MACOM Technology Solutions Holdings, Inc. (MTSI) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the M/A-Com Technology Solutions First Fiscal Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. It's now my pleasure to turn the call over to Leanne Sievers with the Shelton Group, the Investor Relations agency from M/A-Com. Please go ahead.

Good afternoon, and welcome to M/A-Com Technology Solutions Holdings, Inc. First Quarter of Fiscal 2013 Earnings Conference Call. I'm Leanne Sievers, Executive Vice President of Shelton Group, M/A-Com's Investor Relations firm. With us today are M/A-Com's President and Chief Executive Officer, John Croteau; and Chief Financial Officer, Conrad Gagnon. Before I turn the call over to Mr. Croteau, I'd like to remind our listeners that management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigations Reform Act of 1995. Actual results may differ materially from those discussed today and therefore, we refer you to a more detailed discussion of the risks and uncertainties that could result in those differences in the company's filings with the Securities and Exchange Commission, including its Form 8-K filed today and its annual report on Form 10-K filed on November 28, 2012. In addition, any projections as to the company's future performance represents management's estimates as of today, January 29, 2013. M/A-Com assumes no obligations to update these projections in the future, as market conditions may or may not change. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. These financial measures and the reconciliation of GAAP to non-GAAP results are provided in the company's press release and related current report on Form 8-K, which was filed with the Securities and Exchange Commission today and can be found at the Investor Relations section at M/A-Com's website at www.macomtech.com. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 30 days in the Investor Relations section of M/A-Com's website. And now, I'll turn the call over to M/A-Com's President and CEO, John Croteau. Mr. Croteau, please go ahead.

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. I'd like to begin today's call with an overview of our first quarter results, and then we'll review our end markets and the progress we continue to make towards executing our growth strategy. Once completed, I'll turn the call over to Conrad Gagnon, our CFO, who will review our financial performance in further detail. I'll then conclude today's prepared comments by providing our guidance for the second fiscal quarter before opening the call for questions. Revenue for the first quarter was $75 million, representing a 1% increase over the prior quarter and a 3% increase year-over-year. Non-GAAP gross margin was 44%, and non-GAAP net income was $9.7 million or $0.20 per diluted share. We finished the quarter with $92.6 million in cash equivalents and investments, no debt and an untapped credit line of $150 million. Overall, our revenue and earnings per share results were within our previously announced range of expectations. During the quarter, our automotive sales continue to outperform. As a result of this success and as our relationship with Ford begins to mature, it has is led us to the decision to report automotive as our fourth end market moving forward. Automotive sales have proven to be a strong growth contributor and are accretive to our corporate operating margins and we will continue to manage it as such. We believe we have effectively realized full market penetration with our key customer, Ford, and we expect any further growth to be only a reflection of market shares gains by Ford. Moving forward, we expect the Ford relationship will remain a stable and rewarding one for years to come. Taking a closer look at our revenue by market, 23% of our first quarter revenue was from Networks, 28% from Aerospace & Defense, 21% from Multimarket and 28% from Automotive, of which 26% was Ford. Now I'd like to share with you some refinements to our strategy, which I believe will help us stay laser-focused on our long-term goals of generating growth, driving margin expansion and improving our operational efficiency. Going forward, you will hear us talk about our standard catalog products as a standout 6-plus decade leader within the high-performance RF and microwave market. In some cases, we lead the market in specific product categories. For instance, we believe we hold majority share in the RF and microwave diode market by a factor of 2 over our nearest competitor. We're also #1 in pulsed power transistors. We believe this renewed focus on our historical core strengths will allow us to better maximize near-term results from off-shelf products. The rest of our RF product lines experienced what we believe was the bottom of the cycle during Q1, which is consistent with guidance from our peers and the industry experts. Specifically, Networks and A&D were down from last quarter due to what we believe was our customers' year-end inventory management, especially in Asia. We finished the quarter with a non-GAAP gross margin of 44%, which is at the lower end of our guidance due to the previously mentioned strength in automotive sales relative to our other markets. However, we believe we have seen the bottom of the trough, as we saw growth in our flagship diode product line, which is traditionally served as a leading indicator of overall market demand. Quarter-on-quarter diode sales grew across all markets and applications, and order backlog has grown to support growth into Q2. Networks, as expected, was down last quarter. We believe this was largely due to year-end inventory management. We have not yet seen a lift into our backlog demands and do not anticipate recovery in fiscal Q2. However, we believe substantial bookings from our new optoelectronics products will be a key growth driver in fiscal Q2, with continued momentum moving into the second half of the year. Gross margin from these new optoelectronics products is well above corporate average. From the Aerospace & Defense market, we experienced the slight decline in revenue in fiscal Q1, once again, mainly due to inventory management. This time, in Asian radar programs. Our outlook in A&D is flat moving into fiscal Q2, while the prospect of potential sequestration in 2013 is a sobering one for anyone supplying the U.S. Defense market. We believe that the diversity of the U.S. defense-related business limits the risk to only a few percent of our total sales. We're optimistic we'll see growth in Q3 as new satellite communications products, as well as new customers, ramp into production. Consistent with our previously announced strategy, we continue to build out our innovative product portfolio, releasing 28 new products this quarter, specifically 13 in Networks, 12 in Aerospace & Defense and 3 in Multimarket. In summary, the overall business environment remains very challenging, however, we believe our strong execution and renewed focus on core strengths will deliver growth next quarter, consistent with our strategic plan. With that, I'll now turn the call over to Conrad to discuss the financial results for the first quarter of 2013.

