourth quarter at approximately 1:05 p.m. Pacific Time. The earnings release, which includes a reconciliation of all non-GAAP financial measures to GAAP, and this conference call are available at the Company's Investor Relations website at www.netflix.com. A rebroadcast of this call will be available at the Netflix website after 5:30 p.m. Pacific Time today. We will make forward-looking statements during this call regarding the Company's future performance. Actual results may differ materially from these statements due to risks and uncertainties related to the business. A detailed discussion of such risks and uncertainties is contained in our filing with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the Commission on March 15th, 2005. And now, over to Reed. Wall Street hires some smart cookies. But is it in their best interest to put the hard questions to management? Are YOU even their top priority? Motley Fool co-founder David Gardner is still bullish on Netflix. It’s up 253% since he recommended it to his Motley Fool Stock Advisor subscribers back in June 2003. Now, discover the ONE company David calls “The NEW American Super Brand” in a new stock research report. Thank you, Deborah, and welcome everyone. Let me say right at the outset, that we enter 2006 with great confidence in achieving the major goals we have outlined, $50 million to $60 million of pretax profit this year, 50% annual earnings growth for the next 3 to 4 years, and 20 million subscribers in the 2010 to 2012 time frame. This confidence springs from all that we were able to achieve in 2005, and some key marketplace trends I will discuss in a few moments. A quick recap of the year just ended. First, we added approximately 1.6 million net new subscribers last year, growing from 2.6 million to 4.2 million. This is up from 1.1 million net additions in 2004, and 600,000 in 2003. Our guidance for 2006 is for at least 1.7 million net adds, for an ending subscriber count of at least 5.9 million, and you should think of this as the bottom of the range. Second, we continue to improve the Netflix service, and for the second straight time we're independently ranked number 1 in web retailer satisfaction nationally, just above Amazon, Apple, and others. The benefits of our service improvements show up in our churn, which dropped from 4.3% in Q3, to 4.0% in Q4, our lowest churn ever. Consumers are signing up for Netflix, and staying with Netflix. Third, we generated $24 million of free cash flow in 2005, 13 million of pretax profit, and including a one-time tax benefit of $30 million, a total GAAP profit of $42 million. Our earnings guidance for 2006 remains $50 million to $60 million of pretax income, which is $29 million to $35 million of GAAP net income. Fourth, by closing the year with nearly 4.2 million subscribers, we are on a trajectory to cross our original 5 million subscriber goal in the middle of 2006. Some of you may remember that back in 2002, when we were less than 1 million subscribers, we set the goal of 5 million in 2007 to 2009. This seemed ambitious then, and yet, we are going to beat it. Now, of course, our goal is 20 million subscribers in 2010 to 2012, and we remain on track to reach that ambitious target. Fifth, through the benefits of scale, we were able to raise our Q4 marketing investment to $47 million, a sequential increase of nearly 50%, and still exceed our earnings target for Q4. Bottom line, Netflix now has the scale to generate huge net subscriber additions and strong earnings. Of course, increasing our marketing spending pushes up average subscriber acquisition costs, because the marginal subscriber acquired is more expensive than the prior, and our Q4 subscriber acquisition cost was $40.65. This is still far below the contribution profit from a subscriber, and thus, a prudent investment. As we discussed at our Analyst Day last September, our strategy is to grow as fast as possible while delivering on our earnings target. And that is exactly what we did in the fourth quarter. This strategy is enabling us to build a very large and profitable business. Looking ahead, there are several marketplace factors I want to touch on. The first is the continued expansion of the DVD market. According to the "The Wall Street Journal" and Adams Media Research, the DVD market, both rental and sales, grew domestically from $22 billion in 2004, to $24 billion in 2005. Fox is now forecasting the DVD market will grow to $30 billion by 2010. And as the DVD release window moves up against the theatrical window, DVD benefits strongly. At December 9th JP Morgan report says that if the studios move to full simultaneous release of movies on DVD and in the theatre, the DVD rental market would grow by over 50%. The first concurrent release is this week, in fact, of film "Bubble" directed by Steven Soderbergh. While full simultaneous release may take some time for all studios to support, the economic logic of it is unstoppable in our opinion. Another of the long-term drivers of DVD growth will be the adoption of high-definition DVD. Today, you can order a Toshiba high-def DVD player at bestbuy.com for $499 and it will be delivered in 8 weeks. High definition DVD is here, launching this quarter. And Netflix today announced that we will offer all HD-DVD titles for rent the day they launch, at no extra cost. Just as exciting, Blu-ray will launch later this year, anchored by PlayStation III, and we also intend to carry all Blu-ray movies as they hit the market. Very simply, we see high-def DVD as the next big wave of excitement in the home entertainment market, and we will be there at its inception. I should mention that in the high-definition format debate, we see 3 possibilities. One, is that a single format emerges as the clear winner in the minds of studios and consumers. The second possibility is that Samsung and others, create DVD players that play both Blu-ray and HD-DVD. The third possibility is that most studios publish in dual formats, like most game publishers do, for PS2 and Xbox today. Any of these scenarios would be acceptable to Netflix, and we remain neutral in the debate. We are bullish on high definition DVD because consumers in significantly increasing numbers are purchasing large screen televisions at an investment of $1,000 or more. In fact, the Consumer Electronics Association estimates that 2006 will be the first time that sales of high-definition DVDs will outpace regular DVDs. This is a clear indicator that consumers want the superior viewing experience of high-def, and we believe that preference will naturally migrate to high-def DVD as it becomes available. We anticipate that the mass conversion from standard DVD to high-def DVD will take approximately as long as VHS to DVD, about 10 years, and keep DVD at the center of consumer interest. The second factor I want to touch on is competition. You may think that VOD or Blockbuster Online is our primary competition. But all of our research shows that local video stores remain the primary alternative to Netflix for consumers. And it is clear that the local video store economic model continues to weaken. As Blockbuster Online invests more in marketing in 2006 to approach 2 million subscribers, and as we grow to nearly 6 million subscribers this year, the awareness and size of the online rental market expands greatly. The result in economic pressure on Movie Gallery stores, Blockbuster stores, and the smaller chains will intensify. In the San Francisco Bay Area, where online rental is ahead of the nation, Blockbuster closed 10% of its stores in 2005. This is part of the reason that in the Bay Area, Netflix saw an acceleration of net additions in Q4, with Netflix now in over 12% of all households in a market that serves as a remarkably accurate indicator of our national trend line. We expect that more video stores will close in 2006, and our penetration will continue to grow. If total online subscribers gets large enough, it will be hard for any local video store to generate a profit. Consumers prefer the value, selection, and convenience of online movie rental, and the economics of online are very powerful. 40 small distribution centers teamed with the U.S. mail, instead of 4,000-plus local video stores. That is 100-to-1 efficiency gain. As the tipping point kicks in, the future for video stores gets bleaker, and the future for online rental gets brighter. The third factor I want to touch on is downloading movies. A lot has been said and written about digital distribution in recent months, and so I want to be clear about what we see, and where we stand. We remain absolutely focused on positioning ourselves to lead in this market, as it becomes material at some point down the road. Most importantly, we are building towards 20 million DVD rental subscribers, and continuing to enhance our website, so that when we offer downloading, we will have both a mass audience and the most compelling consumer experience in the market. We are continuing to develop our download technology, and we will invest $5 million to $10 million in this area in 2006. When we offer downloading to our consumers, it will be simply a second delivery option for those consumers who desire it. Our brand, our subscriber base, our personalized website, it all remains the same in the presence of a second delivery option. Unfortunately, there are 2 big constraints to creating a large, interesting, downloading market: content availability and getting the Internet to the television. Let's first talk about content availability. Netflix consumers enjoy a very wide variety of DVD content, with more than 55,000 titles. The leading downloading service, Movielink, which is owned by the movie studios, launched several years ago. Today, it arguably has the best downloading selection in the world, and offers less than 2,000 titles. That is about 4% of the titles available on Netflix. Of course, not all titles are equal. So we looked at the specific titles on Movielink, and their 2,000 titles account for less than 15% of Netflix rentals last week. So if you think of selection not in absolute title count, but in an interest weighted manner, then Netflix has over 7 times larger selection than the best downloading service. Now why would a downloading service that is owned by the studios not have all 55,000 titles available? Because of the Exclusive Window Distribution System unique to the movie business, where exclusive TV rights are sold for certain time periods to TV channels, such as TNT and Showtime, in long-term contracts. This Exclusive Window Distribution System prevents any movie downloading service, from Movielink, Netflix, Comcast, Apple, or anyone else, from carrying the full 55,000 titles consumers want. Unfortunately for Internet consumers, many of these contracts are long-term deals, and the TV channels that hold these contracts are loath to enable broad, nonexclusive movie downloading. Someday, however, we believe nearly all movie content will be available online, on a noninclusive basis, as with music today. Our allies in this desire are Comcast, Movielink, Apple and others, and it is up to us to collectively find ways of generating enough revenue for the studios, that the studios carve downloading out the Exclusive Window System. Only when downloading is specifically carved out of the Exclusive Window System, as DVD is carved out today, there will be broad movie content available for consumer downloading, and real consumer appeal for movie downloading services. The second impediment to the growth of downloading is getting the Internet connection to the television. Our subscribers report that only 4% of their DVD movie watching is done on a computer. And as consumers buy more and more large-screen televisions, we don't see this percentage changing materially. Fortunately, technology solutions are finally emerging for getting the Internet to the television. As an example, Cisco Linksys just announced a Wi-Fi DVD player to be available later this year. And the new gaming systems are mostly Internet connected. We hope that by 2010, as many as one-third of households will be able to display high definition Internet video on their high definition television screens. To summarize our views on downloading, on the one hand are consumer and retailer desires for broad, nonexclusive movie downloading. On the other hand, is the Exclusive Window Distribution System, and the challenges in getting the Internet to the television. These latter forces will slow, but not stop, downloading adoption. Our course is to build the largest DVD rental subscriber base possible, build the most compelling and sticky movie websites, develop the strongest movie retail brand, and then drop in the additional delivery option of downloading. For the next several years, however, online DVD rental is unrivaled in its selection, value and convenience for consumers, and this is propelling our growth. The San Francisco Bay Area is the most technology-obsessed region of the nation, with very high penetrations of TiVo, Comcast VODs, iPods and broadband Internet. Yet, Bay Area consumers love their Netflix, and subscribe to Netflix in record and accelerating numbers. In 2005, we grew in the Bay Area from 9% household penetration to over 12%, and we believe we will achieve 20% household penetration in the Bay Area in the next 3 years. Technology does increase consumers' options, and in a region of the country with the most technology options, Netflix is an integral, expanding part of the digital consumers lifestyle. So, when we look at our surging net adds, when we look at the DVD market growing and taking share from the theatrical market, when we look at the continued deterioration of local video stores, when we look at the stunning visual experience of high-definition DVD and the consumer excitement it will engender, we see that Netflix is on track to achieve our goals of $50 million to $60 million in pretax income this year, 50% earnings growth for the next 3 to 4 years, and 20 million DVD rental subscribers in 2010 to 2012. Thank you for listening, and now I will turn the call over to Barry. Thank you, Reed, and good afternoon, ladies and gentlemen. On each of the last 2 quarterly calls, I have spoken to you about the strong momentum in our business, which was reflected in a series of upward revisions of our financial guidance. As last year progressed and our business outperformed our expectations, we raised guidance a total of 4 times including an upward revision of our Q4 targets. Measured against that benchmark, Q4 was another strong quarter. We had 4,179,000 ending subscribers, at the high end of a more revised range, record net subscriber growth, record low churn, significantly improved gross margin, and GAAP net income of $38.1 million and pretax net income of $9.1 million, well above the high end of our revised guidance of $4 million to $7.5 million. Now that we have exceeded our Q4 goals and raised our subscriber guidance for 2006, we are full of confidence and great anticipation as we set our sights on growing the business to 20 million subscribers. At the same time, we also understand that others might not share our confidence. In particular, the recent CES show and various digital downloading announcements have led many investors to question whether growth in digital downloading will erode our business, and if so, when and how rapidly. A moment ago, you heard Reed, excuse me, Reed say that there is uncertainty about how long it is going to take before digital downloading emerges from its infancy and becomes a mainstream service. But most people, Reed and me included, would accept the premise that downloading is going to become an important business. Plain and simple, the long-term growth of digital downloading poses a real challenge to our business. With every challenge comes opportunity, and there is no question that downloading is a great opportunity. The real question is, opportunity for whom. In my remarks today, I would like to explain why I think it is our opportunity, why I believe we can lead the future of digital downloading. If we intelligently manage the rapid growth of our online subscriber base, and the evolution of our business model to incorporate digital downloading as one of the delivery options of enjoying Netflix content. But first, because we believe our ability to lead the future of digital downloading begins with our ability to grow a large and profitable DVD subscription business even larger, I am going to turn my attention to the present, and talk about our performance in the fourth quarter. Then I will conclude my remarks by talking about our view of the digital downloading future. My comments on our Q4 performance will focus on 4 aspects of the business: net income and the impact of our tax status going forward, SAC, gross margin, and free cash flow. Let's take them 1 by 1. First the NOL. In the fourth quarter we made an accounting determination that caused us to recognize the tax benefits related to our cumulative net operating loss. That determination resulted in a large one-time noncash gain of $30.2 million. As a result, under GAAP, future earnings will be fully taxed beginning in Q1, 2006. We expect our effective Federal and state tax rate to be 41%. From a cash perspective, we expect to pay $1 million to $2 million in AMT taxes in 2006. Now let's turn to SAC. As planned, SAC was up sharply in the quarter. The increased spending accelerated our growth, which serves our long-term strategic objectives for the business. And in spite of the increase, we beat the high end of our earnings guidance for the quarter. As long as our profit margins and churn remain healthy, you can expect us to maintain a high level of marketing spending in order to drive rapid subscriber growth. Competitors who spent less will fall farther and farther behind. That leads me to gross margins. The fourth quarter's gross margin was 47.1%, up nearly 400 basis points from the third quarter. Lower cost of content was the primary driver of margin expansion. The second contributing factor was consumer adoption of our new lower priced plans. The popularity of these plans means not just that RPU is falling, but also that gross margin is rising. Because new lower-priced customers produce higher margins on lower revenue. That's largely why gross margin improved in each of the last 4 quarters. That trend will reverse itself, however, in Q1, as we absorb the effect of January's postage rate increase, before climbing through the remainder of the calendar year. Finally free cash flow, which was $24.3 million in the quarter, significantly higher than in any quarter in our history. There were 2primary contributing factors to its growth. Strong holiday sales of gift subscriptions, which boosted deferred revenue, and growth in accounts payable, which resulted in growth in our core business and not an increase in days payables, which remained nearly unchanged from historical levels. As for the first quarter of 2005, I expect that free cash flow will turn negative in Q1 before turning positive again in Q2, and for the remainder of the year. An increase in purchase content, probably in the range of 20% of revenue, will be a contributing factor to the negative cash flow in Q1 this year, as it was in Q1 last year. Earlier today, we announced our support for high-def DVD. This support will not increase our content cost in 2006. Now back to the digital downloading opportunity and why we believe it is ours. In his remarks today, Reed mentioned there are a slew of difficult issues that need to be solved before the downloading ecosystem can begin to flourish. These include licensing enough content to matter to consumers, and delivering that content to the TV. We also said that 1 of the primary strategic objectives for our business is to get big on DVD as fast as possible. Why? We have 2 objectives. 1 is to grow our profits, and the other is to better position the Company to compete in the downloading arena, when downloading finally gets here. We begin with the understanding that downloading, whatever its current buzz, is just another way to delivering content, an alternative to the mail, or the local video store, or to cable, or to satellite delivery. The players in the downloading market will be companies that get the technology right, but that's just the price of entry. The winners will be the companies that also provide the best content and the best consumer experience, and that's what we do best. We believe that delivering the best consumer experience made us the market leader in online DVD rental, and will make us the clear leader in the world of downloadable content. The specific assets we bring to bear include our large, loyal, and rapidly growing subscriber base and an intuitive website that keeps those subscribers engaged. They find great movies on our site. They find those great movies because we merchandise content that is right for each subscriber. We do that better than anyone else on the planet, because we know more than anyone else on the planet about our subscribers' likes and dislikes. That's because they've told us a billion times and growing, what they like and what they don't. Nobody links people with movies like Netflix. It seems to me that reasonable people can disagree about how long it is going to take before digital downloading emerges from its infancy and becomes a rapidly growing market. Our goal is to lead the business whenever its rapid growth begins. And keep in mind that managing an accelerating market from its inception through its transition from infancy to rapid growth, is a core management competence at Netflix. In just 8 years, we will have grown this business from nothing, to about a billion in revenue this year. I don't mean to suggest that it is a "gimme," or that we have a sense of entitlement. Whether we end up on the long or the short end of the digital opportunity will be determined by choices we make over the next 5 to 10 years. And over our history, Netflix has demonstrated its ability to make the right choices. And perhaps just as importantly, to recognize when we've made the wrong choices, and fix them quickly. Our track record leads me to believe that we can leverage the size of our subscriber base and our relationship with those subscribers to lead the downloading market. And if we do, digital downloading will be the engine that drives Netflix to heights we can only imagine today. In closing, I would like to briefly comment on our 2006 full-year guidance. First, I want to remind you to think of our subscriber and revenue guidance like it is the bottom of the guidance range. And second, I want to comment on our earnings guidance with respect to our price testing. As many of you know, we have been testing lower prices, and we will continue to test lower prices for at least the next several months. If the test results convince us that we can cut price, grow faster, and offset the revenue hit from lower pricing with an equivalent reduction in marketing spending, we will drop our prices. Today's earnings release reaffirms our goals of $50 million to $60 million in pretax income, and 24.5 to 35.4 million of net income, regardless of the changes we make, or don't make, to product pricing. So, to be unambiguously clear, we have no plans to cut our earnings guidance for the year. That concludes my prepared remarks. And now, operator, we will open the phones to questions. Thank you. Today's question and answer session will be conducted electronically, if you'd like to ask a question, please signal by pressing '*' key, followed by the digit '1' on your touchtone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow our equipments to reach your signal. Again, that is '*' 1' on your touchtone telephone. We will pause for just a moment assemble our roster. And we will take our first question from Gordon Hodge with Thomas Weisel Partners. Yeah, good afternoon. A couple of questions. One, I was just wondering if you can comment on any usage trends you saw in the quarter. And then maybe dissect that into, or separate impact of the low price plan in the mix versus what you are seeing in the core group. And then you talked about lower content costs. I am just wondering if you could quantify it a bit. We have been hearing Catalog price something down from our studio contacts but new release price something up can you comment with that in terms of purchases and also on rev share side, thanks. Gord, if I don't answer the question comprehensively, just chime back in and remind me what I missed. Let's see, with respect to usage. With the popular, the popularity of the new plans average usage is on the debt Klein and has been through the course of the year. I can tell that you revenue per disk is on the rise, and that if I normalized for the mix change and looked, say, at just the three I planned and get a sense of the overall trend in usage on a normalized basis I would say the trend is down. Typically we see a seasonal increase in the business, and those trends have been dampened as compared with prior years so we are encouraged, especially given the record low churn. And the second question I think related to content cost. If you looked at our statement of cash flow, I think you would see that year-over-year purchase content is up about 10%. But growth in subscribers is up 60% year-over-year, and there haven't been much of a mix change in rev share as a percent of granules, sorry as a percent of purchases over the course of the year. And so we are doing a better job on utilization, and I think our scale has enabled us to work in partnership with studios, increase our buying and lower some of our average cost per disk in the process. More profits for them and slightly lower per disk cost for us. Hi, good afternoon. A couple of questions. You said marketing cost will stay at a high level, you know, with a pretty significant sequential growth. Can we sort of take that $47 million and run that out. If you can make maybe point us in a specific maybe range of spending that will be helpful. Secondly, if free cash flow, you kind of gave us some help on where that will trend but if you can maybe point us to a range of what you kind of target in free cash flow this year. And then finally ad sales this year, if you see, it maybe, you could see maybe a pick up there and maybe give us an idea what you are expecting. That will also be helpful. Thank you. I am going to do it in reverse order, ad sales and free cash flow and the First question related to marketing. In terms of the ad sales, we are very encouraged but it is still early. My guidance on the last quarter's call was for combined revenue in the calendar year for ad sales and previously viewed DVDs in the range of $8 million to $16 million. It is early and we will know more about the size of those opportunities as the year progresses. And we continue to do some testing in ad sales and the result of that testing will inform us about the scope the revenue opportunity. With respect to free cash flow, we don't provide guidance on free cash flow, but we do have in the past given you an indication of what we expect in terms of DVD content purchasing and I think it will be consistent with historical levels, which is in high teens as a percent of revenue. With respect to marketing spending, you'll recall on last quarter's call, I think the quarter before, we indicated our objective