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EarningCall_233800

Good day and welcome everyone to the RedEnvelope Third Quarter Fiscal 2006 Earnings Conference Call. This call is being recorded. At this time I'd like to turn the call over to Jordan Goldstein with Investor Relations. Please go ahead. Thank you operator, and good afternoon everyone. Thank you for joining us for RedEnvelope's third quarter 2006 financial results presentation. With us this afternoon are Dan Lyle, Chairman of the Board of Directors; Alison May, the Chief Executive Officer; and Polly Boe, the Chief Financial Officer of RedEnvelope. Earlier this afternoon the company issued a release reporting it's third quarter financial results. This release can be accessed from the "About RedEnvelope" tab at www.redenvelope.com, and from the financial newswires. This call is being webcast with a web replay available. The live webcast as well as the replay can be accessed on the Investor Relations site at www.redenvelope.com. The webcast replay will remain accessible for 12 months. We have also arranged a tape replay of this call, which may be accessed by telephone. That replay becomes available approximately one hour after the call's conclusion today and will be available through the end of the day, Friday, January 27th. The dial-in access number for the telephonic replay is 888-203-1112 with a pass code required, which is 4612907. Before we begin, I'd like to make a brief statement regarding forward-looking remarks. The presentation today contains forward-looking information regarding future events and the future financial performance of the company. We wish to caution you that such statements are just predictions and actual results may differ materially as a result of risk and uncertainties that pertain to our business. We refer you to the documents the company files periodically with the Securities and Exchange Commission, specifically the company's most recent 10-Q and Annual Report on Form 10-K as well as the Safe Harbor statement in the press release issued today. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company's projections of forward-looking statements, and finally RedEnvelope assumes no obligation to revise any forward-looking projections that may be made in today's release or call. With that out of the way, I'd like to turn the call over to Dan Lyle, Chairman of the Board of RedEnvelope. Dan? Thank you, Jordan. Good afternoon, I want to welcome you also to our conference call and begin by telling you about several significant announcements we've made today. We announced today that the Board has accepted the resignation of Kristine Dang who has left the company to pursue other opportunities. Kristine was our Executive Vice-President of merchandising and creative. We thank Kristine for seven successful years with RedEnvelope and the contributions she has made to our products and our brand image. The Board has also accepted the resignation of Alison May from her position as President and CEO of RedEnvelope. Alison has guided the company for four years through our initial public offering and has doubled our revenues. The Board has retained an executive search firm and is interviewing promising candidates to lead the company through the next stages of our growth. The Board appreciates that Alison has agreed to remain in her position until her successor has been named and through this transition period. The Board has confidence in Alison to continue to execute the company strategy and to lead the management team. The search for a new head of merchandising will be led by a new CEO once he or she is in place. In the meantime, the merchandising and creative teams continue to develop the company's distinctive products and are enthusiastically focused on holiday 2006. I would now like to introduce Alison May who will provide you with an update on our operating performance for the third quarter and our outlook for the remainder of fiscal 2006. Alison? Thanks Dan, and thank you all for joining us this afternoon. Our third quarter ending January 1st has some very positive results, but overall it did not quite live up to our expectations. We achieved demand growth in our main marketing channels of between 14 to 18% but we're faced with a highly promotional retail environment, which forced us to offer significant shipping discounts resulting in a net revenue growth rate of 11.6%. We had planned stronger overall growth. Some categories performed very well, primarily our Home category, New Baby and Kids categories, Gourmet Foods, and Plants and Flowers. On a combined basis these four categories accounted for approximately 42% of our total demand and grew at 30%. Clearly our customers respond when we have the right products. However, our Jewelry and Accessories categories did not perform as planned. Jewelry has traditionally been one of our largest and most profitable categories. And although jewelry did grow over last year our customer did not respond as well as we would have liked to our assortments this holiday season. This had an important impact on our top-line and bottom-line growth. We were pleased with our growth in business gift services this year and believe this is an area that has great potential for the company. While our initial margins increased over the prior year, the shipping discounts we offered offset this improvement and accounted for the majority of our decline in gross margin. We made many improvements in our fulfillment operations this year. Our receiving and quality control functions worked well. We had strong inventory control. We were extremely happy with our new carrier: UPS. We achieved efficiencies in most key areas of our performance center. However, we did experience a software problem with our warehouse management system, which caused our system to operate very slowly during some peak volume days. One of the consequences was that we developed a backlog of orders, which we had to work through manually, a time consuming process and we were not in a position to promote our products towards the end of the season. We believe that we had resolved the systems problems and believed that we were unable to make timely delivery on less than 2% of the orders for the quarter. This was clearly unacceptable performance. And we are offering special incentives to those customers who may have been affected in order to improve the probability that they will return and shop with RedEnvelope. On the marketing fronts, we were able to reduce our marketing expense as a percentage of sales from 25.8% to 22.8%. However, the catalog continues to become less efficient as a means of new customer acquisition. We are re-evaluating our catalog circulation strategy and have hired an outside agency to assist us in the process. While impossible to quantify, I do believe that our advertising campaign last year helped drive traffic to our site and that we might have underestimated the positive impact that had on our growth last year. Our total marketing spend was basically flat with last year but we shifted those advertising dollars to catalog, a strategy that was not as successful as we had planned. We made many improvements to our website including multiple imaging of products, targeted messaging for new and returning customers, customer testimonials with a link to biz rate and articulation of our value proposition. This did improve our conversion but we did not drive the amount of traffic we drove last year when we had the advertising program in place. Given what we have learned, we are looking at alternative customer acquisition and retention strategies for holiday 2006. We had very high profile public relations efforts and our products were featured in many major television programs as well as in most major publications. This is a highly efficient marketing vehicle for us and we believe it brings extremely motivated customers to our site. We continue to gain leverage on our fixed costs. General and administrative expenses declined as a percentage of net revenues from 9.3% to 8.7%. In summary, while we did not grow as quickly as we would have liked due to loss of shipping revenue and a weaker than expected demand for our jewelry and accessories categories, most other categories performed quite well. We also improved three key business metrics. As a percentage of net revenues we improved our fulfillment expense by 30 basis points, our marketing expense by 300 basis points and our G&A by 60 basis points for a combined improvement of 390 basis points in operating expenses compared to the third quarter of the prior year. Our merchandising and product development teams are enthusiastically preparing for holiday 2006. Our customers have sent us a clear message of what they like and did not like about our products. We have a very talented team of merchants and designers who can react to this information, some of whom who have joined us in the last six months and bring very strong merchandising backgrounds from well-known retailers. I would just like to comment that although I will be stepping down, I will be actively involved in the transition to a new CEO, I have every confidence in RedEnvelope and in the dedicated team of people in place at the company and on the Board. There are so many positive trends and the brand has such a strong foundation that I have no doubt that with new leadership and renewed vigor we will be able to realize the full potential of the company. And now I would like to turn this over to Polly Boe, our CFO who will give you a more comprehensive report on our third quarter results. Thank you, Alison. This afternoon I will review our third quarter earnings results as well as our balance sheet, and finally, an update to our full-year outlook. Net revenue for the third quarter of 2006 was $53 million with growth of 11.6% over the $47.5 million during the third quarter of 2005. The revenue growth we experienced in