Thank you, John, and good afternoon, everyone. During the course of my comments, as well as those made by John, with the exception of revenue, all income statement amounts and percentages will be discussed on a non-GAAP basis. Unless otherwise indicated, each reference will be to an amount or percentage that excludes stock-based and other noncash compensation, intangible assets amortization, restructuring costs, optimized litigation costs, fair value adjustments, amortized financing costs recorded as interest expense as well as certain income tax items. In addition, cash flow from operations for the first quarter is discussed on a non-GAAP basis. These non-GAAP measures are provided to enhance understanding of our core operating performance. With this in mind, let me now begin with the review of our financials for the first quarter of fiscal 2013. Revenue for the first quarter of fiscal 2013 was $75 million compared to $74.6 million in the fourth quarter of 2012 and an increase of 3% compared to $73 million in the first quarter of 2012. Revenue in the quarter was driven by strength in sales for our Automotive product but largely offset by partners [ph] in the Networks and Aerospace & Defense market. As John mentioned, beginning this quarter, we are breaking out Automotive as a separate end market. As such, the revenue split among our 4 primary end markets in the first quarter was Network, 23%; Aerospace & Defense, 28%; Automotive, 28%; and Multimarket, 21%. By way of comparison, the prior quarter revenue split among the 4 primary end markets was Network, 28%; Aerospace & Defense, 30%; Automotive, 21%; and Multimarket, 21%. Gross profit in the first quarter was $33 million or 44% of revenue compared to $32.7 million or 43.9% of revenue in the prior quarter and $31.8 million or 43.6% in the prior year quarter. Our gross margins expanded over the prior quarter and prior year quarter despite the mix shift with lower gross margin automotive products. Our long-term focus continues to be on improving gross margin through increased sales of higher-margin new products, market growth and channel efficiency, as well as further cost reduction. In terms of our operating expenses for the first fiscal quarter, total operating expenses were $19.2 million compared to $17.4 million last quarter and $20.4 million in the prior year quarter. Looking specifically at investments in new products, our research and developments expense for the first quarter was $9.5 million compared to $7.6 million in the prior quarter, which was lower than typical due to $900,000 of favorable foreign research credits in the prior quarter and compared to $9.8 million in the first quarter of 2012. R&D as a percentage of revenue represented 12.7% in the first quarter compared to 10.2% in the previous quarter and 13.4% in the prior year quarter. We plan to continue investing in R&D at similar rates to further the advancements of our new product development efforts. Selling, general and administrative expenses were $9.7 million compared to $9.8 million in the fourth quarter of 2012 and $10.6 million in the prior year quarter. As a percentage of revenue, SG&A represented 12.9% in the first quarter compared to 13.2% in the previous quarter and 14.6% in the prior year quarter. We claim to continue managing SG&A to get our OpEx to the 25% target. Income from operations was $13.8 million or 18.4% of revenue. This compares to $15.3 million or 20.5% of revenue in the prior quarter and $11.4 million or 15.6% of revenue in the prior year quarter. We expect operating margins will lift over time, as we maintain our 25% OpEx model and gross margin expands through the growth of new high-margin product and the introduction of operational efficiencies. Turning to income taxes. Our effective income tax rate during the first quarter was 30%. The expected extension of the U.S. R&D tax credit beyond December 31, 2011, was not signed until January 2013. And therefore, the effective tax rate for the first quarter of 2013 does not reflect any benefits from these get credits. Our anticipated effective tax rate for 2013 is 29%. Our first quarter net income was $9.7 million or $0.20 per diluted share compared to fourth quarter net income of $10.4 million or $0.22 per diluted share and net income of $7.7 million or $0.19 per diluted share in the prior year quarter. The share count used to compute EPS was 47.6 million shares for the first quarter, 47.4 million shares for the fourth quarter and 41.5 million shares in the prior year period. Turning to the balance sheet. As of December 28, 2012, our cash and cash equivalents were $92.6 million, which represents an increase of $8 million for the quarter. During the quarter, we made a final earn-out payment of $6 million to Cobham related to the acquisition of the business in 2009. Cash flow from operations for the first fiscal quarter was $14.4 million compared to $9.1 million in the previous quarter and $8.3 million for the prior year quarter. We have 0 debt and a revolving credit facility of $150 million for additional liquidity. Accounts receivable of $52.1 million represents 63 days sales outstanding, which compares to $54.2 million and 66 days sales outstanding at the end of the prior quarter. Inventory was $58.6 million, a $1.2 million increase from $57.5 million in the prior quarter. Inventory turns were 2.9 in both quarters. Capital expenditures in the first quarter were $1.6 million or 2.1% of revenue compared to 2.9% of revenue in the prior quarter. We believe capital expenditure for the fiscal year will be within the range of 3% to 4% of revenue. Depreciation expense on property and equipment for the fiscal first quarter was $2.6 million. I will now turn the call back over to John, who will provide our business outlook for the second quarter of fiscal 2013.