is to grow the subscribers as fast as possible and to wither earnings within the range of guidance we have given for the by. So if response rates are up and margins are up for whatever reason, we will take incremental profits and reinvest them in acquisition of additional subscribers to grow the business faster, which increases enterprise value, and if for some reason response rates are down and margins are down, we will shrink the marketing spending and manage the business and the bottom line within the range of guidance that we've given to $50 million to $60 million. Having said that, of course, results have been enormously strong for the last four quarters, and our expectation is that we will continue to have the economic wherewithal to continue to spend marketing dollars at a high-level to acquire subscriber. What that means in fact depends on the efficiency of our marketing spending in any given quarter and you can see it has been within quite a broad range and we are happy with that range. In last quarter's call indicated wouldn't be displeased at all if it was at about current levels, meaning Q4 levels. We will have to see how it fleshes out. So we are looking at the interaction between the gross margin and the churn and overall marketing spending. Glen, this is Reed. You expressed early in the quarter some concerns about the potential impact of VOD on the general DVD market over the next couple of years, and I just wanted to point out that the same studio Fox, that is being innovative and aggressive on VOD is predicting that the DVD market, rental and sales will grow from 24 billion last year 2005 to over 30 billion by 2010, and what you have to watch out for is the sort of zero sum assumption problem. If you assume that the growth of any entertainment channels at the expense of another, then you do get a net zero sum logic. But, if you think about the 25-year history in the movie business, 25 years ago there was only the movie theatres, there was no HBO, no video, no DVD, and so it was about a $6 billion business. And it has grown as new channels have developed to be close up to a $40 billion business 25 years later. So while there are new channels such as VOD, that have consumer interest, and I think will be financially successful, that doesn't inherently take away from DVD, and, again, the same studio experimenting with novel VOD is also predicting that DVD is going to grow to $30 billion. Thank you. Two questions. The first is a ton of noise about video on demand digital distribution. Is it fair to characterize, it as just kind of a lot of experimentation going on, number one. And number two, how long do you believe the market will be in the experimentation mode and as a related part, what would you use as a signal to say we are no longer in this experimentation mode and on a completely other subject, can you update us on your thoughts about International expansion at this point? Sure Derek. It's Reed. I will do International first. It is something that we look at from time to time, and we look at it in the context of meeting our $50 million to 60 million of pretax earnings growth and our 50% earnings growth year after year after that. So if it's in the budget for doing that, it is something that we will look at seriously. In terms of the kind of phase of innovation and experimentation going on in digital distribution, you know, I think the driving thing is the parallel to the music market. I mean both disk, you know, one is audio and one is video. And it is really easy to think if it happened in audio, it will happen in video, you know, with just a small number of bandwidth separating two of them. And there is surely fundament differences in these two markets and music and in video, and the difference is what is the consumers' interest? In music, we mostly listen to music in the background, in the car, walking around, running with little puny headphone so the interest in higher and higher quality of music is fairly low and thus, for example, high definition music was not a big success. I am referring there to DVD audio and SATV, and instead portability convenience won the day out with things like the iPod. Now if we look at video, what we see is that higher and higher quality is something the consumers care about with large-screen television. We are looking at 40 and 50 and 60-inch television, in another five years I think most people will agree we are going to be looking at 100-inch televisions as the defining thing in people's living rooms. And so what's happening here is that the quality expectation and, thus, the bandwidth around the ecosystem is actually growing significantly, again a big difference from music in that way. So, yes, you are seeing a lot of experimentation, you are seeing a lot of talk, you are also seeing, I think, people over focus on that fact that isn't it just like music when actually it is quite a bit different in terms of a consumer appetite. So I imagine that this phase of interest in downloading, you know, will continue, because music will continue. We are continuing to work and invest in our downloading technology and, again, ultimately it will be about the solving these two big barriers that I outlined, which is selection barrier due to the exclusive downloading window, and how one gets the Internet to the television. Because once you buy those large-screen television, you want it to show up on television. Great, thanks. Reed, I was wondering if you can talk a little bit more, I know you guys have been asked this question in a couple of different ways, but on the subscriber acquisition cost issue, what level when you look at subscriber acquisition costs do you kind of hit break even or where you are simply not willing to go a certain level on a break-even base I. And then if you could also talk about there was no real mention of how you are handling the option expense side of the GAAP calculation. I was just wondering if you could just talk about that as well. Sure, I will pass the GAAP on over to Barry in a moment. In terms of how we think about subscriber acquisition costs, at, you know, $40.65, we are so far below the lifetime value of a subscriber calculated almost any way you want, that we are not particularly concerned about imprudent spending. So on a practical basis, it is about how much marketing we can afford given our earnings targets. So essentially our process is we want to grow as fast as we can on the earnings target. What we saw this quarter is when in Q4, is when we moved up the total spending from 32 million in Q3 to $47 million in Q4, that necessitates more marginal subscribers that are inherently slightly more expensive than the prior ones if you are doing your marketing well. And we are. And that's what generates the higher SAC, but the way I would think about it is we are going to continue to invest not guided by SAC but guided by meeting our earnings targets and growing as fast as possible, and the SAC will be determined largely by how much we can spend. If we can spend a lot more, you will see SAC creep up. If we end up spending less in total, then SAC will move down again because of the marginal efficiency. I am going to jump in….. But we do run a micro economic model that is adjusted for the mix by price points of new subscribers, and we do look at lifetime value and that does inform us at the margin, inform, entertainment margin about how much they are willing to spend, we will be willing to spend. Now having told you, we have an absolute cap, we never discuss what that cap is. It is a relatively easy thing on the back of an envelope to calculate lifetime value. It is one divided by the churn rate times ASP, and as you fold cost from the P&L from that revenue stream you get a pretty quick snapshot of what customer life looks like. It is not precisely accurate, but it's accurate enough to hit the side of a barn. With respect to option expense are, you may recall we were one of the fortunate few to early adopt and we have been expensing for a long time. So no change in our GAAP accounting related to stock option expense. Thank you, good afternoon. Couple of questions, first, Barry, in fact, can you discuss why SAC should continue to increase when you are acquiring customers for lower-priced services which should be easier, and, also, your word of mouth is increasing. I would assume that despite having exhausted some lower-cost channels, your SAC at worst should have stabilized and possibly get lower because you are going after easier customers with a better service proposition, and I will have a follow-up. Safa, it's Reed here. Again, the SAC you want to think of as relative to total marketing spend. If in Q1, we reduced total marketing expense which we are not thinking of, but, for example, hypothetically only spent 30 or 40 million dollars, you would find this hugely efficient in fact. If we had enough gross margin that we are able to beat our earnings target or meet or beat our earnings conference and spend a huge number, let's call it $100 million in marketing, you would see us get the average SAC would climb. Either of those scenarios I think makes sense for the business, again, because we are at $40.65, so far below the total lifetime value. So think about it the more we invest in marketing we are pushing the market and what we are willing to do is push it hard as long as we meet our earnings target. Why are we in such a hurry? Why are we trying to push the market so hard? Because the prize that is out there is making video stores uneconomic triggering the tipping point and mass closures of video store. We are getting very close in the Bay Area where we are at 12% penetration. So we look at it and say, let's push it as hard as we can on 50% earnings growth and 50 to 60 million pretax this year because the prize of collapsing the video store infrastructure is very powerful because that is going to push us to very large penetration when we look at the total market. That is our strategic motivation and we are constrained on delivering on the earnings and we are not going to violate that. Okay, thanks, Reed. Well, can you talk about the impact of potential collapsing of the window as you mentioned with the test movie "Bubble." If there were more mainstream movies available on DVD at the same time, what kind of impact can you see on your rental business? Well, the best research I have seen on this of really documented consumer research, again, is that December 9 JP Morgan report which attempted to answer that question by looking at proclivities and, excuse me, their estimate was that the DVD sales market and the DVD rental market would both grow by over 50%. That it would be very significant growth and theatrical would fall by some large number, I don’t' recall. But, that it was significantly… Yeah, but my question is actually more on the rental side from your perspective, not from others. What do you think will happen to the rental market? I don't see any reason to doubt the research. It would certainly increase the size of the rental market. And we are seeing some of this today with shorter and shorter release windows. If you think about it as simultaneous like "Bubble" that is a highly aggressive case. I think, what we will see over the next three years is 60-day windows, 45-day windows, and you will see it continuing to creep up on the theatrical and that will continue to grow the DVD ecosystem, and again whether it's 25%, 50% or 75%, those are all hugely positive outcomes for Netflix. Safa, it's Barry. I just want to jump in on the SAC question that you posed to Reed and emphasize that SAC is entirely a managed outcome which was the point Reed made. It helps to think of the alternative. What if we managed the business for no growth, but managed it for cash and profit. We lost in churn about 570,000 customers this quarter even as we have record net subscriber growth, and if we spent the same money on a per subscriber basis, to replace those people so that we ran in place but we didn't grow, we would have had 33 million in pretax profit instead of the 9.1 we had. But, of course, we are choosing to grow the business as fast as we can within the constraints of our earnings guidance. So the point being SAC is entirely a managed outcome as a result our choice of growth rates and the level of profitability we are trying to dial in. Thanks. Two questions. One, I was hoping you could recap the gift card activity in the fourth quarter that you alluded to. And historically have you seen those subscribers who received gift cards convert to higher plans down the line? And the second question has to do with HD and the titles, and what you guy have found as far as durability from initial tests. Is one particular format more durable than the other? Thanks. I will do gift cards quickly. We had very strong growth in the fourth quarter on the cash flow statement, I think on the balance sheets you will see the change in deferred revenue account, and that's largely driven by the growth in gift subscriptions that was about 14 million in the quarter. And we see a large percentage of those redeemed over time. And durability. The data advantage of HD-DVD is that it is precisely the same physical process. It's just that the data pits are closer together. So we don't anticipate any effect with HD-DVD. In terms of Blue Ray, it is too early to tell. There are a number of number of factors in the format that haven't been nailed down yet, but we should know that within the next six months from the early samples we have seen, we are not anticipating any problem at all. Initially it looked like the laser is kind of what the issue with the disks are exactly the same format. Have you noticed any more sensitivity, the scratches, any other thing to require to buff the DVDs before shipping them? This is Hagit (ph) for Youssef, First to clarify Barry's comments regarding guidance in Q1. Are you baking any price cut into the numbers, because it seems like the uptick in revenues is a little smaller than the uptick in subscribers. Secondly, the shortening of the VOD release window, I wonder if you can quantify the percentage of rentals that happened in the first four to six weeks of a new release out of the total rentals to quantify the impact that could have on Netflix. And third, a question about SAC, with that evenly distributed throughout the quarter and more happen toward the end of quarter. Thank you. I will tackle the testing in the SAC and then I will turn the shortening of the window impact over to Reed. With respect to the testing, yes, there is a financial impact, and that has also been factored in that there was a financial impact in the fourth quarter and that has been factored into our guidance. With respect to SAC, the marketing spending, let me say subscriber acquisition has a large seasonal component to it, both in the fourth quarter and in the first quarter. Weight toward the holidays, and early in the first quarter as a result of the holidays, and so the spending tends to be up seasonally in response to subgrowth. Reed, do you want to do the…. I don't see any impact from the VOD window stuff. It is just too small to influence the DVD market as a whole. The DVD market, again, fox is forecasting a growth from 24 billion to over 30 billion by the end of the decade. The half of billion of revenue of movie of VOD, you know is just too small for growth in that to impact the total DVD market for at least the next couple of years. Good evening. Thanks for taking the call. Two questions. First, your churn, down nicely to 4% Reed, can you talk about what you think some of the contribution to that was, was it largely priced or can you measure other elements of customer satisfaction that have been driving that trend. And then secondly, can you talk a little bit about on HD-DVD, you know, any form of economic charge required for them. What are you anticipating in terms of managing budgets for carrying dual formats. Do you anticipate, you know, any short-term costs of handling that. Thanks. Sure. On the short-term cost on HD-DVD. We don't see any that will be the same content cost that we will be planning on spending. There is no impact in this year and probably for several years out, and we will see where HD pricing goes over time. In terms of churn, the drivers of it, one is, some of the pricing plans being better matched to a subscriber's usage pattern. If a subscriber is only going to watch two movies a month because that is their lifestyle, than the $9.95 plan is a better fit for their life than the $18 plan and they are more likely to stay and we see that as increased churn. The second is the continued work we do on a better web site and better delivery of the movies. That continues to drive our satisfaction ratings, and, again, you know, it is really quite extraordinary of all of American web retail companies to be rated number one in the nation by independent agency, the University of Michigan and research is really quite extraordinary and it is that focus on customer satisfaction that is continuing to drive the churn down. So, going back to your comments on matching the pricing plans to the usage patterns, is that something that your customer attention team can suggest, in other words, look at your past trends and then suggest to your customer, well, perhaps you would be more comfortable with this plan given your usage rates? It is something we definitely are testing as proactive outreach. Does that help or are there reasons? Some subscribers are very happy watching to paying $18, because they want the three choices at home. So, you know, it is an interesting idea if you right-size someone early. Do you keep them longer? Sometimes do, sometimes you don't, it is one of the hundred things that we test nearly every quarter in a very tightly controlled AV test, looking at how do we improve satisfaction, improve retention, and improve the margin. There is one-third contributing factor, of course, which is the aging of the subscriber base, and some investors who have watched the Company over a period of time have heard us tell you that churn falls over the first 12 months of the subscribers' life and then begin to plateau and we think that the long-term floor on churn is two and a half percent a month and as the subscriber base continues to age, as long as we continue to manage our business well for the long-term structural competitive advantage in the form of persistently lower and declining churn driven by a maturing subbase. Fantastic. Look forward to seeing the trend continue. And just one last follow-up on gross margin. Are, given that we are now baking in, that the postal rate increase. What should we expect the first quarter in terms of gross margin? We don't guide any more to give ourselves flexibility to manage those key metrics like SAC and churn and gross margin find the right mix. And if you look back on our churn over the last couple of years, you can see that most of the time in Q1, it is higher than in Q4, because slightly higher because of the surge in new members that comes in late Q4. So the long-term trend is exactly what Barry said. Some history that says Q1 is also higher than Q4. Yeah, hi, a couple of questions. We talked about accelerated growth in the San Francisco Bay Area, I was assuming the percentage growth and I was wondering if you can say a little more gross, net, year-over-year, sequential. Did you say anything else? Maybe I missed it. What I said it was an acceleration in net additions in Q4. So Q4 '05 net additions were higher than a year prior. So that's the acceleration. On a percentage basis, you definitely have large numbers, and you have smaller percentage growth. Great. That forecast you mentioned about Fox, I just want to make sure, I assume that they are not making a forecast or that forecast assumes that video on demand stays out of home video window, is that made some time ago before some of the recent announcement? We made last summer and I think it is inclusive of their thinking. The biggest variable in it is frankly high-definition DVD and how fast, you know that is the $10 billion market. Remember, VOD is talked about but only a 500 million market. The amazing thing is we have grown a single company now this year at 680 million of revenue to be larger than the entire U.S. VOD market. So just to give it a sense of scale and we are continuing to grow very rapidly. So I don't think there's any update, well, there is no update from fox that is other than the $30 billion by the end of the decade for the entire market. Okay. And if we do see some movement there for the studios, I guess, I would assume that pricing would have to be somewhat similar to, you know, a DVD. Is that sound correct to you? Or would I be missing something here if I would assume that there would be roughly equivalent, talking to the consumer. We will have to see what the formats are. The prices I have talked about are actually quite a bit higher than DVD, and again, I think what we are seeing at Fox is an innovative company. They're going to try a number of different things, as well as other companies to see what improves the overall economics of the movie business, and that is very promising for us because the DVD is such a big driver. No, we are running a number of tests, but we don't have any conclusive results. And the way we look at it, as Barry said have if it preserves our earnings and has faster growth, then that's positive. So we are not contemplating anything that potentially cuts earnings. Yeah, we've got a pretty wide range of experiments going on at different times and scales of them. So I don't want to get into commenting on each one. Let me jump in and follow up on something Reed said. I am sure people were struck to hear that our business was larger than the entire VOD industry, and so I want to define that for you precisely so there is no confusion. We are talking about cable industry, VOD, pay-per-view, VOD near VOD revenues as forecast by Kagan and Adams Media Research for year-end 2005 excluding adult film and TV only. Hi, Reed, can you talk a little bit about subscriber base. Any metric this year remember versus last year at a percent over a year old and maybe help us understand churn that way and maybe about the lifetime value assumptions we should be making that have important ramification force understanding your subscriber acquisition cost. Let me jump in on both. We don't actually disclose except from time to time when it suits us, of course, the percentage of the base that is older than a year. And I don't think we will provide an update on this call. With respect to the lifetime value analysis, I'll give you a framework for it. It requires a number of judgments. You are best equipped to decide how you want to handle those. If you didn't, if you run the math one divided by the churn rate, it generates N number of month time the ASP equals lifetime revenue an the question is what kind of gross margin you want to use and what SAC do you want to use and how do you want to treat all the other expenses in the business and you could use the current quarter's SAC, you could use the current quarter's gross margin and could you extract from the P&L other costs of G&A on a percent of revenue bases. Could you do that in the current quarter or make some assumptions about how some of those fixed costs are going to decline as a percent of revenue over time, and use some other percentage and calculate some different value. And you could look at the statement of cash flows and figure out what content, other depreciation is as a percent of revenue and you could add that back or adjust it and come up with a lifetime EBITDA number a proxy for free cash flow if you are going to get sophisticated about it. Yes, hi, thank you for taking my questions. A couple of questions. A lot of focus on video download. So I was wondering, Reed, if you can talk about your perspective in terms of video download comes really, if you can expect in competition like portal players like yahoo will basically try to compete in the music market and have technology capability and a lot of cash to compete on guy like Amazon and secondly in terms of the DVD download future, a lot of comments from AT&T and SBC in terms of how charging more money for the pipe and premium content and how that will impact the future of DVD download, thanks. Sure, two questions there. One is downloading additional competitors. You know the barriers to downloading aren't so much the competitors eBay, Yahoo!, Movielink and Apple. Because for now the competitors are the television stations or television channels or networks which have so much of the content locked up. Again, you know, the downloading site Movielink with the best selection has about 1/7 of the volume that Netflix has on DVD. And again, it's not their fault, because the rights have been sold to TV channels. So, until that issue gets worked out, we will not see much downloading because, again, the selection is weak. And the only way it gets worked out is when our peer companies such as Apple, Movielink collectively with Netflix are able to generate more revenue for the studios for downloading, than the current TV channels with the exclusive relationship. Then again the second factor is getting that Internet to the television, again, to repeat myself only 4% of our subscribers indicate that they watched the last DVD on computer. The 5% on the television. So we have got a long way to go before this come becomes a big market, because a long way before consumers get enough Internet to the television. So those are two of the major constraints. It doesn't mean it won't happen. It will happen, it is just going to be long and slow, and what we are doing in the meantime is building this giant DVD subscriber base to be positioned for it. Second, you asked a question about basically open access, which is a controversial issue now. You know, the FCC hasn't made any strong indication, are they going to legislature this particularly. I think you are seeing a lot of companies feeling each other out. To put the AT&T comments in context: they were not about the standard Internet, they were about their fiberoptics System (FiOS) to the home. So, but you will definitely see some battles around the Internet. Ultimately the consumer is going to decide, and if the consumer is buying high bandwidth broadband Internet from a company to be able to watch movies, then the deliverer of the Internet (network company) can't cut off access to the movies, because that's why the consumer bought it. I think the economics will work out very favorably, but it will be an interesting, contested area over the next five years. That does conclude our question-and-answer section. At this time, I would like to turn the call back over to you Mr. Hastings for any additional or closing comments. Thank you everybody for listening, and I look forward to speaking with you all over the quarter and see you on the next quarter's earnings call. Wall Street hires some smart cookies. But is it in their best interest to put the hard questions to management? Are YOU even their top priority? Motley Fool co-founder David Gardner is still bullish on Netflix. It’s up 253% since he recommended it to his Motley Fool Stock Advisor subscribers back in June 2003. Now, discover the ONE company David calls “The NEW American Super Brand” in a new stock research report.