the quarter was a disappointment across both our key channels, online and catalog. We had a 15.3% growth in shipped orders but a 3.2% drop in average revenue per order. All due to discounted shipping offered during the holiday season. We did have strong revenues from the categories of Home, Children, New Baby, Gourmet Food, and Plants and Flowers. As Alison mentioned, our disappointments were in Jewelry as well as Men's and Women's Accessories. We are increasing our focus on building stronger assortments in these categories. For the quarter, the gross margin was 52.3%, which is 210 basis points below the prior year third quarter of 54.4%. Again, primarily this was a result of discounting shipping revenue during the holiday season in response to the promotional environment as well as higher shipping expense. While our initial margins did improve over last year, the increase was not sufficient to offset the shipping factor. Net revenue for the first nine months of fiscal 2006 was $91.1 million with growth of 15% over the $79.2 million during the same period last year. The gross margin was 51.7%, which was 160 basis points below the prior year margin of 53.3%. Again primarily due to the negative impact of the Q3 shipping margin. During the quarter we shipped 638,000 orders, 15.3% increase over last year's third quarter. Our prior year order count has been refined slightly for consistency and should be noted as 553,000 orders. Our revenue per order was $83, which was a 3.2% decrease from the $86 per order in the third quarter of last year. Again, this shortfall was due to the impact of discounted shipping revenues during the holiday season. And our gross profit per order was $43, which was a 7% drop from the $47 profit per order we experienced in the third quarter of 2005. During the first nine months of fiscal 2006 we shipped 1,139,000 orders, 14.5% increase over last year. And our revenue per order was $80, which was flat with last year. Our gross profit per order was $41 compared to $42 per order for the first nine months of fiscal 2005. The customer house file grew to 2.8 million names as of the end of the third quarter of fiscal 2006, a growth of 586,000 names since last year and a growth of 279,000 names since the second quarter of this year. We continue to see growth in the percent of our business coming from the house file with 51% of the third quarter sales from existing customers versus 48% for the same quarter last year. While we take this as encouraging news, we also realize the importance to continue to invest in prospecting. Our fulfillment expense as a percent of net revenue improved slightly to 13.1% for the quarter versus the prior year rate of 13.4%. And for the first nine months this rate also improved to 13.8%, from 15.2% in the same period last year. While we did experience limited operational issues in the fulfillment center during December as Alison described, we are pleased overall with the performance from the operating expense standpoint. Marketing expenses decreased slightly this quarter in the ratio of marketing cost to revenue decreased from 25.8% last year to 22.8%. Last year we spent approximately $3 million on our average of our marketing spend for an advertising campaign. This year we chose not to buy traditional advertising and instead rely on a combination of online and catalog circulation. The catalog circulation was not as efficient in driving revenue as we had planned. Marketing expenses for the first nine months of fiscal 2006 were $21.7 million and 23.8% of net revenue, which was slightly more efficient than the prior year's rate of 24.5%. Our G&A expenses were essentially flat in the third quarter to the same quarter last year. The G&A ratio for the quarter decreased to 8.7% of net revenues from 9.3% for the same quarter, due to improved expense leverage. G&A spending is inline with our expectations and consistent with the first half of the year. For the first nine months of fiscal 2006, G&A expenses have increased by $1.4 million as compared to last year due to hiring during the year. The G&A ratio for the period for the nine-month period decrease of 15.6% of net revenues from 16.2% for the same period last year. The net income for the quarter was $4.1 million or $0.43 per diluted share compared to the prior year third quarter income of 2.8 million or $0.30 per diluted share. This was below our expectations due to lower than planned revenue, along with a negative impact of shipping revenue to our margin. The net income improvement of 48% over last year was due to topline growth along with expense efficiencies primarily in marketing. Net loss for the first nine months was $1.1 million or $0.13 loss per share compared to the prior year loss of 2.1 million or $0.24 loss per share. The primary reasons for the improvement over the prior year were again, the revenue growth of 15% over last year, along with the expense management across fulfillment, marketing, and general and administrative areas. Now I'd like to discuss briefly the balance sheet at the end of the quarter. Cash and short-term investments were $28.9 million compared to $27.5 million last year. In our inventory balance of $15.5 million consisted of predominately core products at a level that we are comfortable carrying into future seasons. Our additions to PT&E continue to be below last year, but overall are inline with our spending plan for the full year of $3.5 million. Before I discuss our updated guidance I need to point out that incorporated into our forecast are ordered trends we have seen to date and need to remind you that actual results could vary from our guidance. I also need to provide some background on our upcoming fourth quarter of this year. Our plans for the fourth quarter revenue were always for essentially flat revenue with last year's fourth quarter due to two factors: The loss of the extra week that was in last year's fourth quarter, and by that I mean, last year was a 53-week fiscal year and this year is a 52-week year. And secondly, the shift of $1.5 million in delayed shipment last year from the third quarter into the fourth quarter due to the weather issues in December of 2004. As a result of these two factors, the fourth quarter was always planned to have a negative impact to our annual growth. We now expect our net revenue for fiscal 2006 to grow 7 to 10% and we no longer expect to have positive earnings but expect a loss smaller than last year for the full-year result. The single factor that has caused this change in our full-year expectations is a revenue shortfall, both in product demand, for holiday, and forecasted for the fourth quarter as well as lower shipping revenue due to free shipping promotions. All other areas of the business have generally performed inline with our expectations. Now, I'd like to open the call to questions. Operator? Thank you. Operator Instructions We’ll pause for just a moment. We do have a question from Rusty Hoss with Roth Capital. Good afternoon. Excuse me. On the marketing side of things, and also how it relates to the fulfillment, was there problems at the end of the quarter which is why you didn't spend as much on the marketing side and also, why the revenue growth rate was a lot lower than was anticipated? Rusty, this is Polly. I think what you might be referring to is over the last couple of days, right before Christmas. We did have to stop accepting orders that we could confirm we could ship before Christmas. There was some very minor amount of savings in marketing but it was really was not material. It's going to be – I don't think it is going to be material but it is going to be speculative to try to guess what that would have been. Okay. And then on the inventory you in your prepared remarks you said it's predominantly core product, but are we going to see markdowns as you move that core product out? In other words, is there another quarter of both the shipping margin deterioration, but also markdown margin deterioration? First, in terms of the current position of the inventory, the items that were really seasonal were the Home area and those sold quite well. And overall what we have now is core and we're very comfortable with those levels. Okay. And then last question, maybe a little bit more theoretical, but at what point in the quarter can you see or do you have insight into whether or not a product category is working or not? And then how quickly and effectively can you react to that market dynamic and mark it down or – or to move it out, or be more aggressive on the marketing side? We're certainly monitoring all of our shipping – our item performance through a season, and as we see the need to mark things down or put things on special, we do that sort of in season. Is that what you're referring to? Yes, I'm struggling with the shipping versus the markdown and why you may have been so aggressive on the shipping side and not so aggressive on the markdown side, and if there was a trade-off there that you looked at? Actually, this is Alison, the shipping really – we had made that decision pretty early in the season and that was primarily driven by the fact that all of our competition was offering free shipping and we were kind of holding out on discounting the product piece. So, and some of those issues the fulfillment center, as you’ve indicated, as we got towards the end, made it less made that strategy of discounting products a little less viable to drive demand but shipping fees, some catalogs came out with just free shipping right off the bat and it was certainly dominant on all websites that we saw. So we chose to move in that direction. Were you expecting then when you made that decision, were you expecting to make it up in volume? Was that the idea? In past seasons that has driven increased volume but I think that it has become pretty much of a standard today and I don't think it is one of the key drivers of increasing demand. Good