Thanks, Conrad. In the second quarter ending March 29, 2013, we currently expect revenue to be in the range of $75 million to $80 million, non-GAAP gross margin between 44% and 45% and non-GAAP earnings per diluted share between $0.20 and $0.24 based on an expected 48 million shares outstanding. As of today, we have already shipped or have presently firm votes [ph] for 87% of the midpoint of our revenue range. Operator, we can now open the call for questions.

[Operator Instructions] Our first question comes from the line of Blayne Curtis with Barclays.

Maybe to start with John. If you could just talk about -- your actually seeing growth in the Q1. If you could just talk about which segments you're seeing the uptick in? Is it broad-based, or is it some specific segment?

Sure. So the way we describe it is, first of all, we had a positive book-to-bill slightly over 1 in the first quarter, so there is relative strength, firm backlog across much of our business. The specific growth is coming from our Network segment specifically in auto. We have backlog that covers pretty much the entire growth quarter-on-quarter. I'll emphasize the fact that we're in that Network segment. We're assuming no recovery in point-to-point wireless infrastructure. So if that were to happen, that would be only upside and push us towards the top end of our guidance.

And then you mentioned the Ford business was, you said, fully penetrated if Ford gained share it would grow. So in that expectation [ph], do you see it staying in this range and then at least these in the near-term?

Yes, we would expect minor fluctuations quarter-to-quarter. Any further growth would really be a reflection on share gains by Ford. It's our belief that we're pretty much shipping across all the Ford models that will ultimately ship the SYNC system.

Great. And then you mentioned your strong diode position. Maybe you can just elaborate on where you see opportunities now that you've been in the seat for a while, to grow the core business. I think, most people know the new product story, but if you could just elaborate on where you see opportunities in the existing business?

Sure. So I've been pleasantly surprised. I've gone through 2 rounds of what I call deep dive reviews, kind of full day reviews with each of our businesses. And pretty much, in the diode space, we have opportunities to take share in every one of our segments. In fact, in the last round there is even talk of new applications that are emerging that could drive substantial growth for technologies like our HMIC, the Heterolithic Microwave IC technologies. So I think, personally, that getting back focus on our core business, where we're strong already in the market across all the segments, you can really yield dividends, although it's still early yet in my tenure to claim short-term results.

Our next question comes from Tore Svanberg with Stifel, Nicolaus.

A few questions, and maybe a follow-up to the last question on diodes. John, you said that it tends to be sort of a precursor to broad-based demand improving. Can you just elaborate a little bit on that please?