EarningCall_234116

With us today we’ve got the entire management board of Infineon, that is our CEO, Wolfgang Ziebart, our CFO, Peter Fischl, and our board members responsible for Automotive, Industrial and Multimarkets, for Communications and for Memory Products, Peter Bauer, Hermann Eul and Kin Wah Loh. The conference call will follow the usual pattern. We have got some introductory remarks by Dr. Ziebart, and then we will open up the call for your questions and we will answer them. Having announced the first quarter key figures already last Friday, and with the full press release and detailed figures out this morning, I would like to take this opportunity to touch upon what we think were key points during the last quarter. After that I will open the call and we will answer your questions together with my colleagues from the Board. Last quarter was characterized by a positive development in our Logic segment on one hand, and by a difficult operating environment in our Memory Product segment on the other hand. All in all, the better-than-expected development in Logic could unfortunately not offset a significant deterioration of the EBIT in Memory Products, mainly due to the strong decrease in average selling prices, in particular in DDR2 memory. Overall, Group revenues were €1.67 billion, and this is a decrease of 3% sequentially. And this was primarily driven by the strong decrease in average selling prices of DDR2 memory, as mentioned. I am very pleased that revenues in the Automotive, Industrial and Multimarkets segments, as has in the Communications segment, increased sequentially and were ahead of average analyst expectations. Again, we are very pleased with the Logic segment, which together posted a positive EBIT, ahead of analysts’ consensus estimate for the first quarter. The Group EBIT loss primarily reflects an EBIT decrease in the Memory Product segment, as I will elaborate in a minute. Net loss in the first quarter was €183 million, compared to a net loss of €100 million in the prior quarter. The difference between EBIT and net loss has two primary reasons. First, we have unbalanced and net interest expense, mainly as interest payments on our convertible debt exceed interest income on our cash balances. Second, under U.S. GAAP accounting, we have to write down deferred tax assets in certain subsidiaries when we incur additional pre-tax losses. Coupled with tax payments in certain jurisdictions, without double taxation agreements, this then leads to a tax expense at Group level. I will now shortly comment on the segments’ performance during the first quarter. Starting with Automotive, Industrial and Multimarkets segment. Here the revenues were €652 million, which was an increase of 4% compared to the previous quarter. The main drivers were higher sales in the Automotive business, in particular in the Automotive power products, where Infineon is market leader, with a market share of roughly 16%. In addition, high seasonal sales in power management semiconductors and in ASIC and Design Solutions, contributed to the revenue increase. In the Security and Chip-card business, revenues decreased, as anticipated, mainly due to continued strong price decline. We could increase EBIT in this segment, however, to €51 million, mainly because of the good performance in the Automotive business and because of cost management measures. Despite continued price declines, we were able to reduce the EBIT loss in the security and chip card business due to a reduction in fixed costs, improved cost structure in the products and product mix. In the Communications segment, revenues increased slightly to €334 million, primarily due to a strengthening demand for radio frequency transceivers and broadband access solutions. We were able to lower the EBIT loss compared to the previous quarter to €21 million. On the one hand, this was due to impairment charges occurring in the previous quarter that did not recur in the first quarter. On the other hand, however, operating improvements, such as slightly higher sales and the further optimization of research and development expenditures, contributed to the performance. EBIT in the first quarter decreased to a loss of €118 million. In particular, the severe price decline for DDR2 memory affected our performance. Reacting to pricing, we have deliberately limited shipments, especially of DDR2 products. Also we have made focus in diversifying into specialty DRAM shipments relative to last year. We continue to have a relatively a high exposure to the DDR2 market within the industry. As you recall, DDR2 was the segment of the DRAM market experiencing the most severe price decline during the quarter. Overall, bit shipments declined relative to the last quarter. Cost per bit also therefore increased because of planned increase in R&D expenses for the opening of our product portfolio, and because of costs associated with the ramp-up of the production facility in Richmond. Despite all these difficulties, we have seen good progress during the quarter as well in the Memory business. The conversion to 90 nanometer DRAM technology on 300mm wafers, we have reached the revenue cross-over at the end of the first quarter as well. In our 300mm facility in Richmond, we are on schedule in ramping up volume production. As such, our manufacturing performance is on track. Finally, also in line with our plans, we have booked initial revenues from volume shipments of our 110 nanometer 1G TwinFlash product. Ladies and gentlemen, as you can see in our segment Communication and Security Chip-card business, we are on track with our production measures. An encouraging development is the combined profitability of the Logic segment. Now allow me to comment on the outlook for the second quarter of 2006 financial year. In our Automotive, Industrial and Multimarkets segment, we anticipate slightly increased revenues and a sequential decline in EBIT compared to the first quarter. Further detail, we see a seasonal decline in the industrial semiconductors, which will be offset by increases in the other segments. We expect EBIT to decline slightly before stabilization. First, the yearly price negotiations in the Automotive area usually becomes effective January 1, and cannot be offset by productivity gains within this quarter. Finally, the segment’s EBIT will continue to be impacted by planned expenses for the phase-out of production at the Munich-Perlach facility and by increasing start-up costs for the new production site in Kulim, Malaysia. Especially for the security and chip-card business, we will likely see revenue growth, as planned, in the current quarter. And we remain confident to reach break-even at the end of the 2006 calendar year. In the Communications segment, we expect revenues to decline compared to the first quarter due to seasonal weakness in the Wireless industry. As we have implemented improvements of cost structures in the prior quarters already, operating results are likely to be driven predominantly by the revenue development. We therefore expect the segment’s EBIT loss to increase in the second quarter. Especially with regards to our baseband and mobile telephone business, we reaffirm our objectives, however, to achieve profitable operations before the next quarters. Being already the market number one in RF transceivers, we continue to experience strong design momentum. In our Wireline business, we have continuously extended our customer base in VDSL2, ADSL2 and ADSL2+ during the last quarters and have reached designs with several major customers. All in all, in the second quarter of the ’06 financial year, we expect combined revenues in the two logic segments to remain broadly stable compared to the first quarter. However, we expect a decline in our Logic EBIT due to the details given before. In our Memory Product segment, we expect to increase our bit production by more than 20% based on additional capacities at our 300 millimeter production facility in Richmond and from silicon foundries. We expect our shipment growth to keep pace with the production, with positive effects also for our fully-loaded costs. So far in the current quarter we have seen an encouraging pricing environment for DDR2 products, and improved momentum in specialty DRAM. Regarding one-time charges on Group level, also we cannot be more specific at this time, we expect charges in the order of €20 million to €40 million. And please allow me one remark beyond the results I just outlined. I suspect some of you may be wondering about this anyhow. In the Memory Products group, DRAM pricing is outside of our control and shows significant volatility. However, factors within our control, such as the manufacturing performance, are in line with our plans. As such, despite the first quarter loss in the Memory Product group, our internal efforts to carve out this segment into a separate legal entity are progressing well and according to schedule. All statements made on November 17 and 18 last year regarding the rationale for the implementation of our new strategic set up remains valid. In closing, I want to point out one more time that we look into the future quite optimistically. We are well on track with our restructuring efforts in the loss-making business areas, and experienced strong growth in those areas where we are successful already and hold a strong market position. Good morning. Could you first of all give us some clarity on some of the key operating matrices for Memory in the last quarter? By how much did you grow production, I think you were planning for 13% q-over-q initially. And how much did shipments grow or decline by bit-terms? By how much as well your inventories varied in the quarter, in terms of inventory weeks for DRAM? And also, on the back of that, could you confirm or not whether fully-loaded costs did moderately decrease as you initially said in the quarter or rather, as we suspect, essentially were flat to up? Thank you. So, for your first question, the bit production. We have increased quarter-to-quarter sequentially by 8%, as compared to our guidance greater than 10% stated, mainly because in view of the dynamics of the DDR1 and DDR2 environment, we have consciously balanced the line, the manufacturing line, and therefore increased our cycle time, and looking for that during this activities. In terms of bit shipments, we do not normally disclose the bit shipments that we have done. But we have to say that quarter to quarter we have slightly decreased our bit shipments from our fourth quarter compared to the first quarter. As regards to the fully-loaded costs of this last quarter, we have a couple of effects which relate -- relation to our fully-loaded costs for last quarter because of the three effects there. One is that there is a depreciation of inventory due to the low price levels at the end of the last quarter, especially on DDR2, due to the erosion of price end of September -- end of December. Second, our manufacturing cost is higher due to the ramp-up costs of the front end in Richmond, ramp-up of our 300-millimeter factories in Richmond, as well as our back-end facilities in Suzhou. And, of course, last but not least, we have an increase in expenditure in our product R&D because of a product specification, of course, in relation to the lower bit shipments, which effectively increase our fully-loaded costs. Yes, the inventory level increases from a normal four to eight weeks to versus -- no, has increased to four to eight weeks versus our normal three to five weeks in our previous quarter. Okay. And have you actually passed a charge for inventories, I mean any write-down on the value terms? Is that what you are suggesting? It’s a small charge. Okay, great. And just as a follow-up on that, we’ve -- you having higher inventories, production going up in the current quarter, you are lucky enough to have part of your Korean competition we think not really increasing capacity in the quarter. Should we model shipment growth higher than the production growth you basically stated as you release inventories? And, if so, could we expect an improvement in fully-loaded costs as well in the current quarter please? I mean, by and large we have stated in the last quarter we will deliver bit shipments according to the dynamics of the market. But in what you say, is that yes, I can say that this coming quarter as our bit production is increasing and we have a very healthy inventory mix now there. We expect a higher bit shipment this quarter. And last very, very short clarification on your Wireless side. You mentioned in the press release that you have a new important win for your ultra-low-cost solution. Is this incremental to the slide you presented in November, where I think you had BenQ one OEM non top-six and one ODM as wins for the E-GOLDradio and ultra-low-cost solutions so far, or not? Hi. The first question starting from your Automotive, you have guided down effectively your margin in Automotive into your physical Q2 because you are guiding revenue slightly higher and saying EBIT is being hit by the new pricing structure, etc. How do you expect the margins in Automotive to behave from Q3 onwards? Can we come back to see the Q1 level of margin or is this going to be a new level of margin for you? No. No. Not a new level of margin. You have to understand that in AIM we have a couple of businesses, and Automotive being one part in there. The Automotive margins we see basically, we are recovering the price declines which typically come in a bulk at the beginning of the fiscal year and we are recovering through the fiscal year for AIM in total. I am expecting anyway, in this fiscal year, an up-tick in margin as compared to last fiscal year. So we will improve margin over the fiscal year as compared to last fiscal year. The reason for the decline, the slight decline in Q2, is multi-fold. As I said first, there is a bulk of the customer contracts -- new customer contracts become effective in the second quarter. Those contracts are from January 1. And there are some other effects as well, some seasonality in our consumer computing business with regard to power management and ADS, which is a lower seasonality, but also increased R&D, especially in power. So all in all, this comes into the second quarter. But again, Automotive margins, we will even digest the charges from Kulim and Perlach, which are pretty significant this year, and come up with a better margin. And moving on, can you give us what you expect the DDR2 percentage to be into your Q2? Do you have any plans at this point, whether reducing the percentage or keeping it flat or increasing it? And what exactly was the percentage in fiscal Q1? This is -- we are keeping the DDR1, DDR2 percentage flat for this quarter. And it is almost 50% at the moment. And the last question is on your Wireline side. You’ve said that there is seasonality affecting your Wireless shipments into Q2. What’s happening in Wireline in the Q2? Is that continuing to grow, or is that also being affected by seasonality? This is Hermann Eul speaking. In general, we do not detail these numbers to this level. But you can assume that the Wireline business is fairly stable and continues to be profitable. Yes, thank you. First question on the DRAM business. You mentioned that you expect the fully-loaded costs to move down in the March quarter. But just interested with the continuation of ramp-up costs for Richmond and continued push for product diversification, is there a chance you can get the fully-loaded costs back down to September levels? Or is that not going to be achievable until we get to the June quarter? Okay. Second one on DRAM. Can you give us a sense, right now, percentage of graphics and mobile RAM that you’re doing -- or cellular RAM you’re doing in the business and where you expect that to go over the next few quarters? Our specialty DRAM is approximately -- or slightly below 10%, and we expect it to go up to more than 10% in the coming quarter. And the final question on Communications, just with the commentary that you need to see revenue growth now to drive margins higher, I’m just interested if you could give us a sense of what the break-even rate in the Communications business is now. The last time you made money in the business I think the run rate was about 465 million per quarter. Do you need to get to that level? Or could you give us a sense of how much you’ve lowered the break-even rate with these cost cuts? Yes, well we have publicly stated that to return to a healthy profitability, a market share of 10% in the Baseband business is required. And currently I think we are around 5% to 6%. So I would say break-even is slightly above that. But at 10% we think that we have a healthy profitability. But you can’t put anything, for the entire division, including Wireline, can you put any range in terms of total revenue that would give you? Let’s put it this way, without becoming too specific, you mentioned 400 something. The break-even level in the meantime is clearly below 400 million. But I don’t want to specify further. Thank you. Good morning gentlemen. Just two top-level questions please. Could you just give us some more detail about your 70 nanometer manufacturing because I’ve seen some press statements that now the belief is that your lead is only three months now behind the market leader. Is there any chance of that lead being reduced further as you go forward? And the second question is again there’s been a lot of talk with regards to the launch of Windows Vista. Have you seen this being reflected in your customers’ specifications for average memory per box now compared to, say, three or six months ago? Thank you. So, the first question, the 70 nanometer, we are still on track and functional samples are available. As you have stated, we are three months behind -- we are three months behind our competitor. We say that yes, we are in this ballpark. And lastly, as regards to Microsoft Vista, we expect it to drive the mega bit per box this year. And it is due, according to the market research, I think this we expect to bring the DRAM per box in the future. Do you have any figure as to what the end of 2005 DRAM per box was on average? Obviously we can have forecasts for going forwards. Let me add something. To answer your question precisely, so far we have not seen a direct impact of Vista in the bit per box equipment. That would then probably go to 1 gigabit per box, and we haven’t seen that so far. What we have seen, and this, I think, is one of the reasons why the bit per box has been stable in the recent quarters is a growing demand in, I would say, in emerging countries who are lower equipped in PCs, which actually drive, or influence also the Vista box. Also we haven’t seen that much of the growth as we would have expected, especially in the forefront of the Vista operating system to come by the end of the year. Thank you. Last question. You’ve had a target long term of reaching, say, 20% of your Memory sales as specialty DRAM. Would you still say that’s feasible say by the end of fiscal ’06? We stick to the statement that we have greater than 10% going forward. And your 20%, of course, is finally our goal. A couple of questions. First on DRAM inventory. You are above your normal level by two to three weeks. Do you have a sense of how the overall industry inventory levels are? The reason I ask this is this is the week ahead of Chinese New Year and we have not seen much of an increase in contract price. And second question on that front is from the last few weeks we have seen a disconnect between contract and spot prices, with spot prices rising but contract not following through. Do you have any possible explanation why this is happening? First of all, for inventories, we have, as I say, consciously increased the prices. And I would say that in the first couple of weeks of January we got seen that the price of the DDR2 has stabilized and in some cases the spot prices have actually increased. So you can see that this is a good sign that we are coming back to normal. So we cannot comment on how the inventory status of our other friendly competitors. So I have no idea what they are doing. And last but not least, with response to the Chinese New Year, this I was not very clear about your question. My question is, usually the weeks before Chinese New Year we tend to see a little bit of an increase in pricing as well as in contracts, but we haven’t seen that in the last two to three weeks. And Chinese New Year starts this week, I understand. So my view is this symptomatic of a wider inventory issue in the DRAM segment as to why we’re not seeing any run up? No. I don’t think so. And the contract prices usually follow the spot prices with a certain delay. So the spot price only recovered recently. So we think that in the upcoming weeks then also the contract prices will follow the spot prices. Right. Can I ask a question on the mix of your 90 nanometer and 110. What is the mix of that in the shipments so far? And also 512 against 256, please, can you just give me that detail? At the end of September, we are about 10% of overall production. And coming -- going forward this quarter we expect close to 20%. On the DDR 512M at the moment, we are about -- the 512M we will increase to 65% average in this quarter. Yes. And that was wafer out, which usually has a delay of, say, two months or so between wafer in and out. Right. That’s helpful. And last question please. Flash, you talked about shipping out 1 gigabit products. Can you update us on your ramp plans for Flash, and at what point do we expect this to materially contribute to revenues? Actually, there is no intention to ramp up the Flash production now, in the upcoming months. We still are in the phase of technology development. We think that we are not yet fully competitive as the current 110 nanometer node. We will be fully competitive at the 70 nanometer node. And as we have said in the past already, we will skip the 90 nanometer node and directly move into the 70. And this will then happen by at the end of the year, beginning of next year. All right. And sorry, I know I said lastly, but one more question from me on the inventory, let me go back to the inventory. If I look at the 15% increase, how much of that was from non-DRAM sources? Is it possible for me to split that? Is it possible for you to give us an idea? No, no, no, we were talking about the entire increase in inventory correct. Okay, so we have and when you look at the balance sheet it’s about €150 million increase of which €50 million -- around €50 million comes from the consolidation of Altis. You have to keep in mind that we have extended the contract between us and IBM to 2009 and since we are the major beneficiary of this capacity according to the U.S. GAAP rules we have to, for the first time, consolidate those assets, so therefore the majority of this increase pertains to this consolidation. Hi, I’m sorry, it’s actually Jonathan Dutton from UBS. Just in line with your guidance that shipments could increase anywhere north of 20%, and that production costs could be well below the September levels, based on the pricing environment that you’re seeing, what’s the sort of outlook for DRAM profitability in the March quarter? I know it’s difficult to forecast these things but is there any chance that you might see the division returning to profitability? Okay, and a follow-up question, just on your CapEx plans for 2006. I wonder if you could just highlight what they are, and also what the ramp schedule is for your Richmond, Virginia fab in terms of 300millimeter wafer output? So the total -- the overall figure we anticipate for this fiscal year is around the level of depreciation which is €1.3 billion. As far as Richmond is concerned, Loh, you want to comment on that? Yes, our ramp-up schedule is that we are now at the level of -- give me a minute for this -- we are at the moment 10,000 wafers plus per month, and it’s according to our plans. Hello, I’ve got actually two or three questions. The first one is about the corporate cost guidance for Q2, if you could be more specific if you expect the losses to remain around €34 million. My second question regards headcount. Your headcount has increased quite significantly from 36.5 to 41. That’s more than 10%. Is this related to Altis and Richmond or is there something else? And also, if you could give a guidance for the tax element in Q2, because it looks quite big in Q1. Thank you. You might have to help me. On the corporate reconciliation, the first statement I’d like to make is that in the Q1 and also in the Q2 we will have additional costs because of the move here in our new campus, so there is of course for a few months an additional burden because the old contract for leasing the buildings still generates some cost to us. That is the major deviation compared to the previous months, so this was also the major contributor to the €35 million which you see in Q1. In Q2 you should expect that those continue to go up for Q2 before they come down then in Q3 and in Q4. So I would say that there will be a significant increase in Q2. The second question was why are we now above 40,000 people, and this is related to two -- mainly to two effects, isn’t it, Peter? Yes, one was the effect of consolidating Altis, so that is close to 2,000 people which we added, and the other one is a technicality in Asia which I think we have already alluded to last time where the temporary workers in our fab in Malaysia, those guys which we lease, so to speak, they have to be counted for legal reasons as full employees. These are the two special effects which we had to take into consideration. Yeah, let me elaborate a little bit on the tax situation because apparently we have a significant difference between the guidance and the – or the estimates, I should say, and the real developments. Let me explain this again. The key point is as soon as you project a loss for Infineon, you have to take into account that we have to make a valuation allowance on the tax carry-forward on the assets, so to speak. That really means that in Q1, for instance, on normal -- in a normalized situation, we would have had a tax receivable in the range of €60 million but at the same time, we had to make a loss of this valuation allowance on the tax assets which amounted to around €70 million and on top, we had to make an adjustment, also valuation allowance on tax strategies which were related to MP and now with the carve-out we had to make an adjustment here. So if you go forward and look at the tax estimates and calculations, in a loss situation, you should really anticipate that there is an additional charge which is in the range, I would say, for calculatory purposes, of 30% to 40%, and if we anticipate a profit situation, you should calculate a 35% tax rate. Hi, the first question was just for Peter Bauer. I just wondered how long you think the Kulim and Perlach costs are going to continue to impinge the AIM division profitability? And I wondered if, whether now or maybe in the future conference call you’d be able to give us some idea of what the total cost plan is, and what the spending plan is, just so we can some quantitative idea of how that’s going, just to get an idea of what the clean profitability of that division will be in years to come? Okay, to the first question, the transfer cost for the Perlach and the ramp-up costs in Kulim will remain for the full calendar year and so we said already it’s a high double digit number for the current fiscal year at the break of a three-digit number now, €70 million-€80 million I guess we already indicated. Secondly, you said the second question -- can you repeat, because I just… Yes, I just wondered if you’d be able to quantify how far into that €70 million-€80 million you’re spending during the current fiscal year? I mean, but by quarter, so how much of that has been spent so far in the December quarter and how we might model over the rest of the fiscal year? And if I may, I have another question for Mr. Loh on Memory. One of your competitors is currently roadshowing in the U.S. and has been talking publicly about manufacturing issues at Infineon with 90 nanometer. Just because that is a question that I suspect we’re going to get asked in the next few days from U.S. investors, is that something you’d be able to respond to right now? Yes, hi there. You talked about bit shipments, bit production in the current quarter. Could you give us an idea for the full fiscal ’06, what bit production growth is likely to be? And could you give us an idea about how much of that is coming from the ramp of Richmond and how much of that is coming from your external partners? First of all, the current quarter, our bit production increased to 20%, and then from the remaining of the year, we’re growing according to the market, and hence, we do not give details of how much of it is coming from our in-house, the ramp-up of Richmond and then from our external partners. How much do you think the market is – what is your market forecast for this year, then, for fiscal ’06? Okay, thanks and then just a question on the Comm business, when do you – once you’ve got this period of lower seasonal demand, when do you think we’re going to see some of these new design wins actually become visible on the top-line? Is that going to be a June quarter phenomenon or is it going to be a second half of the calendar ’06 year? This depends in part on the third calendar quarter and of course we expect growth than in the first quarter -- in the fourth quarter. Hi, good morning. Just a quick question in your Memory Products division, would you guys help us to model the level of EBIT losses attributable to your NAND Flash business through this year? For example, did NAND Flash cause more than single digit million EBIT losses in the December quarter? That would be very helpful. In power we are pretty much fully loaded. There are some technologies on the Advanced Logic side where there is still some headroom but pretty good load. No, that’s currently fully loaded too as we add the 130 nanometer technology there, which is currently loaded. And what is less loaded is the C10 so the 180 nanometer technology. Yes, hello, thanks. I have two questions, the first one again on wireless customer wins. You’re mentioning two major customer wins in the quarter. Is it -- would you consider major to be top six, or what does major mean? And is that in addition to your existing well known customer base, or is it one of those or maybe both? Additional, in general, we do not give you those details actually, but some of them are new and some of them are already existing, and all of them are out of the six, seven big players in the industry. Okay, and this one which is new, is it also new when compared to what you told us in November, so what is a December customer win? Okay. And the other question is on memories, it seems that the share of graphics DRAM, I think, remains stable or at least the specialty DRAM you mentioned was stable in the quarter. Why could you not increase the share of graphics DRAM as you had planned at the beginning of the quarter? What was the problem there? Yes, good morning. I’d like to ask you for some qualitative comments about logic demand in the March quarter. You mentioned seasonal inflexions for Automotive, Wireless and Industrial, up or down, depending on the segment. I’m wondering if in any of those segments you are seeing a deviation from typical seasonality, whether positive or negative? We’ve heard from some of your competitors that they expected better than seasonal sequential growth in Industrial or Wireless. I’m wondering if you’re seeing the same sort of thing? Yes, and I would tend to agree to that. The first quarter was very high. Typically we have a seasonality in Automotive, Industrial is that – at least in Automotive is that the first quarter, our first quarter fiscal, the fourth quarter calendar, is pretty low, and for the first time ever, actually, we saw an increase in revenues in that fourth quarter calendar, first quarter fiscal. So that was pretty unusual. Going forward, we also expect Automotive to be stable to up. With regard to the Industrial business we saw a nice Christmas business for consumer and computing, and we also got some bigger share in Asia. For those businesses sold to there we tend to see a strong market development during the year for this business, and also our business performing well. Again, our guidance on the Q2 is a cumulative effect of a number of factors, but not that I’m concerned about the market development right now. And lastly, you’re increasing R&D spending for Automotive this quarter. What is the driver for that? Are you expanding the portfolio or are you just handling more development work for existing customers? Well, it’s two-fold. On the one hand, our development pipeline is 100% full, actually, I would say 120% full, so we need to increase really on R&D resources for ASIC development, and that is product development related, and the second is technology development, as the road map moves ahead for smaller geometries, we’re also investing there. There are two major effects which we think is useful and because this is a profitable business in the double digit range, and I think it makes much sense to invest here. Actually, just one question left. I was wondering whether you could comment on the progress of your VDSL2 project with Siemens, ECI and Deutsche Telecom? Is there already now -- do we have a design win, and how is the ramp-up going to look like? So this is Hermann Eul speaking, so actually, we do not comment on customers in detail but I can confirm that we have already delivered first orders for the VDSL2 market for deployment. Yes, good morning, maybe first regarding a question regarding your Communications business. You mentioned just in the 6 quarters maybe to get where possibly to. You also mentioned you need 10% of market share which is based on you are around 5% to 6%, and you are expecting the design wins you already got in the last two quarters to really go in production and help you in the second half of the year. Therefore, maybe first question, do you need further design wins to come to the 10% or how much of the 10% is already secured by the design wins you’ve got up to date? And on the road, could it maybe be different in the next quarter because maybe your major customer has – for you maybe your own customer is under some pressure, especially in Germany? nd secondly, on the shipped card business, you mentioned in Q4 of the business here, you expect to reach the break-even and you already saw some improvement during last quarter. Would that be a permanent improvement, or was there maybe a big jump because of a new chip card design in the last quarter? So I start, this is Hermann Eul speaking. You referred to the seasonality of the revenues or the next quarter. Actually, from our history we know that fourth quarter in the calendar year has already occurred and it’s not one – it did not happen this time, but we for sure expect that the first quarter in the calendar year, the seasonality driven, will be weaker than the quarter before. Then you refer to the 10% of market share. In the meantime, we have secured very good inroads into new customers to that we see that we are on a good track towards our market share which we need. Regarding to this, sorry to disrupt you, does it mean you are already half the way between the 5% to 6% to the 10%, or something like this, secured by… Yes, I think it is up to you to make up your mind to which extent. Other customers can make it a percentage of market share, so I think the customer base is on a good path, and then we will see how successful these customers are and it’s a good customer base which we are designed in two, so we are fairly confident that we are on the right track here. Let me be a little bit more specific regarding your question, and on your question directly. Of course, we are very happy and every new customer is welcome, but to reach the target I mentioned, those customers we have gained, will lead us to that target. With regard to chip cards, your question to chip cards, it is Peter Bauer. There will be another jump. And the improvement is very much according to the guidance I gave last quarter. I said last quarter we probably see the bottom reached of this in Q1 and have a turn in Q2 for break-even in the fourth calendar quarter. That was the guidance we gave, and I very much would like to stick to that because we are in -- absolutely in plan with our restructuring measures, and so far it did not have adverse surprises any more in the market, even though visibility is low. And this is a -- the reason for that is a multitude of improvements we are currently driving. We have lower front-end costs. We have less inventory write-offs. We have much reduced on the R&D expenses. We have a better mix in product as we won some ID businesses and payment businesses versus the lower margin Communication and SIM business. We have increases in our TPM business and finally, we have a better costs structure because of the introduction of smaller Flash cell and the FCOS modules. So it’s a multitude of programs we are running there, and even though visibility again is low in this market, at the moment we act a little bit irrationally from a pricing side. I can stick to the guidance. Yes, hopefully so. If we don’t get any adverse surprises from the pricing side, which I’m not seeing right now, it would be a steady development, I would think. Yes. Thanks for that. Just a follow-up on the Flash part. We’ve been hearing from you for I think, well over two years now that we are not yet ramping yet but we are continuing. The question I have is, what are we waiting for? You’re saying you’re losing a double digit Euro loss every quarter, so you’re running at €40 million or €50 million of loss every quarter. It’s been going on for years right now. What is your level of confidence that within a year or so you can get to an acceptable level of -- competitive level of technology and can move this into more sort of aggressive production and profitability? And the second very small question, there’s a €20 million-€40 million charge. Can you tell us where it is coming from? Is that Perlach, and will that go into Comms, effectively, in Q2? Yes, well, I’ll answer the first question about Flash. First, the level of losses you were mentioning is much lower. We have much less of a loss per quarter. I have indicated a low double digit and this is not what you mentioned €40 million or so. Second, we are absolutely in plan regarding our technology development in the Flash business. There has been no deviation. There has been no disappointment, nothing. We even have increased the speed and the recent 110 nanometer conversion, for instance, took place ahead of time and the upcoming events in 70 nanometer also are absolutely in line with our plans, so there is no deviation so far from the original plan, neither in timing nor in cost. Second, then, is the one-time charges of €20 million-€40 million and Peter Fischl wants to comment on that. Yes, first of all, this is not related to Perlach because those costs which we incur with the Perlach transition to the other sides are subject to the cost of sales of the business segment. So this is not included then in special charges, for instance, for restructuring. So there are two items that I’d like to name without being too specific. One is some restructuring in some areas, and also some legal costs, so we just give you a range because we know we will incur some costs without being able, at this point in time, to really specify this, so just for your projections we thought that this is the appropriate indication. That, I think, brings us to the end of the conference call. Thanks to all participants for your attention and for your questions. If there are any questions that have remained unanswered, please do not hesitate to contact the Investor Relations team of Infineon, both in Munich and in San Jose. Thanks again for your attention and we’ll speak to you again next quarter. Bye-bye.