afternoon, everyone. Dan, could you talk a little bit about the qualifications that the Board is looking for in a new CEO and whether that person is likely to be hired soon enough to have an impact for the '06 holiday season? Yes, I'd be happy to address that. The first thing we're looking for is someone who's going to drive topline growth in this business. We want a dynamic CEO who is going to provide a great deal of leadership around the strategy that's going to get us into the next level of growth. In terms of the impact that they can have, we're in the midst of developing holiday, but in the early stages of it, for holiday 2006. If we get someone on Board quickly they still will have an impact on product. But in the meantime we have a very strong product team that is enthusiastically involved in developing that 2006 line. So the main thing that we're looking for is that in the next couple of months we hope to get someone on board and our biggest impact is going to be in driving customer acquisition and customer retention, so that we go into holiday with an improving house file and a more active customer base. I see, thank you. And then, Alison or Polly, are the order trends you're seeing in Q4, which I assume in the first three weeks of January, are they consistent with by category with the trends you saw during the holiday? Because it's so early in the season and in addition to that, some of the categories changed dramatically as you move into Valentine's Day versus holiday. Home is not quite as dominant and there's just other products: Food, Plants, Flowers, things like that tend to be the key drivers during the Valentine's Day season. So it is a little early to say that. Hi, a couple of questions. Looking at Q3, trying to figure out your promotional discounting on shipping this year as you were last year, I'm trying to figure out what the difference was this past holiday season versus a year ago as far as promotional activity. It sounds like it was the same, I mean is this, is it mostly you're expecting bigger bump from the catalog? Or do you -- if you realize that advertising is pretty important to the overall brand building going forward? Couple of questions there. First, we had in absolute dollars more discounts for shipping where we offered free shipping with no limit for a longer period of time. I know last year they did have free shipping but I believe there were more hurdles over a threshold. So the absolute dollars of shipping discounts this year were dramatically higher than last year. The second part of your question was more around advertising, could you – Yes, advertising. I mean, do you think it's necessary -- last holiday period advertising seemed to work to drive volume and this past season you obviously shifted your ad dollars to catalog and it didn't pay off. Is it necessary to use advertising on a go-forward basis to really drive the demand? Kristine, we're looking at a variety of options. We do think it's important to have a limited amount of advertising. I don't think we plan on doing the advertising in the same way that we did last year, but we're looking at more targeted advertising and specific markets. But there are also many other things that we are exploring other than that. I think the goal is to shift customer acquisitions that we were dominantly doing through catalog to a variety of different vehicles. Okay. Looking at Valentine's Day, it sounds like you're not expecting a lot on Valentine's Day. You didn't have a very successful Valentine's Day last year. Just I'm trying to figure out, have you done anything different this year versus last year? I mean, I would have thought you'd learned from last year? Yeah, we did. We made a change in our product mix, our marketing dollars are being used more online and for the last minute. This year which was the way that people shopped last year, and we had really -- we changed our catalog so that it's event focused, versus including Home, and New Baby, and items that we had on the catalogue last year, if you received the catalog I think you'll see that it's a very, it's a very Valentine's Day focused… Okay, and then just lastly, can you talk about maybe discuss ad costs? We're in an environment now of rising online ad costs. Can you address that, please? Yeah, we managed that on a – the search words that we're buying; we’ve put effort into natural search and optimization of that. So we've been able to offset some of the cost of that but it is a more competitive environment that is true. Hi, thank you for taking the question. Given the public nature of Mr. Galloway's complaint in particular, in the month of December, I imagine you did some due diligence as to why his order may have gone wrong. Can you characterize that as part of the inventory warehouse management system software glitch that you experienced during December? It was getting a little bit later we were in the middle of the season, and we would make adjustments to it and it would improve, and then there would be something else that would happen. It really affected our ability to print tickets and it affected our ability to scan with our RF guns and it was taking a long time to scan and it was taking a long time to print tickets. So we had everybody set and ready to go but couldn't necessarily give them the work to do it. Okay. What types of investments will it take to improve the system? I imagine that now, obviously, it's improved because you don't have the significant volume in the holiday season. Actually it wasn't --it isn't that it needs a new investment. I mean there's always as your volume increase you put in better conveyor belts and faster things like that, but it really is an issue of having on-site support during the holiday season from our software vendor: Manhattan Associates, and having them be there on-site so that they can troubleshoot these things. That really would have made the difference and we had trouble getting the type of support that we needed during the season. Okay. Is that a problem that will -- I guess what I'm trying to get at, is this going to be a problem that is going to face us again in the December quarter of next year? Or is this something that you'll work on and fix between now and then? Or is it already fixed? Okay. And on your corporate giving initiative, is this a new effort that you've focused on as far as sales teams going out or is this something's that's been underway and just happened to have been particularly successful this quarter? Well, we've had a business gifts area, I think it was called Corporate Sales and we sort of renamed it Business Gift Services this year, and we have some very talented people, some new leadership there, and very successful growth although, it's still a very small business for us. And then on the -- back on the marketing spend, part of my question has been asked and answered but part of it I'm still a little bit perplexed about, did you go into the December quarter expecting to spend a comparable amount of dollars on your advertising and marketing efforts?

EarningCall_233801

Here’s the entire text of the Q&A from AU Optronics’ (ticker: AUO) 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. Q&AOperator May 1, 0000 ET Yes, good evening. I was hoping you could comment on what your expectations are for undersupply/oversupply in the first half of 2006? Yes, this Hui Hsiung answering your question. For the first half, we believe there is an about 5% over-capacity. For the second half, it's almost balanced at the end. However, I must caution that I think the 5% over-capacity actually is very manageable, and also it did not take into account a possibility of a material shortage or a slower ramp-up for the new capacity. I think generally speaking we say if it's within 3% it's, we call it, balanced. So, this is slightly above that level, but I don't say though it's, I mean, 5%, a single digit, a mid-single digit, our business is usually quite management. If it's double digit, then it's harder to manage. Usually 5%, there's various actions we can take such as slightly reduce the capacity loading or shift the product mix. And also, I think this amount of over capacity actually is, on the average, industrial-wide. But I think individual companies may see somewhat different capacities on the demand and supply. For example, I believe for next year, because of the expected high growth, LCD TV demand, I think the company who are, for example, are top five companies who are pretty much occupying about 95% of the LCD market today, I think will see less a problem than the second tier of companies. So, this, I think, will see some parity among different panel suppliers. Okay, if I could just follow-up with one last question. Can you comment on what the average LCD TV size was in the third quarter, and what your expectations are for the fourth quarter and then into 2006? Thank you. I don't have that number on hand, but I can tell you we're seeing a pretty dramatic shift, up-shift, of panel sizes for LCD TV. For the fourth quarter, what we call large size LCD TVs, 30 inch or larger, and this will be over 40% of the total LCD TV market, and I think this trend will continue into next year. By the end of next year, we think this large size percentage will be over 60%. So, in terms of panel sizes, this year we are seeing 32 inch become mainstream. May be that will become the largest contribution for the TV demand. And next year, 32 continue to dominate, and together with 37 Gen 6 lines coming up. So, I think some 40/42 inch are emerging, but really the '07 40 inch above, maybe a larger amount. But I think next year predominantly still 32 to 37 inch. Thank you. Congratulations on a very strong number. My first question was, I think clearly you continue this Company's like yours continue to add to your capacity. At the same time, your demand peaks in the current month for maybe 15 days from now, because the