Sure. I had made a comment during the last quarter's call that we saw kind of a healthy quarter pattern developing, and that really led to not insignificant growth quarter-on-quarter of this base core business. It's really spread across every one of our segments and across many, many customers. And those sorts of businesses, like we said, tend to be early indicators of overall demand patterns. That order pattern continues. Our book-to-bill ratio was slightly above 1. So I'm confident that we'll continue to show firm demand through the second fiscal quarter.

Very good. And on your Opto business being up this quarter -- this current quarter, is that driven by your new products for 100G? Or is there something else going on there?

No, it's all about new products in Opto. I mean, we were growing from a negligible revenue run rate to not insignificance. And, in fact, our orders are strong beyond the second fiscal quarter with high-quality OEMs, foresee [ph] OEMS behind that demand. So I am very confident and very comfortable to say that the second quarter outlook for Opto is not going to be a onetime event. I think it's going effect -- very confident it'll show continued momentum into the second half of the year.

Very good. And you mentioned you're not expecting the wireless point-to-point business to come back anytime soon. I mean, what are some of the comments you're getting from your customers there? I mean, are they -- is there any hope at all for later on this year? Or is this just going to stay soft?

There's no question. The customers for the past year have been predicting have been predicting recovery in the next quarter. The real question is whether we want to bank on that recovery. So the guidance we provide assumes the worst case scenario. There is no recovery the second quarter, our fiscal second quarter. I think it's inevitable that the industry will recover. And I would guess that it would be in the third quarter, but frankly, I mean, I've been waiting for his recovery for the past year. So we'll believe it when they backlog builds with deliveries within the next quarter.

That's very fair. Last question for Conrad. Conrad, you mentioned the 29% tax rate doesn't assume any extension of the R&D tax credit. Is there a chance maybe that 29% can come down as we move throughout the year?

What I intended, if it didn't come across that way, the 29% does include the effective -- in the effective tax rate does include the credit for the fiscal year. It's simply that in Q1 because our quarter ended December 28, it was prior to the renewal of the tax credit law, and so that was a 30% rate for that single quarter. So we do have it at 29% this year, and that is inclusive of the R&D tax credit story [ph].

Our next question comes from the line of Quinn Bolton with Needham & Company.

John, I wanted to come back to the growth drivers. It sounds like Networks, you'll see growth in Opto and then the Aerospace & Defense and Auto businesses are roughly flat. Can you make any comments about the Multi-markets business? Is that sort of flat? Or are you seeing positive trends in the Multi-market segment?

So our Multi-market business is comprised entirely of that kind of standard catalog products. And it's in that area that we see slightly above one book-to-bill ratio. So what I would expect is steady progress, steady growth, steady recovery, I don't know, in the order of 3% to 5% year-over-year. But nothing that's really going to move the needle in a big way, but certainly not dropping.

Okay. So it sounds like Opto is the real growth driver in the second -- fiscal second quarter?

Yes, Opto is the real deal. I mean we have the backlog to cover exactly what we're guiding to. And I don't anticipate any scenario where that would evaporate. So I think that's going to be the big mover for the second quarter. Like I said, we could see outside elsewhere. We're a firm book that at 87%, you can always see push outs or soft turns, but I think things are trending flat to up.

Great. And then just a follow-up on Tore's question. Is that mostly 100 gig, where you're seeing the activity? Or have you guys been able to backfill and see in good demand in both 40 and 100 gig in the Opto business?

So it's 40 and 100 in terms of the backlog. I would say that in the past, we've made comments that in certain parts of the world, the world seems to be moving quicker to 100 and skipping 40, but our backlog, specifically, is for both.

Great. And can you remind us, where were you sort of at this point with backlog coverage entering the December quarter? Is 87% roughly in line with last quarter?

87% is in line with the past 2 quarters for the exact same point in time. Our earnings call last quarter was, I think, the week or 2 weeks later. It was 2 weeks later, and we're at 92%.

Correct.

So 87% is exactly the number that we look to for midpoint guidance.

Great. And I know you made the comments about the point-to-point radio, and that business not -- you're expecting it to come back in the March quarter. But I think you guys have recently extended the SmartSet down to the 8 to 23 gigahertz range, so you've got a broader product line. Can you talk about design wins for the lower frequency, SmartSet solutions and how that might contribute to growth out in the second half of the calendar year or perhaps into calendar '14?