EarningCall_234117

Good evening ladies and gentlemen. I am Prathiba the moderator for this conference. Welcome to the Satyam Conference Call. For the duration of the presentation, all participants’ lines will be in the listen-only mode. After the presentation, the question-answer session will be conducted for participants connected to the India Bridge followed by a question answer session for participants connected to the International Bridge. I would now like to hand over the call to the Satyam management. Thank you, and over to Satyam. Thank you, Prarthiba. Good morning and, good evening to you all and thank you for joining us to discuss out third quarter results. Joining me on this call, are Raju and Ram from Satyam, and Venkatesh from Nipuna. Before we start the discussion; I would like to draw your attention to the fact that during this call, we will make certain forward-looking statements containing our future growth prospects, such statements involve a number of risks and certainties associated with our business. Please refer to our various periodic filings with SEC for a description of such risks. The company does not undertake to update the forward-looking statement that will be made from time-to-time by or on behalf of the company. I now hand over the session to Raju. Thank you, Srinivas. Hello everybody. Thank you for joining us on the call today. I am pleased to report that our performance in Q3 exceeded the guidance. As per Indian GAAP Consolidated Financials the company reported a revenue of Rs. 1265.3 crore, a sequential growth of 9.6%. A noteworthy feature of Q3 performance was the 13.2% sequential increase in earnings, as per, per share on the back of expansion in operating margins for the second successive quarter. As per US GAAP, the company recorded a revenue of US$281.8 million, and an earnings per ADS representing a sequential growth of 5.2% and 9.7% respectively. Q3 witnessed 35 customer editions the highest ever in a quarter. These include 6 fortune global and US 500 companies. The growth in relatively younger verticals was very heartening in Q3 and is indicative of our expanding footprints in these areas. Our strategy to broad-base the growth has resulted in increased number of customers with annual run rate of more than $1 million, $5 million and $10 million. As regards the macro environment there is continued confidence shown by customers in entrusting us with more opportunities to enhance business value. This is leading to increasing instances of consulting led engagement, that demand greater level of accountability and ownership for delivering business solutions. Customers are increasingly looking for globally diverse site and integrated solutions which are creating opportunities for us to partner with them across multiple geographies. Our European and Asia-Pacific business is benefiting from this trend in addition to increasing penetration in the core market. Another key aspect of offshoring trend has been the increasing acceptance of Indian vendors in large multi-million dollar and multi-year contracts. Such deals require significant investments in terms of resources and the main competence. Satyam has increasingly competing in a number of such deals and is well positioned to capitalize on this trend. We are revising our annual guidance of course in light of continued positive momentum, and better than expected performance for the first 3 quarters of the current fiscal. We now expect revenue as per consolidating Indian GAAP financials to be between Rs. 4780 crore and Rs. 4786 crore, implying an annual growth rate of 35.7% to 35.9%. Earnings per share for fiscal 2006 is expected to be between Rs. 30.31 and Rs. 30.36 implying a growth rate of 35.3% to 35.6%. Nipuna our 100% subsidiary reported revenue of Rs. 22.1 crore a sequential growth rate of 21.2%. The revenue guidance for the full year continues to be at US$18 million. Inline with Satyam stated objective to emerge as pure play IT Services and Solutions Company and to unlock the value of our investment, we diverted our demanding stake in Sify for a consideration of $63 million in Q3. Our investment in Sify has generated significant value for our shareholders in Sify inception. The initial investment in Sify multiplied 23 times over a period of 10 years, I would like to place on the card our appreciation for the contribution of Sify’s management in building a world-class organization in ISD space. Thank you, Raju. Our detailed financials have been posted on the website, and I assume that most of you would have got an opportunity to go through the same. However, I will share some highlights of our Q3 performance. The highlight of the quarter has Raju as mentioned is a 15% sequential growth in EPS, to Rs. 8.36, under consolidated Indian GAAP basis. This was driven by a sequential revenue growth of 9.55%, and the 93 basis point improvements in margins on a consolidated basis. We expect margin improvement to happen in Q4, and on a year-on-year basis, we stick to our earlier guidance of decline in margin, consolidated margin of less than 50 basis points. The parent company saw a 6.5%growth in volume while the building rates increased marginally compared to previous quarter. Next manpower edition for the parent company was 950 including 690 freshers. We effect the net manpower edition for the year to be between 5,500 to 6,000. Parent’s company’s cash and bank balances increased by US$33 million during the quarter, this includes $US 16 million, net of tax and fields on sale of our entire stake in Sify, and an outflow of 13 million towards CapEx. We estimate that the CapEx for FY’06 would be around 50 to 55 million. Nipuna expected to achieve revenues of US$18 million in FY’06 and they’re expected to cash breakeven in Q4. Turning to US GAAP, for Q3, revenue under US GAAP towards the US$281.84 million a sequential increase of 5.23%, basic earnings per ADS for the quarter was 36% almost to our guidance of $0.34. Thank you, and I now throw open the session for Q&A. Thank you, very much sir. We will now begin the Q&A interactive session for participants connected to WebEx India. The participants who wish to ask question, may please press “* 1” on your touchtone enabled telephone keypad. On pressing the “* 1”, participants will get a chance to present their question on the first in line basis. Participants are requested to kindly use only handset while asking a question. To ask a question please press “* 1” now. Yeah, I wanted to understand a bit of a business side on Nipuna. We had a net reduction in people this quarter, but even last quarter the addition was just 61 people. And we have a quite bit of processes 54 last quarter, 64 this quarter, but the precise number of people seems to be reasonably low. So what exactly is happening here, is the ramp up according to our plans or is that not moving as fast as we head on debut? Let me offer some broad comments and after that I would request Venkatesh my colleague CEO of Nipuna to respond to your question. We have done, by any standard fairly well, last year we grew by about 50% and this year we are growing at something like 75% to 80%. While that is the case, we have at the beginning of the year come to believe that the growth has to be more balanced and therefore we have been working on a model, where we are keeping the number of associates with the company lined with expected growth and the deals that we are able to have a better visibility on. And on account of that we have started improving in bottom-line terms. This quarter we will be cash breaking even. And we expect that things would turn quite positive for a bottom-line perspective next year. And this is being done while not taking our eye of this opportunity ahead of us, would you like to… Yeah, the only point that I would like to add is that in arriving of this balanced profile between voice and non-voice in the business, we’ve also been increased performance in productivity there by reducing the dependency on numbers rather than, rather focusing on actually delivery and productivity. So that’s the only point, I would add to that. So, last quarter to this quarter did the more procedures went-up by about 13, from 54 to 67 at the same time number of people came down by 34. So, what exactly happened meaning some large process went out, because… No, no, no, if you look at the detail of this 7, we added about 400 associates and lost about 436 associates during the course of the quarter. At the same time we’ve added about, 10 to 12, 10 to 13 processes during the quarter. So the bottom-line of that, these, the product mix in terms of our offering to shifting, if you look at added numbers typically from the voice side. So, in-taking on processes which are on the non-voice transaction processing side, our dependency to increase numbers by, in a large numbers is going down. So the client profile is going through a shift in terms of focus shifting towards transaction processing and bringing about the balance between voice and non-voice businesses. Yeah, our classic example -- well our classic example is the -- we recently set a footprint on the animation space, which in competitive terms do most of the other business in the traditional BPO space has a requirement relatively far lesser number of people, and generating far higher revenues for us. Okay, secondly this is question for Mr. Srinivas. So CapEx still lag that of some of our peers. These guys are bigger, maybe some of them are more than twice your size, but at the same time, the spend $250 million, $300 million per annum, our standalone balance is still shows CapEx of around 50 crores per quarter, which seems low because such as some of the other companies went 250 to 300 crores a quarter. Why is this difference? Yeah this is, Mahesh as I rightly also alluded in terms of the directly dependent on the relative sizes, as the number of people we are adding and number of people some of our competition adding maybe different, because we allotted altogether a different base. So, what I would like to mention is we are basically investing in the infrastructure as for our manpower plan and whatever you are seeing roughly around $40 million is what we have spend in the first 3 quarters. And we are saying for that entire year we will be spending up to 55 million. This is basically to create facilities for the 5,500 to 6000 odd people we are going to add. We are, just to add to what Vinod has stated, this is Raju here. We have taken an approach that we should not make investment in infrastructure beyond what is necessary and what we mean by this is that we have in different cities taken our own premises and then taken an approach of keeping the shelve ready and then we have prepared solutions for quick readiness of the places, and therefore, once you have the structure in place it takes no more than 3 to 4 months for you to attend to any unanticipated requirements, and we believe that the planning that we have done is in tune with not only growth but also some unanticipated spot in business. Also we are not compromising on the business unspoken and at the same time keeping our costs which are either direct or indirect on the check. So, I do very, well I appreciate the fact, what I was just alluding to was lets take a case of Infosys, we should, perhaps this year, would do about 2.1 times revenue of Satyam, 2.1, 2.2 times. But it is spending about 4 times, full 4.5 times the money on CapEx. So that bigger difference, I was just talking of it from a relative perspective. Yeah, yeah I would like to said that we may not want to comment in terms of what our, other companies maybe choosing to do, each company has its own strategy. We believe that adopting a strategy of being ready to take opportunities in the marketplace and keeping CapEx and other cost as low as possible is not a bad strategy to have and we have found what we are doing to work really well. Thank you very much sir. Participants are requested to kindly restrict to one question in the initial round of Q&A session. Yeah, sure. Just wanted to understand sir, what has happened on the margin side, our margins have improved on a consolidated basis, only 93 basis points. Though, the rupee depreciation of 3.7% and then there was onside offshore mix exchange also and utilization also improved marginally should have led to a better margin expansion. Could you please explain that, and as employee cost has really shot up quite well in this quarter about 48% in the rupee terms, so what has actually happened, though our work force addition is only about 4.4% on an incremental basis. Yeah, Pramod on the margin front, as you rightly mentioned we have seen, alone improvement in various parameters, the noting factor has gone up and the offshore mix has gone up. And also the 300 saving has happened, and there will be depreciation, has also helped. This all, all these things really when we are helpless to invest into our business and net-net we have posted around 93 basis points improvement in the margin and also we are saying that Q4 we are going to achieve a quarter-on-quarter improvement in the margins and for the year also, in the margin situation, we are giving it at what we’ve said at Q3 level, there is a 150 basis points. This is, all this after absorbing the 3%, within a 3 session we have seen from the quarter end to till date, to the date of guidance, the rupee already appreciated by 3%. So that means so we will be moving roughly around 80 to 90 basis points. So we are kind of -- some of the improvement we have seen in the current quarter are going to help us, and overall I think year-on-year basis we will be achieving our stated objective. Sure, but what will happen in the next quarters, because next quarter rupee may actually reverse some of its gains and also your employee addition will lead to utilization fall, and so how will, we still be able to maintain margin, what will be the driver of maintaining margin or improving it? So, that is was what I was mentioning, already our guidance is at 44.20, so to that extent, we have already absorbed a 3% rupee appreciation and the consequent impact on our margins, after that we are giving this guidance that our margins will quarter-on-quarter improve, and also the yearly numbers will remain intact. Yeah, the improvement whatever we have seen in the current quarter, the emphasis on, for example the learning factor improvement, the offshore missed the levers, all the levers that came to our rescue in Q3, will definitely are available to us in Q4 as well, while we will not be able to talk specifically about our strategies. But definitely I think we are on track of delivering whatever we are saying. Yes, hi thanks. I wanted to understand from Ram, the situation on the top 10 customers. On the one hand we’ve had a pretty strong expansion from the top customer. And at the same time we have had decline obviously in some of the top 10 customers. So just wanted to understand, what happens in turn and, implication from, these customers going forward? Yes Mitali, this is Ram, one of things that we have been pointing out yearly as for as business trends are concern is a much broader base of customers that we can count on, that will give us a revenue, as we have explained in the earlier statement Srinivas made, there is a significant improvement in the customers that are 1 million customer, 5 million customer and 10 million customer. Not only that the 10th largest customer revenue has gone up quite substantially in the past few quarters. So much so that there is a subsequent improvement in the customers that, are part of the top 10 from today. Now there is an expected churn as far as top 10 customers pool is concerned. Our customers has been falling and out of the top 10. So, we’ve coupled with the fact that the amount of revenue that is required to be qualified for being in the top 10 has gone up. You would expect that, the contribution from top 10 will go down, but there will be a broader distribution of revenue that would account for the growth in business. But to me the fact that the contribution of top 10 to the overall revenue has come down is a very positive sign, as long as we continue to grow the business. So in that sense I would request you to view that positive then that’s the way we are doing it. As far as the top customer is concerned, while there is a marginal increase quarter-on-quarter, that is in my opinion well within the business plan we have for that account. And we’ve continued to view that relationship very strategically to us. And these kinds of variations quarter-on-quarter are expected. So overall the outlook hasn’t changed as far as our expectations from this customer is concerned. So Ram, if I understood correctly, there has been some amount of, decline in some of the top 10 customers, I understand your point on the broader base. But just so that we understand are there any trends that we should understand in these large customers, in terms of spending going ahead? First of all, just to clarify what we are saying is there is a decline in growth percentage. It’s not an absolute terms some of these cases I think the…. As we differentiate that, in that sense as long as the customers continue to grow, it depends on a number of parameters, some projects coming to an end technology -- new technology is being identified for, future value creation. It’s very difficult to project the trend across a fairly diverse set of customers. So far we have not been able to identify any specific trend that would be alarming to us, as long as, there is a broader distribution of revenue across customers, and this applies not only to the top 10 customers, but perhaps applies to market segments as well, as we are quite comfortable with the numbers that we are seeing. We have done some analysis obviously we can’t discuss customer-by-customer on track, while that is the case, suffice to say, that in none of the top 10 customer incentive in absolute term on an yearly basis we have seen any decline. And in that sense it’s very positive. Right and just one more question on, I just wanted to get an update on the enterprise solutions area, what are trends you are seeing there in terms of demand as well as pricing? Yeah, Mitali this is Ram. Again this quarter we have seen the enterprise business solutions marginally, grow faster than the rest of the business I think that was significant than the previous quarters. This quarter it hasn’t being that significant. And nevertheless there is growth. What we are seeing is more a qualitative observation as far as the enterprise business solutions are concerned. There is a shift toward our consulting led opportunity, that are creating downstream volume of our enterprise business solutions. That seems to be on the rise, I think it talks about two things, number one our enhanced abilities in the consulting space, the fact that we are able to subsequently leverage our consulting capability and subsequently that we have in enterprise business solutions, towards significant value creation. So beyond product specific implementation, beyond integration of products, we are increasingly -- being of to engage, in identifying opportunities for value creation in a constructive way and take ownership and accountability for delivering that value. That is probably the qualitative difference that we are seeing. Thank you and good evening everyone wish you all a very happy New Year. My question was on the enterprise business solution side of Satyam, has obviously done extremely well, and the company build a very strong brand equity out there. But from a longer term perspective, are you a bit concerned about the business concentration from the segment is almost like 40% of your revenue now. And in the past few years we have seen some sort of periods of downturn for enterprise business solutions as a whole globally, is quite likely that that period of downturn may come going forward, as well as does that give you any cause of concern? Anantha this is Ram. I think we need to put things in perspective as far as enterprise business solutions for our business is concerned. To us it is not the same as product specific services. We look at enterprise business solutions as significantly different and beyond product specific implementation. To that end they’ve not directly proportion to license sales, or direct product sales. We also think that there are couples of other trends that are noteworthy in the market. One, the capabilities delivered by a package vendor or an enterprise business solutions vendor that capability is being enhanced quite substantially. Today many of the off-the-shelf products would cater to a large portion of business needs of our enterprise. To that end, the likelihood of customers adopting existing packages or existing solutions whether it is in the form of one package or integrated solution. That probability is higher today in the market. So to that end, to the extent that those vendors continue to invest in expanding the areas we have gave solutions are relevant, I don’t see that as a major concern as far as a downturn is concerned. Second, enterprise business solution space in our experience has a value chain its own, it is not that is all defined ahead of time, there are opportunities for consulting engagements, there are opportunities for you to be innovative and creative and defining what solutions would address the needs of the customers much more effectively, putting together capabilities of various products and services. So it depends on what clients do you get engage in the value chain of enterprise business solution, that also defines the limit to which you can engage. So, while there is some influence related to whole product vendors are doing to the extent that you are operating at a business solution that will, we believe that that market to continue to be attractive. Thanks and just finally one small data point from Srinivas, can you give us a cash loss of Nipuna in this quarter? Okay, here my only question was, you are roughly adding about, $0.5 million to $1 million of revenue each quarter for Nipuna, so how would we able to cash breakeven in the next quarter? This is on the back of improvement in the top-line we are looking at for the next quarter. That’s should basically help us in retaining the cash ability on detritions (ph). Hi, congratulations on the numbers. Just want to get a clarification on the Forex part. If you can run us through how has been the Forex performance, you see at the gain 2.6 crores that you have mentioned. Could you run me through break up of that please? And b, if you can give me some sense in the Forex policy going forward, in terms of how you are looking at being the Forex, forward covers and options and what is the average pricing for that? Sure, sure. On the first question on the forward contracts we incurred a loss -- looks around 19 crores or so, and on the foreign currency effects the translation we gained around 22 crores, and net-net we got a gain of around 2.6 crores in this quarter. And on the policy at this point in time we have total forward contracts of around $270 million at an average rate of around rupees 44.5 approximately. Out of this roughly 50% are in option and 50% are in forward. Our going forward strategy is to basically move towards options because as you know option gives us a two way hedge, while it caps are upside and also it will also cap our downside. So to that extent we think options provide us a very efficient hedging policy that is what we are going to do. Okay and just one further question on the pricing front. We have been looking at a flat pricing for the past quite a few quarters, what is the view going forward, and what you think will be drivers for any kind of a pricing improvement? Yeah, Pankaj this is Ram. What we have witnessed in the market is that, in many extend, new customers coming in and partnering with us at present we are coming in at higher than average rates. And we have also noticed in the last few quarters that increasing incentives rate we are able to successfully renegotiate the existing customer, the existing contracts for higher prices. While that is the case, the volumes have to catch up in order to positively influence the average price. I would expect that to happen, but our outlook at this point is that pricing would largely remain at current levels and stable for Q4. Thank you, very much sir. Coming up next is a question from Mr. Hitesh Trivedi with Edelweiss Securities. Please go ahead sir. Yeah hi, my question is with regard to the offshore proportion of revenues for last about 7 quarters odd consistently be proportion has gone up. So my question is how do you see it going forward next to the three quarters what is the sense you have about, about this statistics? Thanks. We, Mahesh we will not be able to say any specific numbers here, but it is our -- pronounced the strategy to increase offshore component. As I rightly pointed out you are saying quarter-on-quarter improvement there. Going to be our focus area continues to be our focus area going forward. We can, we maybe able to see some improvement there, other than that we will not be able to give you any specific numbers. Sure, I’m not looking for numbers I just wanted to sense from you that if you look at your top 50 to 60 counts and, kind of work that you think you will be doing for them over the next 2 to 3 quarters, with that at the extent on offshore you think should be continuing? Yes, Mahesh definitely I mean the emphasis moving the work offshore was not just talk we see overall that is one of the things we give telling over business leaders, that definitely is one of the very important initiatives we are focusing on as an organization. Ram if you could offer some comment about, the client that you have added in the year-to-date in the past three quarters, if you could give some flavor as to what verticals have coming from and whether you think some of them will be converting into world larger relations for you going forward? Thanks. Yeah, Hitesh, in general most of the verticals that we are engaged, it is an extent the service offerings that we provide to the verticals, whether they are addressing the specific business needs for those verticals or not. Our perspective the endeavourer to manage every relationship in a passion of maximizing opportunities from that relationship we’ve independent of the vertical. But having said all that, many of the existing verticals that has been matured of across two years like financial services actually, the relationships are already at a fairly matured level, as for the opportunities will continue to come from the investments that we have made in the relations. For the emerging verticals like, healthcare, like retail and travel and transportations, as long as the customer add from these verticals continue to at the safest which it is, there would be greater opportunities for us to convert some of these into partnerships. Thank you very much sir. At this moment I’d like to handover the slot over to conduct the Q&A session for participants at WebEx International Bridge, thank you and over to April. Thank you very much. We will now begin the Q&A interactive session for participants connected to the WebEx International Bridge. Participants who wish to ask question please press “*”, “1” on touchtone enabled telephone keypad. On pressing “*”, “1” participants will get a chance to proceed their question in a first inline basis. But this is order by to please limit their questions to only one during the initial Q&A session. Also all participants are requested to use handset while asking a question. To ask a question please press “*”, “1” now. Thank you congratulations on a good quarter. I just had one main question which is, your competition stock about potentially having to lower utilization to be able to service large deal opportunities. Now your utilization obviously is significantly higher than some of your peers which maybe a function of your pyramid. If you could just comment on that as you look forward, how you see utilization shaping out, of your offshore onsite business segments? Thanks. As an organization we are giving increasingly more important to take advantage of our entry level recruit and train them well. So that we can keep our cost under control and at the same time deliver a higher level of value to the customer. Therefore, going forward while we will continue to give important to high utilization rate, we would be also preparing the organization of our higher level growth erasing out of larger deal. We, therefore to comeback to your question, we will continue to give importance to managing the utilization of existing resource as well. And at the same time seek creative solution of offer playing with the mix of our resources that we would come to have. So, let said what is the impact on margins as you look out over the next maybe 12, 24 months as you make this change? We have unfortunately we are not in a position to give the guidance for the next year. These are the things that have been factored into the current quarter’s guidance and next year we are quite confident that we will be able to share our, scale which would be arising out strategies converted into basic numbers. Finally could you just comment on the hiring, I mean I didn’t hear an update on the guidance for this year, is it still 5,000 to 55,000 gross hiring fiscal 2006? As we are enhancing the guidance in Satyam parent, Satyam animation, we have given an enhanced guidance in terms of people at a net level to increase for the years to 5,500 to 6,000. About 500 people we have added to the guidance and, and that would place us at fairly high level in terms of any quarter addition. Okay, and if I could just get clarity on the forex benefit below the line on the US GAAP statements from Srinivas, that would be helpful. Thank you, and again good quarter. The product, can you, to other income line below margins and upon US GAAP statements, can you quantify the quarter sale? Four point yeah, that is what I was explaining earlier under Indian GAAP, that is primarily the foreign currency, as such the translation gain roughly 4.68 million and we had a loss of 4.27, it is basically because of our forward contract, net, net we have a gain. I wanted to ask a specific question about the growth in the enterprise business solutions unit. Your growth in that