end product has to be in the game channel by the last month of the year. In this scenario where demand is going to peak very soon, supply continues to build, when, if any, will management consider lowering utilization rates at their fabs and reducing supply? Okay, this is Hui Hsiung trying to answer your question. Yes, what you're saying is the results to holiday seasons, transition of PC products, yes, usually it peaks at November and the second half of December is start to reduce. But however, for the past two years actually it has been up. It happened for some products, such as LCD monitor. So, although LCD monitors growth start slowing down given the saturation of this segment of the market, but we think this will be picked up by LCD TV. We do expect a high growth of LCD TV. So, from Q4 to Q1 we actually do not expect a big drop in LCD TV demand. Some area, such as in Asia market, even in U.S. market we are likely to see the momentum continue into Q1. Usually PC products does see some change, a downward change in the beginning of the year. But, again, that we have already taken into account by saying that next year, the first half, with some slight over-capacity. I think it's still too early to say whether PC will see a big drop. We probably see now notebook still continue have pretty strong momentum, and this is driven by low cost notebook desk top computer, I think that another interesting thing is with the upward shift of the LCD TV size. This is not only LCD TV actually, Monitor also shift up in size, together with Notebook. So, we actually do not expect a very big drop in Q1 demand in terms of total area. Thank you. And just in case demand turns out to be a bit weaker than you anticipated, it's a hypothetical question, but if that happens, would you look to reduce utilization rate as one of the leaders from protecting the profitability? And if you, go ahead Yes, definitely. I think our policy, our strategy, has always been minimizing our inventory and that turned out to be quite successful in past few years by keeping the inventory lower. And I think in the past we did have some problem convincing our competitors doing the same thing. But in recent months, especially this year, actually, it did start to happen. I think that the industry understand the benefit of keeping the capacity low. Again, even if the scenario does happen that we have a 5% over capacity this is not the drastic action to reduce about 5% of the loading. And this, coupled with the fact that many of the product cost structure is some 80% are actually material costs. So, fixed costs at 20% if you reduced the 5%, even 10%, loading, that impact on cost is actually, not very big. So, we think the industry become more mature. That is precisely what our competitors would do. Okay, and one just last question. Is it correct that the TFT panel industry currently is offering price protection clauses on their contracts with their customers? That is, the price ha decline going into the month of December, then the lowered prices will be effective with a retrospective effect? Not a common practice among the industry. I think usually some of the second tier may offer individually this kind of policy. But, in general, we don't do that, and it's actually not necessary. Again, I think the best practice is to reduce loading and minimize the inventory, because even you produce inventory and you keep the inventory at a customer's house and providing price attaching. It's the same thing. The inventory loss is occurring nonetheless. So, we don't do that and I know many of our competitors don't do that. Good evening, gentlemen. Some of your competitors, LG Phillips and Samsung specifically, seem to be pointing to some pockets of excess inventory in monitor panels in the channel during the September quarter. I wondered what you were seeing and what your expectations were for monitor panel ASPs and profitability on those applications through the fourth quarter and into the first quarter of next year? Thank you. Yes, I think I did hear individual cases of where there are some inventory. But I don't think it's widespread. I think before this conference actually we had a check in the channels of some of the customers and we found actually the inventory level is by and large healthy. And actually this is no surprise. Since last year, Q3 was a very bad situation when at the demand suddenly dropped and the inventory was very high. So many customers actually get hurt by that period. So actually since then, the whole supply chain become much more conservative in terms of keeping the inventory, and that practice has been carried out throughout this year. So far, we saw quite reasonable inventory throughout the pipeline. So, the evaluation is a quite isolated case we found. Also, perhaps, to mention that this Q3/Q4, it seems to me that some areas, relatively consumer segments still pretty strong and some still developing markets, China, Russia, that area, I think that monitor demand is pretty strong. Even some channels, even in Europe they saw pretty strong demand in monitor. I think U.S. somewhat lower, but still the description we get is this is expected within the expectations. Or they don't see a very weak monitor demand actually. Thank you. And your expectations for gross margin from here. Do you anticipate sequential improvement in 4Q, and do you think that is sustainable through the first half of next year, given your expectations for this supply and demand balance? Thanks. Okay, this is Max Cheng answering your question. Yes, we do see enough. There's some possibility to see the gross margin improvement in Q4 due to we have chance to move some products to our premium segment. So, there's some chance. And also because the Gen 6 also which could lower our cost across TV and other PC satisfied application. Going to next year, I would say, at this moment, it would be very difficult to give you any forecast at this moment. Thank you. Hi, good evening, thank you very much for taking my questions. I have a number of them. The first one is, earlier you talked about market being in oversupply by 5% in the first half of next year, and you talked about the potential for shortage of materials. Can you perhaps share and give your assessment of what materials you think could be in shortage by first half of 2006? Actually, I didn't say 5 to 10%. I actually say 5% for first half. That's pretty precise. Second half is balanced, okay. The material shortage is CPS lamps are especially long lamp that for large size TV. And also even some notebook, white form notebook, such as 15.4 inch require longer lamp that we are seeing some shortage. Also some pre-omperization film and material. We found the capacity extension from supply side may not catch up with the growth in panel capacity. So that we may see some gap for the first half as well as second half of next year. And my second question is can you talk a bit about what kind of cost down assets on the material side you might be able to achieve in Q4? I know you talked a bit about Gen 6 ramp up having an impact on your margins in Q4, but what about cost down efforts from the materials point of view? This is HB speaking. Generally, from the TV segment, we can see more room for this cost reduction. But for this monitor segment and the notebook segments, actually the room has become bad. But overall, for TV here, because of some new design models, plus some new material in production and so on, we can see more room. But overall, in Q4 we still can have some indicative improvement on this bits of material of maybe 1-2%. And on the other hand, very important here is our Gen 6 ramping up getting even larger. More input with a higher addition ready in Gen 6, and plus our new Gen fab. So, it's actually, I believe the contribution from there even more than is purely material reduction. Thank you, and I have a final question. Can you comment on the margin differential between the notebook, monitor and TV segment for you in the third quarter, and maybe talk a bit about how you expect those margin differentials to change one or two quarters in the future? Okay, this is Max Cheng. I’m very sorry, because we do not provide our segment report at this moment. So, we do not have this kind of information. Overall, actually, by end of Q3, all the products we have actually provided very good margins in general. So, we don't see any deficiency in our files by any specific part at this moment. Good evening. Okay, my first question was along with the, can you talk about maybe your income, your possibility whether LCD monitor notebook in small business size? Sure. Yes, the first question is talking your rank, your profitability by product group, LCD TV, monitor, notebook in small medium size. Frank, I think we just answered that question earlier. We cannot provide segment information. So, unfortunately we do not have that kind of data. However, Mr. Chen just commented that at end of third quarter, August product group, seemed to have pretty good performance the day of, you know that. Okay, a follow-up. Yes, a follow-up to that, I guess, on the Gen 6 fab, in terms of cost, can you tell me when on a per area basis, that the LCD TV cost will be very comparable or lower than the LCD monitor in the Gen 6 fab? Frank, this is within that particularly in our classified area sizes. So, I'm sorry I couldn't provide you that kind of information. But, again, TV has big room to improve size and HP and Dr. Hui Hsiung just mentioned several times. Because you know TV edges first, and we just try to ramp out Gen 6 with bigger scales. So, I believe in our 32 and 37 will be very competitive in the coming quarter and in next year. I believe we won't see any big problem to achieve a bigger room of cost up for TV panel. And because currently there's a shortage of 33 inch and 37 inch. When do you expect to meet the demand fully in the next couple of months? I would