Yes, well, we're very pleased with the quality of customers and qualities of design wins. We're broadly engaged. My -- one of my personal agendas coming into the company I have observed that I believe we can drive shared wallet [ph] at our major customers. We're expanding, not just across their portfolio of needs, but I think from a supply chain standpoint, these customers tend to operate very strategically, managing their suppliers. So I think step 1 is to get the design wins and the products technically qualified. Step 2 is to go drive the share. And I think -- the way I would describe it right now is we're well-positioned with the portfolio that we need and the technical qualifications. The next step is like I said, getting the -- securing the commitments per share. And then, frankly, at some point, the markets have to begin cooperating. That's the real gate from my perspective.

Great. And then just lastly for Conrad. Any guidance specifically on OpEx into the March quarter? Are there a step up in FICO, or any kind of beginning of the calendar year expenses? Or do you expect that to run about 25% of sales?

Yes, that's closer to 26% because of FICO. Good point. And we've factored that into the estimate.

Our next question comes from the line of Mark Delaney with Goldman Sachs.

I was hoping you could talk a little bit more on the Opto business. And I just want to make sure I understand. When you say the growth for the March quarter is coming from optoelectronics, do you mean toward the midpoint of the range? So roughly $2.5 million is your base case for how much Opto drives this quarter?

That is correct.

Okay. Could you elaborate a little bit more on some of the new product introductions and some of the share gain that you were talking about, I mean, Aerospace & Defense program? I think alluded to a little bit of that in your prepared remarks and can you help us understand the timing of when that comes in?

Sure. The near-term growth in the Aerospace & Defense market is not in things like defense radar systems. Those are, obviously, long lead-time programs. The near-term growth in that segment really comes from SATCOM, satellite communications, which has both commercial as well as defense application. And that is specifically the area that has continued to perform for us over the past year, where other segments tended to struggle. And we continue to expect performance through the rest of this year.

That makes sense. In terms of your inventory. I saw that the deferred revenue is relatively flat quarter-on-quarter. And I know that's down something close to 40% from peak levels. So when you're talking with your distribution partner, can you give us some sense on where you think inventory levels could go, as you move through the year?

I'm not sure we have any guidance about whether -- what direction they're going to move. I can tell you that the word from our distribution partner and partners is, at the way I describe is cautiously optimistic. We've seen positive book-to-bill ratios since through the -- through our first fiscal quarter, and they're predicting slow, steady monotonic recovery. Again, that's where I came with the 3% to 5% growth year-on-year.

Understood. And then just my final question. If one were to strip out the sales to your largest customer, by my math, it looks like your gross margins are actually up quarter-on-quarter despite what would've been lower revenue excluding Ford. So can you just help us understand, is that just a mix thing? Or is this some of the new products starting to kick out already in the fourth quarter calendar?

Well, it's new products and our diode products tended to outperform. And those have nice gross margin structures. They tend to use internal capacity. So they have very nice drop through. So you're right. We had -- kind of looking under the hood of the gross margin mix is actually quite favorable, considering the mix issue we have.

[Operator Instructions] Our next question comes from the line of Harsh Kumar with Stephens.

First of all, I'm not sure if you guys gave this, but how much is the diode product line as a percentage of revenues?

Yes. Sorry, Harsh, we don't break out and report revenues by product line. I can tell you, our standard products...

That's fair.

Our standard products across the board, across all segments is approximately 1/2 of our total revenues.

Okay. That's helpful. Okay. And then John, I'm wondering, now that you're maxed out, sounds like at Ford, what is the potential with respect to M/A-Com's ability to get in with some of the other automakers? I'm wondering if you could shout out for us how long it takes -- have you -- are you in conversations already? Any kind of color would be great.

Sure. I mean, we continue to talk to the other major automotive manufacturers, and specifically, domestic as well as international. There's a lot of Ford-looking applications -- forward-looking applications, I shouldn't say Ford -- forward-looking applications for this kind of technology. But the way to describe it is this module that we sell is deeply embedded in the architecture of the vehicle, and so it ends up a very strategic decision and not one that automotive manufacturers make either quickly or in any kind of short-term timeline. So it's -- this is the reason why we really don't talk about growth in that business. Even if we were to secure new business, it would be out in that time frame. It wouldn't be particularly meaningful.