unit has been out performing in recent history. But in the December quarter it grew in line with the rest of the business. And I just wanted to enquire as to whether there was any, sort of timing issues in the quarter that might have affected the growth in that unit; whether there was seasonality there or, large client having it to grow slow down. We really want to get engaged and whether is any slow down at all occurring in the year key related work that you are currently doing. Yeah Brad this is Ram. Enterprise business solution business has grown in this quarter as well but broadly in line with the rest of the business, what we have seen as for a macro trends and the impressions that we gather from our clients are concerned. Point 2 the business trend continue to be robust and we look forward to grow that margin resembled the growth that we have experienced earlier. There are obviously some things happened in any quarter, some tend to be market specific, some tend to be vertical specific but there is nothing but, but we have witnessed in this quarter that we can establish into a trend that will influence that number. Overall we continue to remain positive in that market. Ram, would you agree that the offshore year key market segment is one of the stronger market segments in the industry? It appears that, that’s been true in recent history and we’ve certainly had the view that’s continuing. Okay, and where there any specific timing issues or seasonality or, slow down issues with top clients that would have affected, revenue growth in general in the quarter that we should, we should, that are, material and no worthy that we should understand. As I said Brad there are probably nothing that, that I would look at it an alarming, there are always going to some situations like, time shutdowns in case of their manufacturing industry or, some purchase are just needing to be, differed to next quarter because at the year end issues, that are something slightly better, but those are not major issues that would impact future growth prevention in the market. So, I would, we were not particularly concerned. And I was eager rush; rush getting at something that would be a alarming is that your, your sequential growth for December was, just about 5%, that your guidance for next quarter is, is fairly strong and so I just wondering if there was anything like it was causing, December growth to be, potentially materially low, materially lower than what you are going to see in March. Again there are something’s that we have factored in obviously when we came up with guidance of the March quarter and that has something to do with what happened in the December quarter as well what do we see happening likely in March quarter. I am not sure that there will be any thing more that we would like to add. Hi guys. I just wanted to, to talk a little bit more about the, the margin improvements and just get some clarification from Srinivas. The, the expectation going into the fourth quarter, it sounds like it is for continued improvements in operating margins and I believe that you are, that you are comfortable with that but I guess it was trying to a little bit of better hand along this. What exactly you can leverage that where you, where you still have some luminous, you look at what has, has helped you had a little last three quarters. How much more room is there for continued margin improvement into the March quarter within the certain normal leverage that we would expect here to see on, helping your margins around. Well Julio, Srinivas here in addition to various deliver sites talking about that it is improving the learning factor and of sure on site makes and fixed bid project demands, down based things in addition to, out of this we have mention a little bit ago, one more liver which is available to us is the performance of our subsidiaries. As all of you would observe this quarter the subsidiaries performance and they are less than anticipated level. That’s one way for how we bank our margins in Q3. That as it, when it comes to Q4 they are also expecting the margins to improve there from the subsidiaries, that also is another liver in addition to what all I mentioned earlier. No, I don’t think it is 100 basis points. For us to achieve the target of, the less than 50 basis points decline this is what has been our target from the beginning and that is what we told all of you last quarter as well. For us to get to that target whatever improvement that were required in Q4 I think we’re quite comfortable at that. I don’t think that it requires 100 basis point improvements from the current level. So… And I understand, but I am just saying in the current quarter I added up all of the profits and losses that you reported to all of your JVs and, and subsidiaries and I am looking at about a total loss of roughly $2.69 million which is about 0.955% or about 1% point of drag in the current quarter. Is that correct? Absolutely, you are right. But whether entire -- the drag whether recover in one quarter, 35%. That is what I am saying; I need not have to recover that in, in one quarter. What I require to do is my objective. Is that much less down thing, but to that extent the point I am trying to drive home is that well that is comfortable with the, with guidance we are talking. Okay great. And then on, just to reiterate and then trying to just connect a couple of things here. When we look at the performance of manufacturing and banking and then obviously when you look at the performance of the top 5, top 10 just you cant come back to your point, is there some connection, kind of coming back to the previous question with regards to seasonal spending patterns here, lost contracts or anything along those lines that would be cause for concern as you go forward. I’d like to just offer one comment, our last quarter had about 3% less number of working hours as compared to a quarter before that, not that, that commenting the past in the previous year and if you, if you can change that was from December quarter have, had other positive factors as well. But one of the thing that clearly was that we had lesser number of working hours, given the quarter I would request Ram to add any other factor. Yeah Julio, as far as verticals that you’ve talked about, we attribute that to the differences you would quarter, variations of performance I, I don’t see any physical trends related to this quarter has, as far as the vertical performance concerned. I said we acquired confident of delivering the guidance that we suggested for Q4. Okay, perfect and then I’ll just say if I can guess a one last one and could you just address the turn over in the current quarter. The turnover in manpower, the attrition level have gone up have gone up, that have gone up throughout the industry and as we have also been fully effective party, we are not too pleased with the fact that the attrition levels are way behalf. We would like to work throughout the, efficiency of bring them down. The numbers of measures that we have taken, that is, certain things which are not directly in our control they are rising out of, increasing demand for resources in India, but there are other factors which we believe are in our control and the, we are working on the same. Yes, hi, congratulations on the quarter. I just have one quick question on the outlook for your large deal strategy, what you guys are doing about and especially given the some of your larger competitors are that Inaudible I just wonder if you elaborate a bit more on what specific steps you’re taking at the sales level, at the management level, and at the operational level in terms of your larger deals outlook strategy. Yeah Pratik this is Ram. As I am sure you are aware by now we have brought in significant leadership to address the large deals efforts that is past quarter has joined us couple of months ago. We’ve been very actively involved in not only addressing this market segment from the pipeline building perspective but also declining the processes, the requirements for us to be a significant player in this market, we have a team that is working on, getting the organization ready in order that we effectively competing this market. What we have seen in the last couple of quarters is that certainly the deal sizes have become larger and that we have, we have been participating in our share of lager deals and we also believe that we have recognized what it takes to get the organization ready to participate in this deal. Without going into many details of what all the processes involve, but we feel very comfortable about our ability to complete as well as our ability to deliver. So is this something which you would say, is the fairly matured stage that now you are, are ready to go out there and win on the RFPs. We believe so, as I said we have been working on a few large deals and our experience in, in participating in this deals seem to indicate that we have established. Okay and just a quick follow up question on a separate issue on you Sify stake sale you’ve got a quick cash of $363 million. Just wondering in terms of your overall outlook on the cash balance what you, is seems to be your optimal cash balance, the plan to any return of the excess cash? Managing the liquid assets is what is our saying is clearly one of the more important strategic issues that we are constantly very closely monitoring. We have a, being giving fair amount of importance to inorganic growth and that would continue to be our approach. And other than that, what other things can be done so that the shareholder value can be enhanced, if something that’s we are very much in tuned with, we are not in a position to offer any different department for you on that. Okay I do, on the M&A part, are you sort of suggesting that you will be looking at larger sized transactions going forward? At this time we are not rolling out any possibility, we are, it was without saying that the, assertive that the mergers and acquisition for growth in our organization is fairly activate in evaluating various possibilities. Good morning guys and thank you for taking the call. I have a quick question. If I compared your 9 months earning EPS and according to the US GAAP and the ADS that is substantial if then, is it that how many of your each ADS compute with the each of with these shares in India.? Okay. Do you see that? Okay and next question. We have seen in the last three quarters went up all in by 25% on the rumor that IBM is going to acquire you guys, any truth in that rumor. Well, we have provided a clarity on this issue while in the past we refrain responding to rumor, we have stated that never in the past with any of the large global systems integrator, have we had any dialogue are shown any intend directly or indirectly nor do we intend to do so in the near future because we do not believe that it is in the first interest of the shareholders. And I believe that more that amply clarify to our position. Okay and now if they are, here people are anticipating a slowdown in the US economy, if US economy slows down, still you can keep up with the 30%, 40% annual growth according to your internal project. We are not giving guidance beyond this quarter. So far our experience in the last several quarter is, quarters indicate that the markets are quietly set to, to accessing on the services that we have to offer and we have not so far seeing any trends that indicate otherwise. Yeah hi and good evening everyone and congratulations on decent performance, my first question is actually is the lift of volumes of the last four quarters and for some reasons we have seen as your declining friend, if you look at your volume growth. Is was just saying if you look at your volume growth trend over the last three quarter and as you grew volumes by 9% or 8.7% in the June quarter and around 7.1% in the September quarter and now the number is close to 6%, so actually a declining trend of growth in environment which actually pretty strong, it there something to read out here, or should we expect this just to move back up going forward? Yeah I don’t believe that there is a decline in trend in volume growth it is a number that, yeah, we’ve have if you took at, yeah, if you look at Q1, there is about a 9% volume growth, in Q2 its about 8.7% fairly consistent, only this quarter we, our volume growth is about 6.5%, providing that is certainly less than what we had in Q2. I don’t know whether we have any, any parameters that would lead us to conclude that there’s a declining trend, we are confident of delivering fairly consistent performance that our revised guidance offered fairly indicates that confidence level. Sure sir. And then secondly on the subsidiary margin that you touched upon that little bit, if you look at your consolidated and standalone numbers, there is a GAAP of around 150 basis points on the EBITDA side and I am sure you are trying to get the subsidiary margins up but I think, I just want to ask that over what timeframe do you expect that this gap will close out completely is it 1 year, 2 years or 3 years? Yeah that is difficult to predict but one thing which can I could, I want to add-on is that there is one of the levers we have improving the subsidiary performance and as we were mentioning Nipuna is going to cash breakeven in Q4 and after that do well in, into next year and also the other subsidiaries like City Soft and Knowledge Dynamics and also right now into the integration into Satyam Mainstream, it is already couple of quarters since we acquired them so to that extent we also expect them to perform well, so I mean we want to, we want to bring them into profitable zone soon as or later other than that giving you any timeframe maybe difficult. But we will bring into profit zone very fairly quickly. Sure sir. And just very finely can the management comment on the infrastructure management space that’s been huge growth area for some of your pier group and right now Satyam has possessed only 4%. So also going forward, what is happening in the space and what’s your expectation and that’s my last question, thank you. Yeah. Clearly, this quarter we have seen marginal increase as far as contribution from infrastructure management services is concerned, we continue to be positive about the segment we’re making investments in enhancing the maturity of this space, we are very focused on doing what it is to grow in the space, I think its just a matter of being persistent with the strategy we expect to see that is of on the same quarters. Yes sir. Good evening very nice quarter. Could you provide some insights into the revenue growth in the US region which appears to be relatively sluggish and secondly could you elaborate on your earlier comment about competing for large deals specifically some color on the size and timing would be helpful? Yeah Ashish this is Ram. As far as contribution from the North American market is concerned, I would include Canada where as well you would notice that the percentage contribution to overall revenues about 64% or so. Overall, our strategy has been to diversify to such an extent that we don’t have over difference on to anyone parameter for business that includes the geography as well. So to that end it is as far with pretty much inline with what we would like to see. The second thing is in general the rest of the world outside of US is increasingly adopting a global delivery model as a significant contributor to value, business value. There is no surprise that the markets in Europe and Asia-Pacific continue to grow aggressively. We also see yet another trend that is probably contributing to this which is many of the globally integrated organizations having seen the full supply for as global delivery model in North America is concerned are continuing to expand their focus to outside of North America that also leads to contribution form outside of North America being substantially higher and, there could be other parameters that are specific for this quarter, are that would also lead the number being smaller. But overall, to the extent we are to able to grow other markets as aggressively as we have been that august well for the diversified business model that we are trying to get to. So in that sense, I shall finish the positive try. As far as the large deals are concerned, we are clearly working on few large deals; unfortunately we are not in any position today to say as the specifics of, either the number of being of some of the timeframes within which some of these might get approximated. I think we will be in a position to share with you as and when we make progress. But clearly we are budding in the few large deals in the market currently. Billing rates in quarter and also a final question if you could breakdown your current work force by as of experience with, any brackets that might be readily available at this time? Yeah, as far as billing rates are concerned Ashish, there is a marginal up tick in billing rates this quarter, and I think the right comment is, but clearly we are witnessing new customers coming in at higher than average rates, that trend is continuing, we’re also foreseeing some of the contracts that we have renegotiated, coming in at higher than average rates, but obviously this being in a position to influence our average rate positively would take sometime, so out outlook is for Q4 pricing would largely remain stable on their current levels, but the outlook for the interim quarters is positive. What Ram has stated, we have not be wild, we do analyze this quite intimately, we have not been sharing these statistics of experience-wise positioning of manpower within the company. I’m afraid that that’s not a decade we can go into, in this call. At this time, there are no further questions. At this time I would like to hand over the floor to Satyam management. Thank you. We will now continue the Q&A interactive session at WebEx India. Participants who wish to ask questions, simply press “*” “1” now. Hi. My question leads to the kind of deal wins that you have seen in this quarter. Could you highlight on a few significant deals that you have, like on during the quarter? Yeah Divya, this is Ram. I think two, three positives that we can readily see. #1 is the number of customers that we have added in this quarter is probably one of the highest in any of the quarters for a while; in fact 35 new customers were added in this quarter. But more importantly the quality, there are 6 of those 35 are Fortune 500 customers, were US Fortune 500 and global Fortune 500 customers. That we believe will give us a significant opportunity to mind these customers and build strategic partnerships and these are obviously leaders in their own markets and we are fortunate that we have an opportunity to partner with them. The third thing that we have seen is that there is a increased momentum as far as growth is concerned in gross vertical flat have been, the emerging verticals as we call them where we have made investments in the last few years recognizing the potential and that’s shows so that the efforts are paying off and we are well-positioned to pursue the opportunity in this market. Those are, healthcare, pharmaceuticals, travel and transportation and retail under like. And so clearly, these are positive trends that we are seeing and we believe that those, looks like can be positioned as well for our future growth. There are many more what I think I would just wanted mention the year for. Right. You’ve talked about 5500 to 6000 people of Satyam standalone went up, and try additions. Could you give me the target for the BPO? Somebody could mention this, but attrition this quarter is shorter at almost 18% which is the highest that you’ve had while the industry is also facing similar problems. Do you think there was anything specific that was sparing this quarter, is that… Now I was mentioning earlier, that last few quarters, the attrition levels across the industry have generally gone up, we are not taking comfort from that track, we believe that the current level is at a place which needs to be different and therefore we’ve now, we have taken specific steps to correct the situation. All right. And given the kind of addition in employees that you are looking at during the quarter, is it fair to say that the volume growth for Q4 would be better than what we’ve seen in Q3? The very fact that the guidance that we have given is among the highest in many quarters indicates as Ram was earlier saying that we have fairly confident that the growth would happen on the back of into the volumes. Yeah. Hi sir and congratulations on a very good scheduled numbers. I just wanted your views on this attrition going up for the industry, should it be viewed positively or should it be viewed negatively. Positive in the sense like if a demand is increasing therefore the attrition is going up. What will be your views on these? I think you have a very important point, it is time when in the late 90s industry was growing very rapidly, we have also found attrition levels to be high and then in that sense it positive correlation, it is good for the industry I’m not very sure if it is good for the company. Sir secondly like, I was just going to the left of some the clients, prominent client wins which has been given, just the separating from the indications which has been given, it seems some of those clients are already existing clients of other companies. So I just wanted to know like what exactly is the trend, is it like basically the same client, same last clients are now going in for multi-vendor and is just basically a shift from one to the other and trying to play one vendor against the other? I think it is fairly broad based, the, in the last few years our experience has been that there is tremendous shift in the mindsets of top management in large global companies where they are viewing the offshoring model as, that is a, for its not limited any longer to only given number companies like Satyam are examples, itself has relationships with 105 of global and Fortune 500 companies and if we look at it from an industry perspective, most of the Fortune 500 companies have already leveraged on this, taken advantage of this model, therefore we believe that larger deals are not limited to few companies taking this initiative. There maybe some which are more visible now, but we can expect many more to become more aggressive. Sir, in this line, is there some concerted strategy within Satyam in trying to target some of the larger clients because if the client is also wanting to do something similar and Satyam can offer an alternative then why not, so is there some strategy build… Yes, of course, also that is very much the case. In the last few years, we were personally focused on that. We have strengthened our relationship management capabilities, our ability to address business issues and therefore provide integrated solutions and number of steps whether it is Satyam School of Leadership or the strategic deal focus or the manner in which we are able to demonstrate leadership or innovation and many things that we do. So this is nothing new, as we have been working on these, whatever was anticipative by the place, for more prominent place in the industry is coming out to be true. And in that sense, we believe that what our investments that have been made in the last few years will bear fruit. Sir, next basically just wanted to understand the churn in the top 5 and top 10 clients, say a churn which happens say, over of 3, 4 quarter period looks good. But if the churn in clients have start happening on a quarterly basis, then it basically is that there’s a large amount of possible business that you are doing, which basically increases the riskyness of the company. So if you can just comment on this thing, is the churn happening on a happening on a quarterly basis in the top 5 and top 10 clients? Shekhar we honestly don’t factor the churn is happening on a quarterly basis specifically our client or not. What we are more concerned about is whether the significant partnerships that we have been or would establish, are they continuing to grow? And are we doing the right things in order that growth trend continues as long as, we are confident of that trend continuing, these quarterly variations of client moving in and out of the top 10, I feel we don’t view it a s a major concern. Okay sir. But one last question as related to this enterprise solutions, configuring that its 40% of your revenue that’s compared to 11% to 15% in case of other companies, I just wanted to know are there any service lines which include enterprise solutions which other companies might not be including in enterprise solutions? We are able to create in the market. And the brand recall for Satyam as far as enterprise business solutions opportunity for concerned, we broadly categorize the applications and integration-related services along, various technology and short-term services as enterprise business solutions, we would like to believe that’s a fairly uniform on consistent definition of enterprise business solutions, I’m not driving to how other organizations choose to define enterprise business solutions, if I have to venture I guess, I would think that it is a fairly uniform and consistent one. Yes sir, I would like to add just one question actually, when I go to the breakdown of the expenses, I see a sudden decline in legal and professional charges and VISA charges during the quarter which I believe would be the major driver the margin improvement in the current quarter. Your call on the same and these view going forward? Yeah, the decline is primarily because of lessen number VISAs we have taken when compared to the last quarters, so going forward we expect this to increase quarter-on-quarter basis but overall, we expect to be G&A as a expenditure had to remain under check. Sir, so you could just elaborate and little bit pour on which meager expenses you might see some correction happening because I see traveling going up sharply this quarter, apart from some other expenses? Yeah, I’m in, while it maybe difficult for us to talk about account advice, being to overall what we, our stand is that again in absolute terms will grow quarter-on-quarter but as a percentage of revenue so our endeavor is to bring it down. So that is at a G&A, a advise, I think as you know quarter-on-quarter there will be aberrations so to that extent, we didn’t get, predicting it quarter-wise maybe that much more difficult. Okay now sir that we can just believe that the next quarter it would be a little bit down as a percentage of sales and maybe next year again it would be down as a percentage of sales. One of the, yeah, let us see how it stands out, as I was mentioning this is our endeavor. So we think to see how things turn out. But as that we keep mentioning, selling expenses is one thing where we want to invest, because that drives our growth, so to that extent whatever selling we will make in G&A, mean to something, sometimes you may get something rated by, what we’ve spend on air slot. So overall, I think we need to see how things standout but this is our general strategy. Yes. There was a problem with the International Bridge and you actually lost a couple of callers there but I just out back in on India, thanks for that. A couple of things, firstly, I’m just trying to reconcile your view on the offshore mix. You said you saw more opportunity for that rise. Yet you also said that with your enterprise solutions business you saw more of a shift towards consulting lead opportunities. Now of course consulting that indeed enterprise in general, requires more onside presence so how would you expect to rise offshore if your enterprise is in fact growing more from trend? Well, it is without any doubt a challenge, but the one which can be addressed we have over a period of time been able to enhance the offshore proportion of enterprise solution and we will continue to attempt to do that, we have been able to put appropriate methodologies in place and processes in place to better address the same. And, and maybe on account of that that the offshore levels are, where they are, otherwise we would have been at even higher level by now. So, we did take that into consideration as well when we have made such statement. Okay and secondly a question related, I guess to attrition, I am concerned about the level that is beyond, its now, the size has been for several quarters in spite of some initiatives, I know you’re taking when I met your management team in Hyderabad just last year, my concern is are any of the actions you are taking salary-related, in other words should we be expecting higher salary increases next year and perhaps you could just remind us please when your salary cycle is in very high, in entering year? There was a time when we have brought down the attrition to lower level and in the last couple of quarters the attrition levels did go up, there are a number of things that we could do; we have enhanced the salaries and remuneration in general. We believe that we should be able to put the attrition issues back on track without having to substantially compromise on the, on the remuneration cost, going out of control? Generally, our increases happened; this is Srinivas here, on 1st April that is our financial year beginning so around that time we’ll be giving increments. Okay and then just finally, just a clarification on tax rate, I track on the US GAAP measures. Can you give us a guidance on tax rate US GAAP for fourth quarter of the year please? No. It will go up marginally quarter-on-quarter, the taxation right now as a PBT, the income tax is roughly around 13%, 12.5% or so. So for the entire year, we expect this to be around 13%, anywhere between 13% to 13.5%. Thank you very much sir. At this moment, I would like to handover the floor back to Satyam management for final remarks. Thank you Prathiba and thank you every one of you for your active participation. If you have any further queries, please do not hesitate to contact us. You can send an email to us at [email protected]; we are available for any clarifications and then speak. Thanks once again to all of you. Good day and good night. Ladies and gentlemen, thank you for WebEx conference Service. That concludes this conference call. Thank you for your participation, you may now disconnect your lines. Thank you and have a nice evening.