say, it's still maybe hard to say, because even there's a lot of new capacity is coming on line fast. A spike in production as you mentioned. Maybe there's just a few company who could support the market with good quality products. So, it's hard to say at this moment. Even the new competitors however, it may not be easy. It's a tight situation in short period of time. Maybe I'd like comment this. The TV, especially the large size TV, if you're talking about the branded customers, top 10 brands are actually, and their qualification process is actually quite long. So, I think beyond top five players I think you're talking about now they qualify for next year, I think the contribution won't be very large. Also, I think now there is already a technology gap amongst first tier and the second tier. So, pretty much, this is a market I mean, this year it’s 35% occupied by these five players, and I think next year I do also believe very high I mean around 90% still. I'm talking of branded customers. So, as a result, new capacity even there, maybe second tier, the new capacity that is still difficult to compete into the TV market. Also, responding to your earlier comment, you worried about the profitability of TV product. I think and even new generation, Gen 6, we achieved sufficient yield to render it profitable. So, that's actually not only 32 inch. 37 inch we already start to mass produce a lot much. So, we do expect this will contribute to profitability throughout next year. My last question, may I please, a minimum packing implementation next year of 10%, what do you expect AU Optronics effective tax rate to change in 2006? For the text Frank I do believe the little bit maybe, limit amount in year ‘06 due to which we enjoyed the tax incentive in Taiwan. So, I don't think that will become a major portion in our income statement for next year. Hi, good evening everybody, a couple of questions. The first one is maybe for Dr. Hsiung. Regarding the transition from 17 inch monitors to 19 inch monitors, I think that was one of the expectations for this year. And, from my impression, is that it doesn't seem to be very strong, and I was wondering if you can comment on maybe for monitor demand for next year, if you do expect more 19 inch and perhaps even 20 and 21 inch LCD monitors to become more popular? And my second question is perhaps for Max, it's regarding operating expenses. It looks like the SG&A expenses in the third quarter almost doubled for the second quarter. I was wondering what the factors are for that one, as well as maybe some guidance for the operating expenses into the fourth quarter? Thanks a lot. Thank you. I’ll answer the first question. Indeed, in terms of monitor, I think we're still seeing gradual shifting up of the percentage from 17 inch to 19 inch. That is ongoing. But I think, as you mentioned, next year the overall monitor market, the growth will reduce from past around 40% annual growth to some 20 some per cent annually. But, however, have a stronger presence in the 20 top inch wide format monitor. This is a kind of new driver and it's occupied both a high end as well as a transition from for example, 20 inch wide, this is actually transition from 19 inch, 4 by 3. So, it's almost the same category. And this we believe will have some volume next year. So, we try to be early mover in the wide format monitor market. Automatically, this 20 plus inch market and usually it's a higher FT a well. It takes for example, it's very efficient in Gen 6. So, we actually have some percentage of Gen 6 capacity dedicated to large size monitors, especially wide monitor. Okay, this is Max. I'm trying to answer your second question. Well, there's a couple of reason. Was the higher operating expenses in Q3. The first reason was our Gen 5 ramp up in Q3, which we put into in SG&A under our accounting policy. So, that will be one of the reasons. The other one will be there's a lot of expenses just top line related. For this reason, you will see the amount is probably higher than in terms of absolute amounts. Going to Q4 I believe that the expenses will be, in terms of percentage, it could be around 5 to 6%. Okay, it could be across to 5.0 to 5.5%, if I'm not mistaken, going to Q4. I guess they’ll still be in this kind of range. Hi, just got a short question. Can you give us an update on your 7.5 G plans, and how do you plan to fund it? That's my understanding. Well, the schedule for Gen 7.5 will be scheduled to move in those equipment in Q2 of '06, and then test one in Q3, and then hopefully start to ramp up our mass production in Q4, year 2006. The funding, actually it's been pretty much fully funded already because at this moment we still have a long term bank facility, about NT$85b. So actually we still have room to withdraw those syndication loans under current covenants of our terms with those banks. So, I guess for those CapEx, we do not have any problems for next year. Right, so there's actually no change in the ramping up schedules for 7.5. Is it possible to actually bring it forward one or two quarters? Thank you. It seems that clearly from hearing all of you that you do believe in a relative sense monitor demand growth eventually, it will slowdown, because penetration already is quite high. But you believe a world supply will be quite limited because even demand will be quite strong. Now, could you throw some color on your expectations for ASP TV demand for 2005 and in 2006? Yes, the 2005, the TV set demand now looks like is around 20m sets. And 2006, the TV set demand, we believe, is quite likely is in the 70%, 80% range. So, 75%. So, I think mainly people grew versus in the neighborhood of 35m sets. That's for next year TV set demand. However, that is not equivalent to panel demand. Usually, TV still, from the past experience, TV still have a roughly quarter pipeline inventory like, in other words, 2005, the set demand is 20m, but panel demand around 25m. Accordingly, 2006 the set demand is 35m, and panel demand is around 44m. And this has usually caused some confusion, but systematically we check. We found empirically it does happen and it's longer, also the majority of the shipment is by sea shipment. So, the majority in transit a long lead time. As well, a longer channel lead time. And I think another point I'd like to make is not only the volume growth, but the size growth. For example, Q4 this year and our large size above 40%, and this is pretty much the industrial large size, around 40% some this larger than like 30 inch, and this trend was going up to, by the end of Q4 next year, we believe will be over 60%. So that is, by itself, it's a very significant growth in capacity requirement. Yes, and how much do you think is the monitor inventory in the channel? You know, when you speak with your customers and they're having some discussion particularly on the 19 inch? So, could you comment? Yes, it's a good question. The 15 inch, we think, is shorter. Is probably 2, 3 weeks. And the 19 inch is probably four weeks, some six weeks. And this is still considered as normal for what we talk to. So, anywhere between two weeks to six weeks. And at this time, your next question comes from Jenny Sash from OU Optix. You may go ahead. Hello Jenny, your line is open. Hello, hi. This is Helen Hope from Goldman Sachs. You mentioned in the afternoon that there is no change to the 6G, 7.5G ramp up plan, and the CapEx project increase is simply change of timing on payments, your equipment suppliers. Can you help me understand, why you want to pay your equipment suppliers earlier? I would assume you have pretty good negotiation power, and would still really like to pay later rather than earlier? And then, the second question I have is that how much flexibility do you have in terms of the '06 CapEx? Any chance you could still adjust or postpone your spending for second half '06? Helen, this is Max. I'll try to answer your first question. Actually, you know, because all the time we do not exactly understand what kind of a schedule for those equipments from our equipment vendor side. So, it's very difficult for us, for financial department, to forecast a very precise number at the beginning of this year. So, all the time we will give you a range of our CapEx in a year. Also, you know, for 2006 we are saying NT$70b to NT$80b. That is the range. At the minute we pay our vendor earlier for that purpose. So, that is the reason, not because we pay them very early, which is not the case. And then for '06 CapEx, do you still have some flexibility in terms of adjustments? For instance, can you adjust your, say, second half '06 spending without incurring any penalty by your suppliers? Yes, linked, assuming at some point, the first half next year, you decide to spend less in the second half of '06. Is that possible to make that adjustment? Yes. This is HB speaking. I think as I mentioned very clearly this afternoon, we are looking for this long term, more long term plan, and not make any decision change just because one quarter, or two quarters over supply or whatever, okay. We just keep our plan, keep on going, okay. There's not any reason to have some adjustments. That's the first part. I'd just like to add some comment. Again, the over capacity is over all industry, but for AUO actually, just based on our current customers, both TV and Monitor, actually considering the normal growth of customer demand, we are already very tight for first half. So, at least at this point we don't see any reason we should slowdown our capacity ramp up for the Gen 6. Operator Instructions You have a question from Helen Wong from Goldman Sachs. You may go ahead. Helen your line is open. Okay, ladies and gentlemen, this closes the question and answer session. Now, I'll turn it back over to the management for closing comments. Yes, I think today's conference I think is quite clear. But we hope you understand all the papers in Q3 and the Q4 outlook, and we try to manage very well in next coming years. Thank you very much. Thank you for participating tonight, and I hope we talk to you in our next quarter results conference. Thank you. Good night and good 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_233802