Got it, John. And now that your -- in terms of your management, now that, that seems like you spend a little bit at a time there in sort of the top slot, what [indiscernible] for calendar 2013 as you from where you're sitting?

I apologize, Harsh, you kind of broke up for a second. Is your question about what type...

I'm sorry, I'm in a hotel [indiscernible] for calendar 2013?

Sorry. Okay, I understand your question. What my priorities are for 2013, is that accurate?

Yes, yes.

Okay. So the way I'd describe it is like this. The previous leadership did an absolutely fabulous job in terms of these market-driven penetration strategies, with application-specific solutions whether it be for point-to-point, CATV, broadbands, SATCOM, MILCOM, RADAR and so on. And that is all going to be wonderful growth drivers. I mean, you're starting to see that strategy pay off in the second fiscal quarter. In addition to that, not instead of that, what I found is there is a gold mine in a 6-decade heritage that this company has in things like the diode business; technologies, like the HMIC technology and ALGAS [ph] technologies that have lots of legs. We are the market leader. And what I've really focused on as a top priority is to get structural lines of accountability and focus to maximize those near-term results. I mean, these are products that are on the shelf. We don't have to talk about new product cycles. We don't have to talk about long lead time design ends. I mean, this is driving short-term results. And I think we can demonstrate that. We can outperform our peers in the short-term with that. The second priority I have is in those application-specific areas the focus on maximizing our share of wallet. I think there's lots of room -- in a lot of cases you move from a product selection to a vendor selection process. And I think we have the opportunity to grow our share just by focusing on relationship building with those major customers. Those, I would say, are the 2 top premier priorities that I have coming in.

Our next question comes from Jeff Myers [ph], Wachovia Capital.

So most of my questions have been answered but just on the Opto business. So is the strength you're seeing there across all the products in that pipeline? Or are there specific products that have been stronger than others?

Well, I think, always, when you get this kind of initial business, it's not a widespread part of the portfolio, but it's not a single product or 2. It's -- other way to describe it is reasonable coverage of our portfolio driven by I think, it's about 3 or 4 customers over in Asia Pacific. So it's not -- it's reasonably diverse, but it's not -- certainly not in a condition that I would call a mature business with a lot of diversity across the portfolio.

Got it. When you look at the potential growth for those products, is it just a question of your customers ramping new products that contain your products in them? Or is there something else that'll I guess, be getting [ph] factor to your growth there?

Well, I think we hit the market perfectly in terms of the market health in this particular segment. It makes up for the wireless infrastructure to be honest. So I don't think this market is indeed cooperating. The first gate is typically getting the product qualification, and then there's a vendor qualification process that go through your quality systems and so on. We passed all those gates with these major customers, and now it's indeed, as you said, it's ramping the customer products into volume.

Got it. And are these usually sole-sourced programs? Or are they dual sourced?

Yes, the nature of our business, I would say, the dominant majority is sole sourced. It's not a product of product, direct second source. Even a device which is pin-to-pin compatible has different electrical characteristics. So when we talk about the concept of multiple sources, it's not on a product basis. It's customers who manage their cost supply chain relative shares.

Our next question comes from the line of Elizabeth Howell with Raymond James.

I have to start a quick one on OpEx. Just what are you thinking in terms of the puts and takes as we go throughout the year? And then did that 26% level you referred to earlier include the negative impact of options, or was that GAAP?

Okay. This is non-GAAP reporting, and that 26% was this current quarter. And we're aimed at reducing it to our target of 25% over the course, which would be typically 13% spend is the target for R&D and 12% for SG&A. And currently, it's the other way around, about 12% in R&D and 13% in SG&A, 13% to 14%.

Okay. And then how do you get to the target level?

The target? A couple of ways. By increasing revenue on the top line, that changes the percentage and holding our costs, as well as becoming more efficient in how we spend our SG&A in particular.

Thank you. And presenters, as it appears there are no additional questioners in the queue. I'd like to turn the program back over to John Croteau for any additional or closing remarks.

Very good. I want to thank everyone again for joining us on today's call. And I look forward to reporting our continued progress next quarter. One last comment, Conrad and I will be attending the Stifel, Nicolaus conference on February 5 and the Goldman Sachs conference on February 12, both of which are in San Francisco. I would welcome the opportunity to meet with any of our investors that plan to attend. Operator, you may now disconnect the call.

Understood, sir. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.