EarningCall_234118

Good day everyone and welcome to the Linear Technology Corporation Fiscal 2006 Second Quarter Earnings Release Conference Call. Today’s conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Paul Coghlan, Chief Financial Officer, please go ahead sir. Hello good morning, welcome to Linear Technology conference call on the company today, by Lothar Maier our Chief Executive Officer and by Dave Bell our President. I will give you a brief overview of our recently completed second quarter and then address the current business plans. We will then open up the conference call to questions to be directed at Lothar, Dave or myself. I trust you’ve all seen copies of our press release, which was published last night. First however I would like to remind you that except for historical information, the matters we will be describing this morning will be forward-looking statements that are dependant on certain risks and uncertainties including some tracks among others as new orders received and shipped during the quarter, the timely introduction of new processes and products and general conditions in the world economy and financial markets. In addition to these risks which we described in our press release issued yesterday, we refer you to the risk factors listed in the company’s Form 10-Q for the quarter ended October 2, 2005 particularly management discussion and analysis of financial condition and results of operations. Secondly, SEC Regulation FD, regarding selective disclosure, influences or interaction with investors. We’ve opened up this conference call to enable all interested investors to listen in. The press release and this conference call will be our so form, the response to questions regarding our estimated financial performance going forward. Consequently, should you have any questions regarding our estimates of sales and profits, or other financial matters for the upcoming quarter as well as how they might impact our income statement model and our balance sheet, this is the time we are free to respond to these questions. For the second consecutive quarter, the financial statements for the just completed December quarter contained the effects of FAS 123R stock-based compensation. This long-discussed and anticipated accounting pronouncement is a requirement for companies beginning with those like Linear whose new fiscal year commenced after June 30, 2005. The majority of companies and many of Linear’s competitors will not be required to report on the FAS 123R until later in the year. Because of this discrepancy in timing and because the effects of FAS 123R are not yet well-understood, most investors have requested that we report pro forma as well as GAAP financial results. Indeed, most of the earnings estimates published on Linear estimate pro forma as well as GAAP earnings. In our press release, we have intended to demonstrate the differences between our results with stock-based compensation included and with it excluded. Essentially, the impact on Linear’s earnings was $9.543 million after tax, or 9% or $0.03 at the EPS level, $0.36 pro forma, $0.33 GAAP. As you are well aware, FAS 123R requires companies to estimate the value of stock options using the Black-Scholes or other option valuation techniques. These require estimates to be made of stock price volatility, option longevity and employee termination rates. During the past 5 years, the market price of Linear stock options at the date of grant has varied from a low of $23 to a high of $55. The Black-Scholes valuation of options using, determining the charges to our income statement has ranged from as low as 10 to a high of 25. FAS 123R has also impacted the number of shares used in the termination of diluted shares outstanding. On a GAAP or FAS 123R basis, we have 2,010,000 more diluted shares included in the calculation of diluted shares outstanding, than would have been calculated on the prior accounting regulations. In addition, FAS 123R has an impact on our balance sheet and our cash flow statement. The most obvious impact on the balance sheet is the increase in inventory values. To the extent, stock-based compensation is granted to employees in manufacturing, i.e., cost of goods sold, these costs are required to the first capitalizing inventory and subsequently pass through the income statement when the products are sold. In our September quarter, $1.2 million of stock compensation charge was capitalized in inventory. There was no additional amount capitalized in the December quarter since inventory turns over within as quarter cycle. However, this means that cost of goods sold has a full stock compensation charge this quarter and is therefore roughly 1.2 million higher than last quarter. Other balance sheet accounts affected are the deferred tax asset and equity accounts. Each of these accounts will increase the stock-based compensation as amortized. Subsequently, these amounts will be impacted when estimated deferred tax assets are compared with actual if any realized benefits. As we said last quarter, this is a great stuff this year in accounting to see our efficiencies. However, on a broad scale, stock compensation accounting; however flawed, does give investors a general sense of comparable values between and among companies for the stock distributed to employees. We continue to strongly believe employee ownership is essential to motivate outstanding performance. Managing it to the benefit of both shareholders and employees is our job. As I said earlier, the percentage impact on earnings for the quarter was roughly 9%. Our return on sales with this estimated charge was 39% whereas before the charge it was 43%. Both our very respectable returns neither of which we believe we would have reached without employee ownership. Aside from stock option accounting, I would like to focus on how the business performed in the December quarter. The December quarter was good quarter for Linear. Sales grew, profits grew, bookings grew; we had a positive book-to-bill ratio. GAAP earnings per share of $0.33, was up $0.02 from the $0.31 reported in September. The gross profit percentage decreased slightly due to the additional stock compensation amount and cost to goods sold that are referred to above. R&D and SG&A percentages improved slightly. Operating income and net income increased in both absolute dollars and as a percentage of sales. GAAP return on sales was 38.9%; pro forma return on sales was 42.5%. Diluted shares outstanding decreased by 2,148,000 or roughly 1% on a GAAP basis. During the quarter, the company’s cash and short-term investments increased by 7.1 million, net of spending 56 million to purchase 1,618,000 shares of common stock. Our bookings improved with particular strength in communications infrastructure, networking, industrial and automotive end-markets. Our ending on-hand inventory at our distributors is lean, cancellations are still minor and lean times have remained unchanged at 4 to 6 weeks. We continued to have an excellent business model and are therefore able to remain both highly profitable and cash flow positive. Accordingly, we achieved strong performances in various generally regarded financial industries. I have already discussed our return on sales. Our return on equity was 20% and our return on assets was 18%. We need to take cash and short-term investments out of these two calculations, our net return on equity was 184% and our return on operating assets was 80%. We have no debt and our current ratio was 9.6:1. Cash and short-term investments now totaled 1.842 billion, an increase of 7.1 million over the previous quarter. Cash and short-term investments represent 88% of stockholders equity. The company announced that it is increasing as quarterly cash dividend by 50% from $0.10 per share to $0.15 per share. The company began paying a cash dividend in 1992 and has increased the dividend every year since. We’re continuing to be cash flow positive and our components and our cash generating capabilities has enabled us to significantly increase this dividend payout by 50%. Looking ahead, the March quarter is historically strong for Linear, we’ve had good bookings momentum, particularly in classical analog end-markets such as industrial communications infrastructure, networking and automotive. Consequently, we expect sequential sales growth of 5% to 6% over the December quarter. Now, I would like to address the quarter’s results on a line-by-line basis beginning with bookings. As I stated earlier, our bookings increased over the previous quarter, cancellations were minor and we had a positive book-to-bill ratio. Geographically, bookings increased both domestically and internationally, with increases generally, evenly distributed throughout the major geographic areas. At this time, every quarter we give you a breakdown of our booking percentages by end-markets to give you insight into those markets that drive our business. As I said earlier, there was strength in classical analog areas, partially offset by reduction in high-end consumer going into the March quarter. Communications continues to be our largest area and represents approximately 33% of our business, up from 32% estimated last quarter. For us, the 3 significant areas within communications are cell phone and telecomm infrastructure, networking and cell phone handsets. Cell phone and telecomm infrastructure had 11% of our business is unchanged from last quarter, but topped in absolute dollars. The area of largest growth is networking which had 15% is up significantly from 13% last quarter. However, over Ethernet circuits and Hot Swap circuits, areas rich in technology lead the way. Cell phone handsets decreased from 8% last quarter to 7% this quarter. Our second largest business area is industrial, which was 32% of our business up from 31% last quarter, industrial has a cross section of many costumers in many markets and generally has a strong March quarter also. For the December quarter, computer represented 14% of our business, unchanged from last quarter but up slightly in absolute dollars. High-end consumer was the area with the most change at 11% of our bookings, down from 14% last quarter. This was not unexpected giving in a high concentration of consumer sales in the December holiday period. The automotive end market increased from 6% to 7% of our business with the strength being in European and Japanese automotive-related manufacturers. Finally, the military products had 3% of our business was similar to the prior period. Moving from bookings to sales, as I said earlier, sales grew 4% sequentially from quarter-to-quarter and 6% from the similar quarter in the prior year. Similar to bookings, sales grew domestically and internationally. Within international, there was growth within each major region, Europe, Japan and the rest of Asia. In the USA, both OEM and distribution grew. In summary, the USA had 29% of sales grew 1% from last quarter, Europe at 16%, and Japan at 14% remained unchanged quarter-to-quarter. And rest of world, primarily Asia-Pacific at 41% was down from 42% last quarter, but up in absolute dollars. Note that 51% of our sales were created in the USA of which 22% was shipped overseas. Moving to gross margins, gross margin was 77.8%, this impressive number validates our strategy of selling unique high performance analog semiconductors into a broad customer base. Gross margin decreased to 3/10 of a point from last quarter. As discussed earlier, stock compensation caused this change. There is a full quarter’s compensation charge and cost of goods sold, whereas last quarter, part of the charge 1.2 million was capitalized in inventory. This had an impact of 4/10 of a percentage point. Aside from this, gross margin actually improved by 1/10 of a point. ASPs increased to $1.63 from $1.55 last quarter. This was due to some changes and mix that had no impacts on gross margin percentages. Our factory efficiencies were similar to last quarter as benefits from the increased sales were partially offset by lost production due to more holidays. Moving to R&D, research and development decreased as the percent of sales from 14.8% last quarter to 14.3% this quarter while increasing slightly in absolute dollars. Labor cost increased due to additional headcount and additional profit sharing cost. This was offset by decreases in stock compensation expense and in several other R&D expense areas. SG&A, Selling general and administrative costs at 12.2% of sales were unchanged from the prior quarter percentage. However, they did increase in absolute dollars by $1.2 million. Labor, primarily headcount additions and direct sales and profit sharing were the largest contributors to the dollar increase. Operating income increased by 4,925,000 largely due to the increase in sales. Operating income as the percentage of sales increased to a very impressive 51.3% from 51.2% last quarter. Interest income increased by $950,000 largely due to the increase in the average rate of interest earned, from 2.1% last quarter to 2.9%, to 2.69% this quarter, due to the continuing increases in the Fed funds rate. Our affected income tax rate remained at 30.5%. The major tax savings items continued to be the benefits from our tax holidays overseas, over tax extent interest income, our foreign sales tax benefits, and our R&D credit. The resulting net income of a 103,264,000 is an increase of 4,083,000 from the previous quarter. Earnings per share of $0.33, is an increase of $0.02. The average shares outstanding used in the calculation of earnings per share decreased by 2,148,000 shares during the quarter. There were fewer diluted shares outstanding this quarter because the average stock price was down this quarter from $38.4 to $36.03. Consequently, fewer previously granted stock options were in the money, leading to fewer diluted shares outstanding. On a pro forma basis, before stock-based compensation, net income would have been 112,807,000. Earnings per share $0.36 and diluted shares outstanding would have decreased by a further 2,010,000 shares to a total of 311,782,000 shares, as there are less diluted shares outstanding on the prior accounting standards than they are FAS 123R calculation. Moving to the balance sheet, cash and short-term investments increased by 7.1million, net of 56 million spent to purchase, 1,618,000 shares to common stock, 28 million spent in fixed asset additions and 31 million paid in cash dividends. Our cash and short-term investment balance is 1.842 billion and represents 78% of total assets and 88% of stockholders equity. Accounts receivable of a 126.3 million is an increase of 7.5 million from the previous quarter. Our day sales and accounts receivable partly changed, at 44 days versus 43 days that we reported last quarter. This increase in receivables is due to largely to the 9.1 million, increase in sales for the quarter and to a lesser extent to the normal slowdown in collections during the calendar yearend holiday period. Inventory at 37,098,000 was basically unchanged from the 37,181,000 reported last quarters. As mentioned earlier, stock-based compensation accounting did not have an additional impact on inventory over the 1.2 million reported last quarter. Our inventory turns of 6.3X was similar to last quarter. Deferred taxes and other current assets increased 8.6 million from the September quarter. 5.3 million of the increase relates to deferred taxes on stock option accounting. The remaining 3 million is primarily an increase in interest receivable on our investments and an increase in prepaid insurance. Property, plant and equipment increased by 17,137,000. As we had additions of 27,515,000 and depreciation of 10,378,000, approximately 21 million of the additions relates to the purchase of 2 buildings at our headquarter site that had previously been rented. Other additions of roughly 6.5 million relate primarily to purchase the fabrication and test equipment needed to increase capacity for our growing sales. Other assets totaled 50.4 million and decrease by 1.7 million. They consist primarily of intangible assets relating to technology agreements, which are amortized over their contractual period primarily 10 years using the straight-line method of amortization. Moving to the liability side of the balance sheet, accounts payable decreased to 4.9 million largely due to the timing of payments on capital equipment purchases. Accrued incomes taxes, payroll and other accrued liabilities deceased by 3.5 million. The largest items here are our profit sharing accrual and our income taxes payable. We pay our profit sharing twice a year, so our accrual increases in the second and fourth quarters and decreases in the first and third quarters when payments are made. The increase in the profit sharing accrual was offset by a decrease in income tax payable since we have 2 estimated income tax payments this quarter versus none last quarter. Deferred income on shipments to distribution increased by 409,000. We shift modestly more to distribution this quarter that they shift out to their in-customers and this resulted in the modest increase in deferred income. Our accounting on shipments, the less distribution is conservative. We do not record a sale nor income in our results of operation until the distributor ships the product out to it in-customer. We continue to closely control our inventory distribution to properly position the inventory without any unneeded buildup. Deferred tax and other long-term liabilities remain largely unchanged. Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions for net income, for dividends paid, stock repurchases, and employee stock activity. In addition, this quarter, there was an increase in common stock for the quarterly calculation of stock-based compensation on the FAS 123R. Looking forward, historically the March quarter has been a quick quarter for Linear. European, US distribution and OEM accounts had more business phase, as there are fewer holidays in the March quarter than in the December quarter. The industrial end-market historically has been strong in March as for most companies it is their first quarter on the new fiscal year capital budgets. On a macroeconomic front, most forecasters are predicting an improved 2006 over 2005. The US economy has projected to have reasonable growth and Japan and Europe are forecasted to improve also. Recent semiconductor broadcast have also had an upward trend for 2006. However, economic news can be easily influenced by political events and customers and many end-markets are generally cautious and therefore intend to order, just the current demand. Nevertheless, our bookings improved last quarter and we have a positive book-to-bill ratio. Our current requirements, i.e., business that needs to book and ship within the quarter remains at approximately 60% which is still at the high end of our historical facts. Our lean times are 4 to 6 weeks which can easily support this level of turns as we have often done in the past including the last several quarters. As we’ve said earlier, our booking improved in several end-markets, specifically industrial, communications infrastructure, networking and automotive. As the result, given the seasonal strengthening of our business and the diversity of our bookings improvement, we are forecasting sales for the March quarter to grow 5% to 6% over the December quarter. With respect to profits, the impact of stock option accounting will be relatively similar to the quarter just finished. Consequently, profit should roughly track sales and therefore we are also forecasting an increase for profits in the 5% to 6% range. We have told you that we are added to our infrastructure. We have completed and begun occupying the new building at our Singapore test location and have also completed our projects, the air capacity to our wafer fabrication plants in Camas, Washington and Milpitas, California. These projects are important as we expect to meet the capacity. We sell into many diverse end-markets that are rich in analog circuitry. Either to manage power importable products or to sense real world electronic signals and meant to convert then from analog to a digital format for easy storage and transmission. We supply high performance analog solutions that are key to the functioning of most electronic systems. Our linear or analog parts have symbiotic relationship with digital circuits in a world that is becoming more electronic. Our circuits reside in a broad cross section of end products whether they are in industrial applications, communications applications or consumer electronics. In each of these areas, we often add circuits in the latest generation end products such as, computing and communicating devices, cellular base stations, cellular phones capable of multimedia access and transmission, security monitoring devices, Power over Ethernet industrial applications, the latest GPS systems in new model cars, and high-end consumer products such as digital still cameras, and MP3 players. Last quarter, we announced the new family of module products. Initially, interest in these new micro-modules has been high and we continue to believe that these products represent a significant business opportunity in the next several years. In summary, we are in a strong segment of the electronics marketplace namely high performance analog. We met our projections for the December quarter and are projecting growth in the March quarter to be inline with our historical patterns. I would now like to open up the conference call to questions to be addressed to either Lothar, Dave or myself. Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press the “*” key followed by the digit “1” on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is “*” “1” to ask a question. Thank you. Dave, following up on the new micro-modules, last quarter you mentioned that, there is a roughly 100 customers sampling up product, can you give an update on, in terms of design traction there and then in terms of, from design opportunity to revenue what type of timeframe we should be looking at as we go out over next year or two? Sure, as Paul alluded to you in his module, you have the receptions actually been very good. It was just a quarter ago that we made our announcement and we’ve had tremendous reception on the product in fact, every month we look at our datasheet downloads for new products on our website. And this new micro-module product is around, like in the range of 4 to 5 times what we would normally expect for a leading new product introduction. So certainly, the kind of interest that we’ve seen from the, the customer community is been very, very strong. On the other hand, these are primarily going to go into industrial and communications infrastructure kind of products and the design cycles for those are longer than you’d see set of communication or our consumer product rather. So, we are getting a lot of activity, lot of sample activity far more than a 100 that I referred to you a quarter ago and we are getting some really prototype bookings already that was started to put on the backlog in December. So in summary, I would say that the kind of reception we’re receiving at least meets the expectations that I have for this new product grade. Great and then if I can have a follow up on the wireless handset front, any visibility in terms as we approach most 3G handsets been sold, how your designs are there, as we go out through 2006 year? Well, the 3G handsets, I think we’re going to have even more opportunity as we do in the current generation of handsets. If there is any bad news, it’s the cell phone market has a latest and kind of stagnant from the future standpoint. There is some 3G handsets that have been designed with frankly the deployment and the sale those handsets has been delayed in lot of markets, so 3G handsets as I mentioned, you’re going to see more opportunities for high performance analog, you’ve got functions that don’t even exist in the current cell phones and on top of that because you are packing more and more features in, such as the ability to watch television and videos and so forth, efficiency in the backlight is going to be important for as today, it really isn’t that important because the backlight is not on for very long. Overall, power management, efficiency is going to become more critical as well. So, I think that when we do see more and more sale, our 3G cell phones we are going to see Linear Technology’s participation in that increase as well. Great and then lastly for Paul, Linear Tech has been much less aggressive than it’s piers and given that options and you guys do a good job in terms of the profit sharing, any update in terms of compensation, your own employee reception to restricted stock and how you view that going forward? Well, Craig I think employees are pleased that in some cases they’re getting restricted stock, we tried to a balance of restricted stock and stock options, maybe leaning a little towards restricted stock when they stock market itself or Wallstreet isn’t responding to our results adequately with loop. We also think it’s very important as many as out of balance between stock or equity compensation and cash compensation and consequently we’ve been a leader in our industry and cash compensation to our employees. So, I think we continue to do the things that enable us to hire the best talent and secure the best talent, and I think that will continue service well going forth. Yeah hi, the dividend increase, is it something we should expect moreover, in other words, is this a dividend growth company at this point and should we expect this to be systematic in terms of quarterly or annual or, can you talk a little bit about the catalogs for this and does it a signal appropriates for dividend over share reproduce is going forward? Yes I think, first of all we’ve paid dividends since 1992, we’ve increased it every year. The average rate of increase has been in the 20% to 30% range. This year we increased the dividend to a much higher level, which is 50%. If we typically increase it once a year and going forward we will have to make decisions in subsequent years as for the amount we’ve increased in those. Certainly, we’ve heard from the investor public that they are interested in more distributions of cash in either stock repurchases or dividends, we actually thought the dividend would increase the yield and relative to choosing between dividend and stock repurchases, I think we will do both, but will probably lean a little more toward the dividend. All right Paul, might trying to something else you’ve said, over these, sort of couple of times, I think in your monologue that employee ownership is essential, but its crucial. Yet, it seems like the percentage of your company is owned by employees is pretty low. So, how do you see that’s going to change going forward, is it going to be an issue of more, the stock versus options or what can get guys to hold the stock longer? Well, first of all, the tax structure of the stock options let me talk about those rather than restricted stock, really almost forces the employee to get the stock options to exercise. Because once you, exercise and sell it, because once you exercise that you have a taxable event. So, over the years, the stock that employees have been granted in stock options most of them for tax reasons, not all of them have sold that stock immediately. So, if you look at the total shares outstanding as a company, the 311 million on a pro forma basis, those shares, probably 85% of them or 80% came from stock options. We only went public once, and only had a securities offering once. Now, what’s happening is yet restricted stock. And going forward, restricted stock is a taxable event when the restricted stock itself gets invested, but the way we do it here Linear is that to pay foreign shares, so going forward, the employees will have the choice to keep their shares or sell their restricted shares without thinking of the tax consequence. But right now, Adam, I think us and most companies the tax laws under stock options is almost prevented employees from owning stock that they got through stock options. It could have bought stock in the market, but not through stock options. Is that clear? While if they continue to stock options, I mean the way it works historically was we are growth company, we are in technology, we hired the best people, we pay them allowance stock and we pay them in cash. We give them stock options more than just once, we refresh the options every couple years or sooner depending on the employee and the employee get this options, invest it, sells it, that’s another option, invest it sells it gets profit sharing, gets base pay, stays forever founds out great circuits, we have good sales and good net income. That’s kind of how we try to do it. Maybe one last question on this front that, can you share now what percentage of your total operating profit be, within go to profit sharing or space out the magnitude of profit sharing on some sort of normalized basis, taking out the semi-annual accruals you talk about, is it 10% or is there some number you can share with us? Well, we typically like to share the number more at salary basis, in the past quarters, the past halves we have not yet announced internally what would be this time. But in past year, it has been 40% or greater of salary to employees and that’s generally has been 10% or more of net income, of income before tax. Adam, we don’t want to give the exact number then you will be micro-managing or profit sharing plans, we’d rather have that latitude rather than you guys. Yeah, thanks a lot, we had a lot of mix data points, I think leading up into Intel, we had a lot of companies and some are saying that, that surprises me, I was panic a little bit, really strong robust demand, lean inventories that were probably too lean out there, than we had in Intel and some concern now. We were somewhere in the middle of that. So, tell us what you think you’re seeing a different picture, and also if in fact, we are seeing some of these slings out there, how do you manage against that in terms of inventory specifics, et cetera. Well, first of all, we are an analog guy, not a microprocessor guy and within analog we are very diversified. So, historically, industrial has been a good business for us communications infrastructure, of late consumer type products those that an Intel might be more in for example, like computers and they are not in cell phones, the computers and cell phones and mp3 players have become a big driver in the overall semiconductor growth. So, I think, what we are seeing definitely is a growth in the more infrastructure or practical analog-based areas at the moment. Things like industrial telecomm infrastructure, automotive networking. So, I think, we have a sense that the general, generally 2006, we think it’s gotten off to a better start than 2005. We think, even off late, people are starting to anticipate 2006, in all these broad categories being a little stronger than they had initially projected 2006 to be. Consumer spending, I don’t know how that will work out, it’s continually we’ve been stronger, I think, than people thought. So, we definitely feel little better going into 2006 than we did going into 2005. Great, and you mentioned industrial, now it seems to be a bit of magma to a lot of those, it seems it will help if you classify, help us understand what pieces going there and also there tends to be something I think, historically that’s been a with the year cycle. Is that what you expect from that, or it’s, once again get started, it continues to go for a while? Here to be honest which is bit of an enigma’s in that, there’s just so many customers, so many clients across so many end-markets. That it’s hard to take 2 or 3 data points and therefore project that market, Michael. So, we kind of share the same forecasting as you have. For us, industrial includes obvious things like ATE, scopes and those types of pieces of equipments that have bought for engineers and than in the manufacturing equipment, it also includes the medical area, it also includes surveillance in those areas. Typically, at the start of a calendar year, it’s a little bit more robust because people up there, a lot of non-public companies are in a calendar year basis, have their budgets approved, are ready to spend. The general feeling we have is in the IT area, Y2K is 6 years old now, companies have a fair bit of cash, that doesn’t mean they will spend improvingly but, if they think their business will grow they think capacity is getting a little tighter, they have cash. We typically, we not typically but presently see some positive general signs in industrials. But just like you, it’s hard