Here’s the entire text of the Q&A from Qualcomm’s (ticker: QCOM) Q4 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. A couple of questions. Sanjay, can you give us some ideas of your visibility on your business going into the current quarter? Second, you made a comment in the press release about your fine work in DO being adopted by HSDPA. Can you talk about how you see your current position for HSDPA? And then finally, have you approached any operators, talked to any operators in Europe regarding this complaint filed by competitors and any feedback from them? Thanks. Hi, one is visibility for your business, Sanjay? The second was, EV-DO's IT contribution to HSDPA? And the third one, have you had any discussion with carriers, especially in Europe, about the recent litigation? Okay. Sorry about that. The first question was regarding Sanjay, your visibility on the current quarter, i.e. your backlog and how do you feel about the numbers you put out there? The second question is around the comment you made in the press release around your DO contribution, or what you developed in DO being significantly adopted in HSDPA. Can you talk about what your patent portfolio looks like in HSDPA? And then finally, on this recent complaint filed against you, have you talked to any operators in Europe, gotten any feedback from them on these allegations? I heard the first part of your three questions, three part question and I will address it. I feel very comfortable with the guidance that we provided you of 46 to 48 million, Brian. And unfortunately, I didn't catch any of the second and the third part. I know the second part was something to do with EV-DO, but I didn't get the detail. The third question was asking a question whether we had talked to carriers in Europe yet about the E.U. allegations. We have actually been focused on the manufacturers. We have had some conversations with various manufacturers. It's clear that this group of six companies had been going out soliciting other participants. And that they were turned down by some significant partners of ours who we've had discussions with. But we're continuing to reach out to our partners around the world about this issue. Thank you. Our next question comes from the line of Mike Ounjian at Credit Suisse First Boston. Please proceed with your question. Great. Thank you. Just looking toward the holiday season here, if we could get a update on whether there's anything we should be concerned about in the way of channel inventories? And also, just given the continued ramp of the MSM shipments. Should we be concerned at any point about any capacity constraints? Or at this point, is there good potential upside to extend demand is there? Also just to repeat Brian's question, I think the middle one that wasn't heard, I think would be interesting for us also to know. On EV-DO, I think if I understood the question correctly, was IPR contributions from EV-DO to the HSDPA standard. Really how much of the EV-DO technology was contributed to the HSDPA standard, given the intellectual property in that that as well. Okay. So the channel inventory issue, we believe the channel inventory is very much in the range that we have guided you previously that we consider normal. We consider 16 to 20 week channel inventory to be normal. We believe right now the channel inventory is very much in that range. So we have not seen any sign of any challenge inventory in any particular region. Your second question was, as we ramp our volume from what used to be 16 million unit run rate per quarter to potentially 46 to 48 million a quarter, this quarter, do we have any volume constraints from suppliers? Right now, we are able to meet that demand without any question and we have worked very hard to bring multiple sources for each of our products. We believe, as our volume ramps up, we will be able to meet most all of our demands. There may be one chip for one week where we have some difficulty meeting the exact number, but we expect that's the normal operational process. And we don't see, at the present time, any difficulty in meeting the accelerating demand we see in front of us. In terms of the EV-DO contributions to HSDPA, not just modulation techniques, but also protocol techniques have been put into HSDPA but also into GPRS and Edge. So the investments that we've been making to improve data capability on the CDMA2000 side have found their way into the GSM and WCDMA communities as well. Also I'd like to remind everyone that we're looking to take one question from each participant. And so if you ask more than one, we'll pick which one to answer. Thank you. Thank you very much. Just wanted to check whether there was any benefit from the ending of the CDMA royalty sharing agreements recognized within the quarter you guys just reported? Daryl, as I said, the improvement we had in fiscal 2005 was extremely modest. The benefit has all been targeted in fiscal 2006. Thank you. Can you talk a little bit about the strength in the reconciling items EBIT, was that the display business, the QMT? And if so, when does that become material enough to break out? Yes, in the reconcile you've got a number of things. You've got the -- our display technology investments. You have some corporate R&D investments. And you also have some MediaFLO, where we're making investments to develop media flow opportunities outside of the U.S.A. operator side. I don't see breaking that out into a new segment for the next, certainly for the next year. Thank you. A number of the largest CDMA equipment vendors reported pretty weak CDMA infrastructure deployments. I think one major U.S. vendor, in fact, talked about operators delaying 3G deployments in anticipation of EV-DO Rev A. I was wondering if you could put the network deployment slow downs in perspective? Particularly as it relates to your CDMA handset guidance, as well as the infrastructure chips of business? I think we've seen strong demand for DO. As Sanjay talked about, in terms of chip shipments as you've seen from some of the carriers announcing their results, Verizon in particular just recently did that. So while there certainly is demand for a DO Rev A that's been articulated by the operators, we think the handset shipments will continue to go forward. And Sprint in particular also, has announced they built out their network and they're going to continue to do that through this year. So we think that that is actually continuing to go ahead well. If I can just make a comment about the CSM shipment, as you know last year, we had record CSM shipment and we thought that that was consistent with the very broad 1x roll-out. This year we've seen the CSM shipment being relatively strong but certainly not as strong as last year. Which perhaps is consistent with the view expressed by some infrastructure vendors that you quoted. But this is the normal cycle. And the strength that we've seen this year has been more geared towards DO deployment -- Verizon has deployed a significant amount in the United States and of course Sprint is rolling out that deployment. So I think that we're seeing cyclicality of technology deployment. I don't think that we see any more than that. I was wondering if you could give us a little more thought around the need to ramp R&D so aggressively into next year. At what point or how shall we think about where your R&D scale is sufficient enough that that can start to tone down again or level off versus your revenue growth? Thanks. Okay. So although we are going to continue to ramp R&D aggressively, the rate is already starting to slow down in this last fiscal quarter and into next year, though it will grow still greater than revenue, as we're projecting. It is less. And the reason why is because the opportunities are ahead of us. So there's a number of things that are getting integrated into the chip sets now, from new modulation techniques to multimedia capabilities to graphics capabilities to processing, as we look at the new DO Rev A opportunities and beyond that DO Rev B, the idea of running multiple radios at the same time, multiple threads in the processors; all these things are adding new capabilities, generating, we hope, new revenues for all of the participants in the value chain. So it's really a recognition that the opportunities are strong ahead of us. And this is fairly traditional for us. We make large investments in R&D at these technology transitions and then we reap the benefits as those products then ramp to generate large revenues. Good afternoon, guys. Could you just talk a little bit about your ASP thinking on the handset side? Obviously, you're looking for it to come down and then go back up in your guidance. Can you talk about your confidence around that and some of your deviation assumptions? Sure, Bill. It's Bill Keitel, here. I think you saw last quarter, we finished one quarter $231.00, we forecasted $215.00 and we came in at $213.00. So I felt pretty confident about that forecast. We came in pretty close. I feel pretty good about the $206.00 forecast as well. You get the regional differences going on there. But we're expecting WCDMA and DO to increase, but at the same time, we're also expecting the low-end to advance. We've been pushing pretty hard there with our investments and we think we're growing the CDMA market as a result. So if you look market, or region by region, I expect Europe to be strong in the next quarter, Latin America to be strong, North America to be strong. In fact, as I look across all the markets those kind of stand out as the stronger growth. But I look at each region to have some growth, with maybe perhaps, the exception of Korea. They might be kind of flattish. Our next question comes from the line of James Faucette at Pacific Crest. Please proceed with your question. Mr. Faucette, your line is open. You may proceed with your question, sir. I'm sorry. I just wanted to follow up on that question. As you look at your ASP improving for next year while you're expecting growth at the low end, have you had to moderate your expectations of growth for some of the emerging markets like India and China? They have proven they have a bit of a tough year. If so, what does that do for your longer-term outlook and strategy for the CDMA? Thank you. James, I'm going to reserve, ask me this question again next week in London because we are going to get into our regional breakouts. But I would say that you've seen some moderation this year relative to our forecast and we have factored that into the 2006 and in our forward plans. Honestly, it's not that the market isn't going to happen. It's only the pace at which we get there. So in the case of those lower-end markets, the Chinas, India and Latin America; we work closely with the operators -- I think we got the products that they want and need. And we're in a tough battle with GSM.. But nonetheless, I think we're feeling pretty good about this forecast for ASP's next year. I would say that we saw strength in Latin America and we saw some improvements in India. We saw some pretty aggressive moves by Tawda in particular in India. So those two markets look like they're actually doing reasonably well. China, of course, we're still waiting for 3G licenses. And I think that the uncertainty around that will continue to have some effect on China Unicom going forward, though we're there trying to help them with their marketing as much as possible. Good afternoon. I think this question is for Bill, but I just wanted to try to understand any complexities that the EC complaint might trigger here. And without singling out any one of the complaintants here, do any of them have license agreements that might expire in fiscal '06? And if so, does that create any reporting complexities if the two parties disagree on royalty rates? Well, we're operating under agreements, Louis. So I don't see that complexity. From time to time we'll have a licensee that will perhaps dispute a amount here or there. They're generally small. They come and go. And it's never anything that even gets up to the point of an accounting question, really. I don't see anything on the horizon for next year. Thank you. Question for either Bill or Sanjay. Could you help us understand the QCT line a little bit? Looking at the MSM shipments up about 11% sequentially and revenues up about 19%, last quarter we saw the MSM's be down sequentially and revenues were up about 3% sequentially. So you talked about modest ASP improvement, Sanjay, both quarters. But it looks to be something else going on there. So does modest mean mid to high single digits? Or are there other, and it also sound like the CSM's haven't been that strong, either. Is there just other chip set parts of the business that are doing well that's contributing to the better than MSM growth in that business? Thank you. Quarter-over-quarter our ASP improved by 7%, Tim. And driven really by pretty good, healthy traction in our multimedia and enhanced multimedia chip set, 6100, 6500, 6250, 6550 and 6275. Does that close the gap for you? Ladies and gentlemen, due to time constraints we will be taking one more question. Our final question is from the line of Mike Walkley at Piper Jaffray. Please proceed. Great, thanks. Maybe just another comment for Sanjay, here. As you look at the strong growth sequentially in you WCDMA shipments, can you talk about your visibility in that versus your predict on handset growth? Maybe the rate of growth of the two divisions? That would be just great if you would comment on your growth in WCDMA chips. Thanks. I feel very comfortable with the progress that we have made so far this year in getting market share in wideband CDMA. If you look at all the carriers who are launching 3G handsets and look at how many of the handsets that they're launching that use our chip set, I feel pretty good that we are increasing our presence in the wideband CDMA marketplace. Now how well these handsets ship and therefore, what is my eventual market share is obviously difficult for me to predict because there are lots of transactional issues; what subsidies do, carriers provide, what deal do the OEM and carriers do. That I don't have visibility into and I can't predict. But in terms of the numbers of handsets being launched and in terms of the handsets being launched with carriers who look to be very aggressive this Christmas, I feel very, very good. And as we've shared with you for the last three quarters, we've seen substantial increase in our wideband shipment. If I look at number of hand sets now being designed, based on our wideband CDMA chip sets, again I feel very comfortable. If I look at our leadership in HSDPA and then soon to be sampled HSUPA, again, I feel relatively comfortable with the progress we are making in UMTS. As I have shared with you a number of times, we continue to invest in that technology. I feel very comfortable that that's the right place to invest and we're seeing results that justify that investment. At our New York analyst meeting I outlined three themes driving our growth; innovation, execution and partnership. Now, with the events of Friday, I just want to say that we will respond to our competition in whatever form is necessary. But I want to assure you that we will remain focused on what's made us strong; and that's leading the industry with technical innovation, executing to the commitments that we make to our partners and helping to drive their businesses and make them strong. It's been a record year for us. And with all the opportunities ahead and the growth that we see of our markets ahead of us, we expect an even better 2006. So I wanted to say thank you all for being with us today. And hopefully we'll see some of you in London. Ladies and gentlemen, that does conclude the conference call for today. We thank you once again for your participation, and ask you to please disconnect your lines. Thank you and have a good 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_233803

Here’s the entire text of the Q&A from Network Appliance’s (ticker: NTAP) fiscal Q2 2006 conference call. The prepared remarks are here. A quick question, I guess, in terms of longer-term thought process. It seems like with the launch of SQL Server, the IBM relationship, Decru, you had some new low end products coming later this fiscal year, what is it going to take to get back to a 30% topline growth? I noted the numbers are still in the 25 to 28% range -- very healthy rates. But I know the goal is to get north of 30. What is it going to take to do that? This is Dan. It is really going to be really, I think, a question of sales productivity, shorter sales cycles, higher win rates, etc., more indirect channel contribution, all of which kind of fits into sales productivity model. And we're very focused on ways of improving our overall field effectiveness. I should point out that we are kind of hampered on a year-over-year comparison by about 2 points of currency movement. And that would be just enough to push us over that 30 bar. But I have to tell you we're very focused here on trying to get back over 30% growth year-over-year. The entire Company is committed to that kind of number. Further to that topic, just given the comments on further penetration in the Fibre Channel SAN world, should we assume that some of these recent hires, both of whom are SAN industry veterans, suggest a greater focus on driving market share gains in Fibre Channel SAN environments, and perhaps even trying to evolve the culture internally towards that end? I think that is a pretty good assumption. A couple of employees pointed it out to me as well. We still have a core orientation towards NAS, and we're not walking away from that. But we have set our sights on gaining share in the SAN market. Our strategy in a nutshell is continue to lead the NAS markets, be the leader in the iSCSI market, and have a share position there that is about the same as in the NAS market, and then continue to gain share in the SAN space. The real strategy in a nutshell is the unified storage message, right. Any flavor the customer wants, he can get the best solution possible from Network Appliance. But in order to make that a reality, we've got to be a real player in the SAN space. I was just hoping to understand a little bit more about the services run rate. Could you talk about that? It seems to be doing fairly well. What are your expectations given the recent performance has it changed at all? Combined with any color on the gross margins of that particular organization. I think you should expect the service topline to continue its performance that you saw this quarter. There's no reason why we expect service to slow down from a revenue growth rate standpoint. We've got lots of new service offerings. They are compelling. We have been investing in professional services, and that organization is really starting to hit stride now. As far as the gross margin is concerned, we do expect that some of the benefits that we saw this quarter, particularly the onetime credits, will not repeat next quarter. I would look for next quarter's service margins to be in the mid-20s. With regard to the new product that you are going to launch at the high-end, Dan, what kind of contribution are you looking for this product? And could there -- how does it differ -- I know since it is higher end, you probably don't have as big a disruption risk. And can you talk about how much contribution you expect this quarter, and then to the overall growth rate from this type of high-end foray -- maybe for the rest of the year? The new high-end