to point that 5 or 6 companies that are bellwethers and say we can extrapolate from them, so what the whole market will do. And then, just a final question may be for Lothar or Dave. Seeing, some others who made a lot of noises here about doing more aggressive analog offerings. Can you comment on just what that means for you guys as and how feasible that is? In terms of competition, I think, I was obviously now guessing for using aggressively. Yes, certainly we look at the offerings from the foundries in terms of the how they match with the process requirements that win your needs and as a rule we really not found much that will encourage us to go more towards the foundries. We currently do use foundries; we use foundries for a small percentage of our products, which is maybe about 5%. But we have 100s of different processes, which are tailor towards our analog products and those processes are unique to Linear and we really don’t even find those nowadays with some of the new processes that are being offered by the foundries. So, we were aware of those and again for us, its not big drop. Thank you, first congratulations on the good time guys. Secondly, throughout 2005 we had an order pattern where our first month orders tended to be strong and then the second two months tended to be not quite as strong relative to seasonality. Can you just talk about the linearity that you saw in the fourth calendar quarter than what you’ve seen in quarter today? Sure, in our fourth quarter actually we’d kind of a barbell quarter our October was good, November wasn’t quite as good and December was the best, if you want to talk just about gross bookings, you were up to, we think we are up to pretty good start in this quarter, that’s certainly, we’ve told we given you forecast to growing, so certainly our beginning size well in for that. Okay and then, looking at ASPs, it looks like we’ve got another step function change, is that attributable to some of the more infrastructure-oriented strength that you are seeing Paul? Yes, that’s what it is, as if you looked, I told consumer products, well on a booking side went from 14% to 11% of our business, and then the, I’ve told you, industrial picked up, networking picked up, infrastructure and the automotive and the ASPs are higher in those areas and they would be in consumer or cell phone areas. Okay and last quarter on the conference call, you indicated that on the telecomm and networking side, optical was coming back from the death bed and starting to show some signs supplies, are you seeing some acceleration there in particular? Now, Craig this is Dave, yeah I think its coming back, but you need to keep in perspective, and if you went back a year or 2 optical is virtually dead, that market was in a coma. So, it has got a heartbeat now, but optical was still really, a fairly small percentage of the overall networking infrastructure business right now. Okay, and on the micro-module business that you talked about earlier, its sound like you are seeing a very strong interest in those products, but that given the design in cycles, we should expect the revenue profile that look like a classic analog model where we’ve almost got imperceptible change in the revenue line as that starts track the designing activity. Ultimately becoming material, but initially not being that significant unlike a big product cycle, where you’d see a sudden increase in revenues on a quarterly basis. Is that fair? Yeah, I think that’s fair. But from our perspective, frankly, I think, it’s a good thing, because the flip side of that is, although it takes longer to ramp up those products stay in place for many, many years. So, in the industrial and infrastructure marketplace, we could be selling those same products for 5, 10 or even more years. Okay and then just lastly to close it up with you Paul, I think we were expecting $80 million in CapEx, is that still the bogie this year? Thanks guys. If we look at the computing business, historically, you’ve given us a breakdown of that 14% into notebooks and PDAs in one category and then kind of give a demo for us all into another. Can you give us a rough idea of how that breakdown now? And then the consumer side with the drop there, was there anything more than the seasonality, any designing activity, either lost or gained? Okay, seasons are nice and simple for you guys. Then the last one, with the industrial and more classic analog markets coming back to life, is it fair to assume that we are going to keep creeping towards somewhat normal seasonality, if I look back historically, you guys kind of, over the last 3 quarters have gotten closer and closer but you are not quite at your historical averages for sequential quarterly growth? Yes, I think we will get closer, but historical averages, if you go back a couple of years we had very little in consumer. So, we do have something in consumer, so, I think, we will be in the range of our historical averages, probably may it dampen just a little bit by more strength and consumer which will then maybe help the December quarter a little bit more than it hasn’t helped in past years. But that’s just a gut guess at the moment. Great, and now the final question, I knew you guys don’t compete on twice very often but couple quarters ago, you talked about walking away from the little bit of handset business, because it got, the margins got squeezed a bit. Are you seeing that sort of time continue, we’ve had a number of different analog companies, either entering the market and then claiming to be high-end or some of your more direct competitors claiming to be a little bit more aggressive on price going forward, have you seen any of those things affect your business? Well, what do you start out by saying that our business model Ross, is always been to sell our products to customers that appreciate the performance of the products in a value we bring. And, and if those customers in the consumer area or the cell phone area is fine, to sell those products there, if the markets stagnates a little bit which is, frankly, I think, which happened in the cell phone market for the last year, so we really got the features having grown very much. Then it allows free competition to close the gap a little bit and we got plenty of other places to focus our attention and sell our products. So, I think, its kind of a natural having the flow that happens and during the last year or so in the cell phone market in particular, this has been some features stagnation and that’s been packing us a little bit as well as the seasonality that Paul talked about. But I am still pretty optimistic, because I think when 3G cell phones started taking in more and more during the coming year or so, then you are going to see, things like video displays, or you are going to efficiency becoming more important, you are going to see new high-speed communication protocols, that need new power functions. And as you get a free view opportunity for this once again and customers are going to value Linear Technologies products and our performance. There is really nothing new, I think it’s just kind of this natural way evolution that happens in that market, Ross. Just a little bit of the key things that start Dave, can you give us the breakdown by business unit power management, mix signal and signal conditioning? Yes, our management, in total, it looks, it was a little over 60, the other 2 kind of split the difference pretty close to evenly. Okay and then can you comment that if there is any sort of change to the company’s strategy to increase your market Tier 1 OEMs, is there any thing that you are doing differently these days? Well, Tier, large companies always been important to us, Tier 1 OEMs are always important and depending on the industry or end-market they’re in, depending on the, how they want to interface with their customer base somewhat easier to interface with the analysis, so biggest important to Linear as the company that we have goods presence in all of these Tier 1 OEMs across in markets particularly those end-markets which are strong and classical analog stuff and some of the more consumer-based areas, all you have to be careful with some of the Tier 1 customers, some of them are very demanding an issue that might not make good business sense for company. So, I think, overall, we are probably, improving if that’s the right word or continuing to grow our presence in Tier 1 companies but always with the, a good sense of what’s the, what’s the good business proposition for them and us. Have you seen any change in behavior from some of the Tier 1 OEMs that they sort of, try to break the model and look for new and innovative products? Yeah I think its, I thinks its just fair to say that, we are known for the quality of our products as well as the richness of the technology and what we try to do is that naturally put this in favor with people that want to be feature rich in the products they introduce to the market. Some Tier 1 companies that have historically put most emphasis on being a low cost manufacturer, if that’s not being as successful strategy for them at the moment and they want to get more feature rich, they dint get more attracted to someone like Linear Technology and understand our business objectives, understand what it takes that good products and good, on-time delivery et cetera and then we tend to do better at that time have been. Doug this is Dave, one of the thing I might add is the way these large multinationals do business, I think, has changed a little bit in recent years. They use to be, as you probably know that you, you dealt with the addition of the multinational on Europe by the one of the guys in Europe, guys in North America, herein North America and so forth. And I think one thing that is happening is, there is much more global coordination in some of these larger companies, so we adapt to that as well. The other thing which happened is of course, a lot of these big companies are using OEMs and ODMs before manufacturing more and more, so that requires us to adapt in the way that we coordinate with those manufactures as well. So, I think is just a little bit of a change in the influence that global supply base management stuff works in some of these big companies. All right, terrific and then one last one, Paul, looking at this returns percentage still about 50% that looks to me like your backlog coverage has fixed, tend at a little bit from about 95% within the quarter to about 92% within the quarter. Is my math correct there, have you seen some sort of backlog extension and the coverage of your backlog? No, I think that we told you the percentage of returns is roughly the same. So I mean, I didn’t do the calculation the way you did it, so I have to may be walkthrough that with you but, for I mean, our returns percentage is roughly the same as it’s been our last quarter maybe a little wider that the couple of quarters before that but than its still well within our, our lean times. So, if you look at 4 to 6 lean times and if a customer orders during the lean time that would lead a customer to roughly as 65% returns quarter, so I don’t think that there’s going to be change to be honest with you but I haven’t done the calculation the way you did. Well, you may have answered this in a way, you’re, looking at your historical seasonal patterns Q1 is typically been a little bit stronger we average out the last decade or so than the guidance that you are currently giving? Is it the change in mix that’s causing that or is this partially your view on sort of the macro environment? I think Tom its, my guess is there is a little bit of both. If you look at the last 10-year period, you know we have to see how 2006 turns out, with the growth projections for overall semiconductor and for analog semiconductor are both less then probably the average of the 10-year of the decade. So, we got a little bit of, maybe these forecasters being a little more expecting 2006 to certainly beat 2005, but still not to be vintage year, we can use that turn. So, there is a little bit of that in it, and I think there is also what’s you address quite accurately there is a little bit of, towards the end of the decade you referred to, we were more into consumer than we were at the beginning of the decade. So, the fact that consumers are a little bit bigger part of our business and consumer generates and we’ll have a good March quarter relative to this September and December quarters that would dampen number will. And Paul a general question on the way pricing works between you and your customers, competition is, I understand it is largely a factor at the point where the customer designs your, designs in your product versus your competitor. But then for the life of the product there that’s become a pretty stable relationship. Is, how does pricing work over that life of that design win? Is it set early in the relationship does it move through time? Can you give me some guidance on that? Well Tom this Dave. You are right, the place you win the design is when the socket is when the design is going down, and particularly when this industrial and infrastructure downs you tend to whole out of that sockets for many, many years. So, it depends on the customer of course, what kind of price reductions happened over time. But again, one of the beautiful things about us being has highly involves in the industrial and infrastructure market is that I think that those customers obviously are far less price sensitive and for more considering, we can’t newly supply its reliability in the filed the performance of the product and so forth. So, there is far less pressure in those markets to give continue price reductions over time. I don’t know if that answers your question on it Tom. Are the contractual relationships that preset pricing that will be sort of learning curve pricing over a number of years or is this something that reviewed annually how is does that structurally how is it work? Yeah it depends on the customer side and in some cases we do have a multiyear contract pricing in other cases pricing get negotiated annually. It’s also depended on the volume. So, we often time give pricing based on volumes and so when a customer achieves certain volumes, they’ll also will kick in an automatic price reduction. One, last one. Can we call the companies which are made public this is got to be the most stable business model of any semiconductor company, that’ll own probably most technology companies. Do you see anything in the either the competitive front or the mix of business, in terms of end-market mix, some high growth product becoming more commodity like, in terms of like handsets I mean, just becoming matured that would cause you to alter the business model? Tom this is Paul. Some of the factors you eluded to occur, but remember we are $1 billion company and a 30 billion plus analog market. And even if you look at the high performance sect of that which nobody is clearly identified, but generally people articulated being a third or so in markets, both say 11 billion, we’re still a pretty small player overall in this big analog markets. And we can continue to execute our model, we think going forward indefinitely in that, there is a real premium in certain aspects of the analog markets for excellent technology that technology can only get sold if the execution through the factory is flawless, so that we have good quality, good reliability, good on-time delivery, low lead times. So, so we think we can continue to execute that strategy. We can continue to grow indefinitely. There has been changes in competition some come in, some come out, a lot of the competition that I think focus in WallStreet look at and focus on, and say “Gee! You guys got to have to change your model” is concentrated in the very high volume businesses that change over time. So, we participate in these high volume businesses such as consumer in cell phones, but we are not dominated by them. And we move from one to the other when the technology evolves from one to the other. So, I think, as long as, electronics continue to be a bigger portion of your life and my life and analog has, I think everyone happens in is a significant part of that and as a symbiotic relationship with digital, we honestly don’t see any reason to change the overall strategy, just execute well, save people well, have a little turnover and good cash flow, invest the best products, have the highest quality, we can continue to grow with this margins and do as well as we have in the past we believe. Paul you accretive, accurately predicted bookings are growing at the December quarters is that your expectation for the March as well? Okay and then David your optimism about how Linear to this and then 3G is that based on design wins that your just waiting to go into production or is that more based sort of Linear’s precedence of being in the most feature rich phones? Well, I think it’s both. We certainly have some design wins in phones that really haven’t gone to our introduction, sort of, also I think the whole evolution are deployment of 3G is been delayed in most markets so, I think a lot of this cell phones manufactures frankly put more their energies as of weight into present kind of 2.5G products and they’re just waiting for the market to the go for 3G. So, I think that there is a lot of development activities that’s kind of been postponed as well, so, it’s a combination of both. One design is already, it really haven’t gone into high volume, but also a lot of I think future opportunities for new designs that just really haven’t been completely funded at cell phone companies. Thank you, gentlemen and couple of questions. First of all, in communications, I think you mentioned Power over Ethernet and Hot Swap as maybe some outline strength in the industrial and market, are there any specific trend that we should be looking for as far as how from this analog is concerned? Well, I think, one of the beautiful things about industrial market, it is so diverse, it’s diverse geographically, it’s diverse in customers as 1000s are mostly of the small and medium-sized customers and it’s only diverse from our product standpoint as well. So, it encompasses certainly a power products but it’s also the data convertible products amplifiers, interface products, you name it. So, I think, it’s one of the beautiful things about that market and then on top of that of course is we talked about earlier, it’s a very stable and customers tend to design end products to go for long, long time. So, one of the things that I want to mention, maybe this kind of alludes back to some of the earlier discussion in cell phones is, we’re a participant in cell phones and in high-end consumer products but where we identify opportunities that value the performance of our products and many of the companies that we could deal with there, we don’t even see in the industrial world, a lot of these guys whose names have come up in many new small companies, we may compete with them in the cell phone opportunity, we don’t even see those guys, in most cases in the industrial markets. And yet, we’ve got a lot of new products that I think are pretty exciting, there we’re going to fuel some additional growth in industrial. Its growth partly, because of the industrial market, I think its poised for overall growth but, its also going to grow for us because we’ve got new product categories, that in the end, try and get us the opportunities there. The modules is one those, the modules principally aimed at industrial infrastructure, we’ve got new data convertible products particularly some very new high-speed data convertible products. We are getting designing rooms on, we will get new RF products, that’s a new product category for us as well and we talked about long design cycles, but again very stable business. So, there is a new areas in industrial that I think we’re going to fuel our growth on top of the overall industrial dollar growth worldwide. That’s great and, if I am not mistaken I think our ASPs aren’t gone up now for the last, I think 2 or 3 quarters and I know its, its big, its mix base but, do you think its fair to say that, your ASPs have bottomed in the foreseeable future? Well, they have increased, we think they may have bottomed but, to be frank with you Tore what’s, what I want to really emphasize is the ASP is what’s relevant to us then it is the margin; we get on all these products. So, if you go back to couple of years we had an ASP significantly higher than the $1.63 we have now. The ASP back then was over $2 and we’ve gone down to an ASP slightly under 140 I think. So, what we, remember now our goal is to be as diverse as possible, within the electronics markets and to go where, where our features are valued. Sometimes that’s been valued in very low ASP products, cell phones different kinds of consumer products other times it’s valued before that in the networking area where it is very, very valued in the boom. So, we don’t drive the company by expected anticipated or budgeted ASPs we drive it by profit, in cash flow and revenue growth. I guess its and then, certain instances that can be used as a proxy to see if some of the traditional analyst markets are, have bottomed and are bouncing back would that be your you first statement? And then just finally you had some, some capacity additions throughout year calendar’05 can you give us dividends as an idea where you were a year ago and where you are now as far as, how much revenue you can actually generate with that additional capacity? As Paul mentioned earlier, we just completed a large expansion to our test facility in Singapore, and also we just completed 2 expansions to each of our 2 wafer fabs one in Camas, Washington one in Milpitas, California. Those capacity expansion projects are completed and are online and they would allow us when fully utilized to support revenue for sales about twice of what we are doing currently. The projects that we did will primarily on building construction, and plant, and equipment installations and to take full advantage of those expansion project, all we would have to do is that production tools and labor to it. So, we could ramp those expansions up very quickly just by the additional labor and capital. Yep, hi thank you very much. Just few follow-up on your handset exposure, that is now about 7% or 8% of your business which is about half a foot it was couple of years ago. And I just wanted to get your perspective on, do you expect that to go faster that 14% or 15% level with 3G or should we think of it, what I feel computing business which has declined as the percentage of the overall sales for other structural reasons? Yeah, Simona this is Dave. I know that some quarters ago our handset business was highest as 12%, I don’t know that we have records of being higher than that. But it has drop down now, in these most recent quarters, down to 7%. So a little bit hard to predict exactly what’s going to happen in the future. I think the 7% number as Paul, alluded to is really doing in 2 factors one is that we are talking about bookings here. So, as we go into the March quarter, which has seasonally lower handset business, we would expect the bookings to be a little bit lower. And then on top of that, as I alluded to as well, I think that the cell phone marketplace from a feature standpoint has stagnated somewhat, and its made, given the opportunity for something characteristic to close the gap a little bit. As, I mentioned, I think as 3G comes on, and you get new features, and a more focus on power efficiency in those handsets, my expectation would be that yes. I think there is opportunity for that percentage to grow in handsets again. But don’t hold me to a number it’s really hard to predict exactly when and how much, but I think yes it could grow. Sure, now that makes a lot of sense. And the second question if I may, on the power module room segments, and in the context that you have recently launched power module product. Should we praise any significance, what is your intention of the recently launched PM bus standard in the industry, which some participants have during last year? Is that something we should have focus on, or what is that the context for that standard? Well the PM Bus is getting a lot of attention, now it’s a little bit unclear; just how bigger impact its going to have in the near-term on the power-mentioned business. Where if you really have some interest is going to be a very large infrastructure and networking companies and so forth. But we planned to participate there as well. Which really driving that some audience the interest from this big infrastructure companies is to have more what they call parametric capability being able to read back from the power supply, then it’s like the temperature, the voltage, how much current is drawing and so forth. As well as some program ability features. But for instance, we recently I think just during the last month, we released a product ICC2970, which is a product that allows you to add those features to any of our power management products and allows you to communicate over the I2C bus which is worth of PM bus users. And give you those telemetry and program ability features. So a little bit unclear just how big its going to be, but we certainly aren’t using products that address the need for those kind of features with those big customers. Hi good morning, I wanted to ask you on R&D, you had real nice growth in R&D in fiscal ’05, but last couple of quarters have flattened out on the year-over-year basis and I just wanted to understand what we still expect in the next year and what this means for the rate in new product introductions? So that, and certainly we hired more people Lewis quite a bit more, so we’ve actually the quarter before this was one of our highest hiring quarters in the R&D area that we’ve ever had. So, from a headcount standpoint, we’ve opened new design centers, we opened one in Phoenix; we are looking at other places as well. From an expenditure standpoint, I think R&D continues to get a lot of focus from the company to grow. So, I think that you shouldn’t read anything into quarter-to-quarter propositions as to any change in the zeal with which for the importance of which getting good new people maintaining the people we have and introducing lots of new products. So, we continue to put a lot of effort on that, now there is really been no change whatsoever in this strategy to direct a lot of expenditures towards R&D. I think historically, in a year like this, I think you could see that in years frankly when we grow 30% to 35% on the top line, which should had a couple of those not this past year but the past, the 2 before that, its hard to pick up excellent talent at 35% per year. So on those years we probably would not grow R&D at the same rate of sales, whereas in a flatter year, we might actually grow it faster themselves. Okay, just a detailed question on your gross bookings comment on, I didn’t hear this but, in absolute dollars, what did your cell phone gross bookings do sequentially, what in dollars, was it up or down or flat? Way down, okay. And then, just looking at the March quarter, you’ve given us pretty good time what’s going to happen there, but can you distinguish between your Disty outlook versus your direct business outlook for the March quarter. So historically Disty is pretty strong in the March quarter. There are more day sales as I alluded to in my opening comments. So we would expect US Disty in particular to grow on a March quarter European Disty as well, if it matches its historical patterns. No, I didn’t say that, I said Disty would grow, you mean March, what’s that, that’s actually a granularity I am not sure, sure we know at the moment… I mean, we expected to grow, where it comes from our growth of 5% to 6%, we just have to see how that’s going to play out. For that, I don’t want new kind of, I don’t want to take one particular segment here and emphasize that then get at 3 months from now what happened in that segment. Thanks hi guys. First I want to plot the dividend increase which I think positions when you are as the leader in technology, Paul you mentioned the following ’06 would be a good year. Could you may be talk about what you think some of the growth drivers are by end-market if you maybe willing to stay, which are those booking markets might increase year-over-over and which might decrease, I’m assuming consumer will be probably higher percentage a year from now but if you would offer some thoughts about where you think you’re going to see growth this year? Yeah I know you’re on a fiscal year in June but you know from the calendar basis if you, if you have that. Well I am, I am not sure there’s any area we don’t think there’ll be growth, we think there’ll be good growth in, in probably the best areas across percentage wise, might be in the communications infrastructure, networking and automotive areas. But I think in all the areas, we would expect to grow, we would like to grow with the top line obviously more in our historic patterns in calendar 2005 will have been part of this. We grew calendar 2005, 8% if include a royalty we grew at 12%, not 8% was more that almost all of the competitors the calendar 2005. But it’s not what we would hope to grow calendar 2006, we would like to be more in our historical patterns to do that every area we would expect would grow and with the front end of it and you know you’ve been through this cycle off, targeting off, forecasting the quarter yearend without forecasting 4 quarters from now. So, we see some good trends in industrial; see some good trend in infrastructure that they’ve alluded to earlier. It cell phones, it’s this new technology that comes to bare that could bring some, some benefits so we’re reasonably optimistic going into 2006. Yeah and you certainly outperformed the overall market in terms of revenue growth in ’05, in the automotive area, is there one or two things that you could point to that you think will be a large revenue drivers this year? Yeah Bill, look, historically there are sales that’s been principally gone into like telemetric systems and navigation systems, thing is that they are kind of the dashboard of the car and that’s where we are started out in Europe and that’s where our early growth is been in both US and Japan. What’s starting to happen now is, is that continues to go by the way as we have greater and greater sales in those area, but what’s now happening in those markets, is we’re now getting parts designed into other types of functions throughout the car. And as I’m sure everybody is aware of the electronics content in the cars is continues to escalate and so that’s good news for us as we start getting design into the engine control systems, collusion of oil systems and allow the head lamps and tail lamps and you name it, it just goes on and on. In your way, the frustrating part of the automotive business is it’s a very long design cycle. So, the kind of growth that we’re seeing now particularly in Europe and Japan our design wins that we in general got may be 2, 2.5 years ago, but we’re very encouraged by that because US has some personal problems as we’re all aware with Dell plan others, but Europe and Japan we’re seeing really good growth and I think that the free trains starting move now and there’s middle its going to stop that. Okay, thanks David and last Paul what would you expect the inventories on your books to do in the March quarter. Yes. If you look at your consumer business there is the decline in, decline in bookings quarterly season of your as we look at in to March quarter or is there anything else that you see going on high-end consumer for the year? That’s so much going on in high end consumer Krishna, I mean we think its seasonal but which is so much going on, there is things could come in as things to go out I mean a lot of this products you have designed in they have, they have changes in product cycle and product offerings much more frequently and its in the industrial communications or automotive areas. So, there is always stuff for you to get in with you hopes but didn’t think you would and next stop that you get designed out. But, you know, you would hope to hold for longer. So, I think the downturn but if your basic question is why do you go from 14 to 11, we went from 14 to 11 because we move from the December period which is heavily consumer-oriented towards holidays into a period with this less celebration if you will and less than either by consumer products. Okay and in the other areas industrial, telecomm, networking and automotive you said all those areas, you know are strong going into the March quarter, can you sort of rank out all those four areas or is there equal trends in terms of booking in revenue of momentum in all those four end markets? Well that, again, you know I can rank order if you will what we’ve seen, but in predicting remember we are very broad-based we have lots of great product, we don’t try to force fit anything, we try to have reactive the market have the best stuff. But if you want to know the market that was the strongest force would have been the networking of all of those areas that was strong. So, in several of the strong, the strongest of the strong, if you will, was networking at the moment. Great and just one final question, you know you have talked about some of the competition that you have seen more in the high volume market such as cell phones maybe mobile PCs and some areas of this consumer. Do you see any of your competitors, you know client build primarily, just access or follow your footstep consolidate longer new trends more high value-added market networking, telecomm infrastructure. Do you see any evidence for competition from these high volume analog plays in these most specialty markets? Well this is Dave; of course we are trying to emulate our success. So that’s not as a surprise. I guess the real question for you guys to move over is that a capable of doing that, I think that’s the capability of our design organization is secondhand, I think the way that we design and develop our products is unique in the industry, our ability to detect trends in many cases even before our customers do. I think really give us an edge here. So, that’s surprising the companies that are attempting to duplicate that but I think if we continue to do what we have done year-after-year and emphasize the basics of our business which distinguished us, I think we’ll continued to be on front. And having said that, kind of alluded to here, a couple of times, there will be markets from time-to-time like the cell phone market today where I think there is a been a little bit of plato and features and that give us an opportunity for some of these other guys to close a gap a little bit. But that’s not a crisis for Liner Technology, I think its crisis if you’re, once you’re cloning, that’s all you’ve got to be able to do that. But as 3G cell phone come along as other high-end consumer products starting coming long with other features and so forth we’ve got those opportunities too. But we are in, we are in a market or a particular function say a cell phone gets price eroded to the point where it is no margin left, we walk away from that market, we’ve got plenty of other things to do. Hey Krishna, this is Paul, you will be able to answer that question in a minute, within a months, I mean all the competitors are going to announce their earnings all of that you can ask how they did an industrial, networking, telecomm, infrastructure and automotive. So you can gather a fully data average it and compare it to us. And I mentioned early Krishna, I think lot of the guys who compete against in many case in these rapidly price regarding businesses and sell cell phones we don’t see those guys other places. So some of these new things that are exciting that are driving businesses like automotive, industrial, communications and networking we’ve got new growth areas in those markets that many of those competitors that we see in the consumer areas just don’t have product offerings. Hi before when you gave out the second detail by product type, I think that sounded like there was little change from what it’s been historically and given all the other trends we have been talking about on the call. So little surprise with that so, if that’s right maybe could you give us a little bit of segmentation within power management, how much would you consider to be low current portable type stuffs versus other segments upon management whether that’s changed it all over the last several quarters. Yeah Jeff this is Dave. You know frankly, we really don’t have a kind of a granularity of data in front of us. But I don’t think there is been a big change in favor our products are going in power. Power is one of the product areas where we participate in all of these various markets. And in high-end consumer of course, that is historically has been principally a power market, so I guess you could argue that if high-end consumer goes up or down that might influence the distribution of power products. But the honest answer is I just don’t have the data as to where these 1000s of power products of categorized by market. Okay, yeah, I was kind of, lumping together high-end consumer and handsets, I think that maybe you’ve added for our management down, I mean if the stuff you said was strong and networking PoE and Hot Swap, I think can you remind us whether that you categorize that in power and just in general, what you would say that the strength in networking is coming mostly from, for evenly from power as from other areas or whether there is any color there in terms of where that the products have been more successful? Well let me help a bit you Jeff, remember now when I get you in market I give that based on booking when someone ask me what percentage of our sales was by business unit that was unfair. So for example, bookings in the consumer area are down a bit because we expect sales in the consumer area in the March quarter was probably be down as you would expect. So that, but yet the December quarter was a strong quarter in consumer if you talk about sales only and their power products is strong in that area. So I want to make sure when I kind of make things, two different things here in addressing the question. You see, see where I’m coming from. Absolutely yeah that’s a good point, I guess is that, is can you remind us few points about PoE and is that top mix signal, or is that you consider it to be power management? No. You have the actual off and PoE stuff we do not consider power product so that would be a mix signal product. Yeah, that’s a little bit. But, but I think that, lot of the growth we are seeing in PoE that power referred do that and some demonstrating our mix signal category. Luckily, that’s lot of power opportunity across the board in networking and other areas as well. Thanks for taking my questions. Units apparently were down in the December quarter so with the, the industrial segment coming back in March, you guys expect that both case these units to be up in March? Well we don’t really forecast ASP to be quite honestly as I said about half an hour ago in some of these questions but the, we think sales are going to be up 5% to 6% we told you, right now if you asked me to the GAAP, that gets like ASP might not change to much and that it’s probably be some growth in units but if you asked me secondly did I care one way or the other as long as I met 5 to 6, I would say no. Okay you mentioned Paul that profits sold in the March quarter likely raise of the same rate as revenues. Do you think kind of going forward that this is going to be the trend that when you go probably in July for the rest of the year basically profits driving at roughly the same rate as revenues. Well I think, I think so, revenues take a dramatic turn upward in profit will probably out strict revenues a bit because you have a great and broader fixed cost and so a broader sales base and so that it depends on how quarters we haven’t forecasted yet and don’t know the answers to yet fold out. But I think if you growing in a, in the range we are now, for the next quarter that profits would be would be pretty close to sales. Okay and in general in terms of just of the market, I mean, our products that getting 80% than of gross margins are they, are they growing at the same rate as the lower gross margin products I mean, not necessarily yours but explain, the markets in general, I don’t know, our 20% gross margin product the revenue that they were growing at the same rate as, as the ones for 70% to 80% or is there meaningful discrepancy? Well if you’re talking about, I think you said not just us. If you talk about the overall market, there is certainly been more growth in the overall market in the past year and areas like consumer which in encompasses some high performance, some commodities some very inexpensive analog stuff. Certainly, there has been growth in infrastructure areas or networking areas or people have asked us about different forms of infrastructure in communication. So, but relative to Linear’s growth, you can’t have an roughly 80% gross margin 78% gross margin and have pretty wide swings in your products offerings. Its tough to get high 90% gross margins on anything, so, that for us, we’re selective in all these markets we are still a small enough player that there is plenty of opportunities for us continue with these margin levels in each of those end-markets. Quite of your question is overall, the whole 33 billion Linear market, I guess is the more excused towards consumer the little, the markets are called would be to have higher margins. Okay. So in terms of your own revenue growth rates do you expect that to, to match with the industry or probably be a little below that? Yes. We do, we’ve done that historic. Yeah, we certainly think we’ll grow fast anyhow. last we grew, I’m a little surprised by the question, last year we grew, last calendar year we grew 8% the overall market has been projected as having grown 1%, the last 2 fiscal years we grew 33% and 30% and market didn’t grow anywhere near that. Great, thank you, just a couple of quick ones. First is with regards to asking the growth in the segments you’ve mentioned end-markets, you didn’t mention consumer electronics has being order, you tell it outperforms consumer growth, did I mentioned that correctly? Oh! Not specifically for March but I think the question is more about ’06 in general over the book for the drivers for ’06 and you mentioned some of the categories is been, more progressed that did mentioned high consumers been one of this, just wondering if you could help us, I mean, I’m sure that correctly. Well, Steve I think, I’m kind of stuck to the question, when someone says to me pick the areas of the all the areas which one do you think will grow the most. I’d thought I said I mentioned networking has having grown the most, I though t I mentioned industrials starting of but, I can’t name them all, so on the other hand, I also said that in 2006 we thought it’d better year than 2005 and we’d grow all the areas. So, at sometimes, the I’m kind of, tied by other questions ask, so if someone says to me of all the markets which one do you think will grow the most, I can’t name them all, so that I didn’t name high-end consumer because I think the others may grow a little more but that doesn’t mean high-end consumer couldn’t be really good. When Dave mentioned earlier, if something takes off in 3G phone or something like that later in the year that could change these dynamics, but answering the question here on January 18, looking at the bookings we got last quarter, looking at the markets as they presently are in this quarter that we’re in, I think consumer will grow last than the other ones. Okay great thanks. And then just one question on the handset, obviously a lot of other people are trying to focus on the handset pickup designed ones there, when you guys compete for the sockets, is your success necessarily exclusive of other people success a few win, how would you typically win on a power on the handsets for the people get in there, sort of a, what percentage of the sockets are you wining in, in some all of the other displays, et cetera. Well we didn’t know, it doesn’t all go to one guide, especially with the very cost sensitive product like a cell phone, they make decisions on each individual I see opportunity there so, you can, you can sometimes win one, you can sometimes win a few or just it really matters this one was the best fit. But again, I would say that, we’ve got products today obviously that distinguish themselves by the performance and we think that there is potential and increasing number of those opportunities where we can win based on our performance. Okay and the last question where a couple of functions on the 3G handset where pockets we think you’re going to end up being a little bit better or stronger than others? Yeah I think there was both some new functions that didn’t exist in 2.5G phones, this in the high-speed data protocols for instance that they need some new power management functions. But also as we sort of, packing more and more features together and particularly as we probably know these 3G phones are going to have video capability, so you’re going to be able to watch television programs in the light on your cell phone, so if you are doing that, you are running the LCD display and the backlight for long period of time so now the efficiency of those power management circuits becomes critical and customers who wanted to pay more for high efficiency as well as system general, they probably are willing to pay more for high efficiency in the other power management functions. So, those are the kind of trends that I am talking about on 3G that I think are going to make it more performance-intensive and make those customers willing to pay for the higher performance of our products. All right, I was just, I was just, just wondering if there’s one or two where Linear in particular, was capturing design wins versus other stay on those video function? Yeah, all right, I think there are some specific parts like wide LEDs like I mentioned, I think that’s going to in area, I think replacing Linear regulars with DC to DC converters from improved efficiency and as I mentioned even in the transmitter, I think there was some new opportunities for us. Yes thanks for taking my question, looking at the consumer market; some of big new feature is, to be everywhere iPods, PDRs, cell phones, flat panels, HTTD. Can you talk a little bit about where you are seeing design activity I’d know, obviously you can’t predict how those markets are going to grow but, where is the design activity and can you give a little bit of color on, is the big driver going to be, White LED, back lights for flat panels or what sorts of circuit opportunities that might you have but you think might will grow in the second half of this year. Okay this is Dave again, all right design activities around the globe, but one of the interesting things that Paul had mentioned in his introductory comments is that, then inspiration as we track it for the US is actually 51%. So lot those high-end consumer products is still being designed here in the USA even if they go to manufacturer predominantly in Asia. On the other hand, there is the ODMs in Asia that are gaining more development capabilities, so there is activity going on there too. So I don’t want to sound evasive, but it’s going on everywhere and we’ve got support for those design activities everywhere. Okay I am sorry, misunderstood your question. Well if we made into the set Asia there are 2 above is lots to stop, which I think battery charges for instances and many cases battery chargers where you can charge from wallet after or USB. We are talking about Linear regulation, and DC to DC converters, the power various circuits, we are talking about wide LED back lights, as you talked about in the case of like camera phones, you might be talking 3 or 4 different sets of LEDs for flash and multiple displays and so forth. You might be talking about interfaces to SIM cards, for powering up a ply it goes on and on and on, and part of our goal as a company is to read the trends and identify those new needs, before the competition does and make sure we’ve got those parts to support those and we are going to give before the competition does. And as we consistently done that and will continue to do that. Which is why when things are changing, as I said cell phone market is something with a great opportunity for us because we tend to have the new functions, those customers need well before competition does. Auguste, Auguste let him discuss this is Paul, I mean trying to answer your question, we are also trying not to tell all our competitors exactly what we are doing. We can now felt with question and make it generic enough that is, that Dave can answer you sure have him on the hot seat here. He doesn’t really want to tell what’s in the design cycle here so that the competitors hear it in there first hand. Let me take this totally differently, may be answering this way, do you guys see in the consumer cases, video as a driver of growth in the second half of this year or if you going to take a longer to deploy video on, the poultry of devices its going to be more than ’07 phenomenon. Okay I think we are going to see some growth during this year and I have to qualify it by the fact that I am not an expert in this market, you probably know more about it than I do but we’re seeing video in a number of products from iPods and portal media players to some new 3G phones that are just starting from a, so I think there’ll be some growth, I would guess that it would frankly we are going to see far more growth may be in 2007 but, but frankly that is just my own guess and I can say you probably have a better read on that market than I do. Yes hi, you sort of, answered this question I just want to ask it in different way, anything that you can tell in terms of looking at your more seasonal market which would include high-end consumer computing and handsets to the extent that we’re not talking about, whatever sales that being impacted by lack of new features, anything there in these 3 markets which looks like its not tracking to what it’s a normal seasonal trends, or do think demand was largely been seasonal in these markets? We guess it’s been seasonal, and we don’t see any special party thing going on, that, that’s so I think seasonal is the answer. Can you, may be you can tell me, I don’t have that number in front of me how did three grow over two. Well on the, well others in the third quarter you had about 6% sequential growth and 7%, 7.8% in the fourth quarter. Well we don’t project the quarter beyond the one we’re in at the moment so, I think we told you we grow 5% to 6% in the March quarter, so a little hard to me frankly they compare this to 2003 I don’t have the data in front of me and the markets are different and it’s just each of these years are different with their own challenges. So I guess I can’t respond to most of that question. Okay on the ASP you mentioned about I pick a lot of the ASPs but all those from your point of view there remaining to it, where the $1.63 did you mentioned that? And what makes the ASP become from down to $1.55 and the first quarter to do down the $1.63 in the third quarter, in the second quarter. I told you the bookings percentages, booking grew in the networking, the infrastructure the automotive and in terms of getting some industrial areas more than they grew in the and in high-end consumer or they went bookings went backward. So the ASPs, which you would expect because you are moving out of the December quarter into the March quarter. So what, what you have is you had in, we had more bookings in non-consumer areas than we had in consumer areas and the ASPs are higher in non-consumer areas than they are in consumer areas. Okay, as to somebody’s question you answered that ASPs maybe and winning the same in the June quarter of $1.63 probably which say is probably the bookings are likely to be like bigger and the next, in this quarter and the March quarter which means the revenue growth would be much higher in the June quarter? I, I am not following you bouncing ball, can you tell me that again, what we haven’t projected the June quarter and we are not going to project the June quarter. You are not projected the June quarter, I am just trying to have and implied answer to it inside, you mentioned about ASPs remaining good in the March quarter which means that the bookings are likely to occur in what the bookings are in the December quarter and the March quarter, is that correct? So you could have the same, you could have the same, if ASPs and I said we don’t run our business by ASPs I did trying to respond to the question, I said they somewhat enroll now ASPs I thought would be roughly the same. So, if the ASPs stay roughly the same that would mean that what I, what I told you we booked, would remain, the relative, the relative percentages one to the other of these end-markets would be roughly the same. Okay, one last question on book-to-bill ratio that you mentioned was positive, now when you say positive was it greater than 1, was it 1.1 or do you want to comment on that, and… Yes good afternoon, good morning rather. Hi gentlemen. I was just wondering two things 1) on the, that we are in the normal seasonal period, Paul as I would call your June quarter is not quite as strongly as been March quarter and in December and the March quarter were as strongest quarters is that roughly correct? Historically, some years have been different, it depends on the year we’re in but, if you took an average of all the years you probably find that to be true. Okay. Second one is actually on the 3G cell phone business, there has been sort of a, I guess some pretty large semiconductor companies, more digital types talking about the pressure by the service provided to come out with $200 3G cell phone in calendar ’06. Those sort of main stream pricing as 3G cell phones as those had used platforms for Linear Technology sockets. Is that shift the come to path in calendar ’06? Hi, this is Dave. I am sure there is going to be a range of product offerings in 3G, I have been heard about this $200 3G phone but, this is going to be a range of products and, as always we are going to find a greatest opportunities in the ones that are more feature rich and the push performance. I think in general there is going to be more opportunities in 3G, than the there are the 2.5G phones but again I think even within 3G that is probably going to be a spectrum. So, again I don’t know the details of this particularly $200 phones you’re talking about, so I really can’t comment specifically on that but, I think its certainly into high end 3G and feature rich phones that’s going to be a better a opportunity for us. I really don’t know I don’t know where you draw the line that I don’t think it is a line I think that in general they are more feature rich and performing some intensive to product whether it via comes, cell phone or any other consumer product, the greater opportunity there is for us. If you move to the other end where really price is the thing that matters most and performance is less important, then I think that hands of been in the lower margin business and in many cases and the stuff where there is just isn’t enough profit in there to make it with in a while. Hi, guys, thanks. I just wanted to get a follow up on inventory levels and you mentioned inventory was looking pretty lean coming out of the quarter. Is there any sense with those being main inventory levels that your distributors or customers might be making most to move that higher? I realized your lead funds haven’t moved much but, then sometimes your customers are moving more towards what’s going on the industry as suppose to you guys, could you give some color there? Yes, Chris historically when the distributor has wanted to lean more towards their read on the industry unless power ability to our lead times to match their needs. We put lot of pressure on them to resist that temptation and rather just, in a way of 4 to 6 week lead times in certain cases we can do better than that. We really try to encourage the distributor to speak more to our lean time patterns then to guests on inventory and stock up on inventory and do things like that. And I think they’ve generally been impressed that whenever they needed it we’ve supplied it for them. So I haven’t had to make those sort of estimates and they haven’t had to tie up their assets, their cash assets to do that. Okay, this is a follow up and I guess what you saying is that, they are not putting more inventory place in your products and I guess if you could comment do you think your lead times are substantially lowered in your competitors right now? Well, I don’t know all the competitors to be frankly. So I can tell you true of cycle often time as you get in the lower part of our cycle our lead times are not dramatically bettered in our competitors, but as the cycle heats up our stone stretch out there do. But my most honest answer to these, I don’t know the competitors lead times, maybe Dave or Lothar do, but at the moment I do not. We will do hear some annexable evidence about lean time stretching out of some of our competitors but I don’t think he is going to anticipate than with us, I think all we trying to get remain well Yeah hi, thanks for taking my call. I want to understand if you feel that your company is best optimized for operating income growth, if you were to sacrifice some of the margins can you grow your operating incomes after then what you’ve delivered in the last couple of years. And I just want to understand, how you think about that? Well the way we think about it is what we have is we have a team and the team here is driven, that produce the best analog parts, and the best thing is it start to design, and works its way through the factory responding to that and its all build on, on how we do have good gross margins, how do we have cash-low and how did we’ll be the leader at the, having the best store richest technology. We bring that historic moving from that to more of a commodity to increase operating income would have a temporary benefit but a long-term determine, as you can’t keep the thing focused on 2 objectives, as well as you can crisply focused on one objective and if you have confidence at that objective enables you to grow at a reasonable rate, as I told you the last 2 fiscal years we grew 30% and 33%, this calendar we grew 8%, where the overall margin grew 1, the overall market grew 1%. We did that focusing on the high end, we did that without any deterioration in our margins and that’s what we do. If you want invest in a company that’s more focused on consumer and therefore more optimizing maybe a broader spectrum on the market, sadly that’s not us. Well and its not a question of about what, where I want to invest and I mean, that I was determined but my question is more or less a stock market is valuing the company based on earnings growth, I want to just understand what you have thought process is on that in terms of growing Linear’s earning faster than where you are by sacrificing some margins and I think you’ve answered my question. Thank you Thank you, a very few quick ones, you said China in the past was about 5% of the business is that up still there now or any changes there? Well we really look at China principally from a demand creation stand point, our shipments into the China are considerably more than because a lot of manufacturing goes on in China products, we are not designed there. We, I don’t believe that recorded an exact percentage for demand creation in China. But that number does continue to grow as you would expect. But still a fairly small percentage of our demand created number today. Okay and some parts on the high end notebooks, you have said that as the notebooks are moving out of Japan to the Asian countries, what do you think it happens does, does the hand move more towards the value and notebooks become less attractive for you or do you think same kind of consumption of the high end notebooks in the Asian countries? Well I think their percentage hasn’t moved appreciably during in recent quarters, Paul you’ve got those numbers what was it about 7%, we think? And I guess last one for Paul how do think you compensate your employees, is it a power with rest of the industrial above that because, when I look at your financials you do such a good job of matching cost that I don’t see it in stock options I don’t see it in the margins. So what’s the compensation have compared to the rest of the industries? I think we pay, in total packages we pay more than, than our competitors. Base pay were probably similar profit sharing were far ahead of what our competitors say and then in stock option, we grant stock option restricted stock etc. So my guess is if you’ve been an engineer at Linear, no last 5 years you’ve done better than had you worked that any other place. Thank you. Paul at the last analyst meeting you showed some interesting converter products, I assume those were in your mixed signal space as they could you kind of calibrate where those are in the grand scope of things as you know, percentage of your mixed signal business percentage of your overall business are you doing that? Randy this Dave, I will see if I can take a stab at it. When you are seeing converter products you are talking about data converter products I assume? Right the crowd pleaser. The, those converter products, we continue to expand at offering what you were referring to there with weighing the stack of papers is actually one of our higher resolution the 24 bit Delta signal converter that’s one family products. It’s kind of a one, one end where it has very high resolution that relatively slow conversion speed into the industrial applications. That product here continues to grow and we continue to add products to it. The other area that’s really exciting to us and probably wonder we talk more about frankly is at the other end of the spectrum and has very high speed analog to digital converters, pretty fast that our part out now that is the best in the industry, that is a 16 bit part samples of 130 mega samples and that seem it seems like high-end base stations and medical equipment in some industrial applications were principally that infrastructure. And ancillary that there were introducing a lots of new products and we are that there were introducing a lot of new products and we’re really excited about the growth prospects there too. So as far as the breaking out what percentage of our businesses in those we don’t do that today those are in our mixed signal product category but we don’t breakout publicly what percentage of our business those product lines are. And Brain here this is Paul. Since that analyst meeting which was about a year and a half ago, I think now maybe to hard recognition in the marketplace for A/D converters has gone up fairly significantly. So the products you saw there and the one subsequently introduced have moved us now into a position where we thought are very highly in that area. Good morning, thanks for taking my question. I just have a quick question on the Power over Ethernet market that’s been a good growth driver for you, I know you are striving your current strength there. Is it possible that your biggest customer in that area could begin to sourcing product in 2006 or do you, foresee remaining a source or supplier there? Well I am not going to comment on any dual source or anything alike that about any specific customers, but the PoE market has been a good one for us as you recognize and we pointed out ourselves and I think a good trend for is it we think that more and more sockets, are going to be included to powered sockets during the coming years. So I think you are going to reach a point that might be distant future where at least in commercial applications almost all of that Ethernet ports are going to be powered. Another good thing is that it’s a really powered analog problem to solve and I think that, that’s what’s given us a leadership position against our competitors, its it goes into a real world application or you have to deal with a lot of hazardous conditions, and it’s a really tough anyway problem to solve and that’s the kind of stuff we’d like to do. And I think we’ve enjoyed the words because of it. Do you have any idea of kind of what portal shipments were in ’05 and maybe what they could be in ’06, or if not specific numbers maybe what type of growth we could expect in that market in ’06. No we are not prepared to get any specific down there, but I think here you should expect that there is going to be continued growth worldwide in the number of powered ports I just mentioned, but we are not prepared to give any specific on that. And it appears we have no further questions. Mr. Coghlan I will turn it back to you for any additional or closing remarks. Well thank you for your attention it’s been a long conference call. Just to summarize we had a very good quarter, the December quarter, our forecast for the March quarter is to grow on the 5% to 6% range. Thank you very much for your attention today, I wish you all the good day and a good week.