system will not contribute anything this quarter. We are planning as always by the Q4 of our fiscal year, not the calendar year. You won't see any regular contribution to this quarter. It will probably be coming to market, certainly on a limited basis, on our fiscal Q4. But the objective of the product is to be a complete replacement for our high-end 960 and 980 pair. You should expect two models, much like we did with the FAS 3000. And it is going to be well above the 980 in terms of performance and capacity. It is the first time we've had a 64-bit microprocessor, and it makes a big difference in terms of bus throughputs. And I think you'll find it to be quite a behemoth. No, in fact nothing in Q3 -- no disruption, no issues whatsoever. But in Q4 I would expect to see, especially for some of our longer-term and more performance sensitive customers, that they will start adopting the 980 pretty quick. But you know it really will be additive. I think it is going to be an accelerator for Q4 to the extent that the customers decide to adopt it right away. Don't forget there our typical sales cycle on new system is 60 days or something like that. Testers really take an eval and make sure they're comfortable with the whole thing, and not necessarily commit to it until after they have been through that level of evaluation. So even in Q4 I would expect the revenue to be somewhat diminimus. But we will see. It is going to be introduced in Q4. Like I said, the performance sensitive customers will take it. And we will just have to see what that equates to relatives to incremental revenues. I was just wondering if you could maybe talk about IBM a little bit? The FAS 270 shipped in the quarter, and the 3000 is starting this quarter. Yet we're only looking for 1% of IBM contribution next quarter. What are sort of the touch points to look for in terms of ramping those products a little stronger at IBM? The plan was always it would take them about a year to introduce the complete product line and to roll it out across all geographies and all channels. It is a progressive type of roll out. And I think the plan has always been they will build over time in terms of revenues in our mix. We have no indication from them for this particular quarter, which is their fiscal Q4, what the volume might be on the FAS 3000. It is brand-new. And I think that is really going to be the first indicator. At the end of this next quarter we can kind of give you an indication I think as to what the volume might look like going forward. But to be very honest if you, this is a new product for IBM. And we are all proceeding fairly cautiously with respect to all the support infrastructure, manufacturing infrastructure, etc. And our expectations are that until all of that infrastructure is really smooth that you won't see a volume ramp coming through. I wonder if you can give as any metrics that give us a sense of how much progress you are making towards hitting your 70% large enterprise attrition goal a few years out? I believe, perhaps a year ago, you talked about -- you tried to get to a 70% enterprise penetration mix. And I wonder how much progress you're making towards that? I don't remember the 70% number. But I can tell you -- I recall the sign we put up -- and I think it was Rob Salmon put it up in the analyst meeting -- that we were really trying to go for one-third from top enterprise accounts, one-third from I guess what you consider to be the Fortune 2000, and about one-third from you consider to be down to the Fortune 10,000 or 15,000 or whenever. Our view is just roughly one-third, one-third, one-third. So maybe that is where the enterprise number got to 66 or something. This particular quarter enterprise revenues were up 10 points in a quarter over quarter comparison. I think we're making great progress. But you know our profile right now is just about 60% from enterprise accounts. And that includes the top two segments I was referring to. I should point out also that the government agencies are in their. A number of our top enterprise accounts are either in DoD or in the civilian agencies. We have done extremely well on the enterprise business. And as I look at the mix, we are actually a little ahead of our plan relative to where we expected to be with adoption in the enterprises. A question about operating margins. You mentioned that your target for the year was still 15 8 to 16 4. But yet if you use this quarter's operating margins and then basically back into the operating margins based on the targets you are giving for the next quarter, it would imply some pretty low operating margin levels for the fourth quarter. Can you give us some further observations about what you are thinking as far as operating margins, and the hiring that goes along with that? And are you being sort of very conservative just to see how it develops? In other words, is there room for operating margin upside? This is Steve. So maybe I wasn't clear on the script part of the call. But basically our objective is for each quarter we're looking at 15.8 to 16.4. That is not to say the full year is going to be there. We already have demonstrated a pretty strong quarter here that is obviously going to have an impact on the full year. But I think that Dan made reference to it earlier. We think that that level of operating profit is the level that optimizes our ability to grow the top line, and to turn in the fastest-growing EPS that we're capable of over the long haul. Just to follow-up on that question, Steve, I think you are pretty clear about the balance of growth and profitability, and how you guys are managing the business. But in terms of the hiring initiative that you guys are talking about for the full year, how much of the remaining target do you plan to get done in the third quarter versus fourth quarter? Steve again. I think you're going to see it spread pretty evenly throughout the quarters. We're looking to do about roughly 300 a quarter when we started the year. And we're going to pick up the pace a little bit here, if we are capable of doing it, but that is certainly our plan. And that is how we get the operating profit numbers we talked about. A follow on to those two questions. Just looking out longer term, for this year I think at the top end of your ranges you're talking about EPS growth kind of roughly in line or slightly above revenue growth. For next year should we assume that EPS would grow at or slightly below revenue growth? And if so, at what point do you get you think to a point where you start to see positive operating leverage in the model, or is it just kind of growth for the foreseeable future? We will probably have to get back to you at our securities analyst conference in March with an answer to that question. We haven't made any kind of disclosure or announcements about what our FY '07 plans are. Right now we are concentrating on optimizing FY '06. And we're working on our plans going forward. That said, I would like to respond to the last clause you had. I think it is all about growth for the foreseeable future and trying to maximize both our revenue growth, market share, etc, over that period. I do think we are in a market which is undergoing significant structural change, market share shifts, primarily away from server vendors and towards pure play storage vendors. And I think it is incumbent upon us to ensure that we maximize the opportunity to gain share over the next several years. Furthermore, I think our history has shown that the way to optimize the EPS growth is in fact to drive the revenue line as far as we can. And if we don't reinvest enough in revenue maximization, then ultimately it shows, in not just slowing revenue growth, but even a slowing in EPS growth. I don't see anything in the near term that would change that outlook whatsoever. And then could I just ask a follow-up. In terms of after this year you have talked about the services personnel a lot. Going forward with the additional services personnel would it more on the R&D side or would it be investments in the indirect channel to further expand that. I love your discipline guys. Shifting gears slightly, on the buyback front you more than doubled the amount you are spending on buyback over the last couple quarters. Can you provide some more color in terms of expected levels going forward, especially given the incremental program that you announced today? And I assume that going forward you'll still manage it along the lines of buying back enough to offset the dilution, but will you just comment there as well? This is a Steve Gomo. A couple of points of note. First, the levels we're talking about have an unspecified time frame with them, just to make sure everyone has got that on the record. The amount of cash we are talking about here is excess cash. We have been doing our analysis of what we can afford to buy back to make sure that we have enough cash for operations. And we have a significant amount of cash left in what I will call strategic reserve for any strategic initiatives that the Company may want to pursue. As we have looked at this, we set a strategy for ourselves that has -- it is kind -- two aspects to it. The first aspect of it is our intent is to try and eliminate the dilution associated with employee stock options that are granted. The second aspect of it is, is that on top of that, to the extent we have excess cash, which we do, we're going to go back and eliminate the dilution associated with acquisitions that we've made, both historically -- and then it will take several years to catch up there. But then on go forward basis, we would like to do diminimize that, or bring that to a neutral position as well. So that is the strategy behind what we are thinking about here. And again, it is based on the fact that we have excess cash. We have enough to run our operations, and a strategic reserve as well. I should point out that we have gotten the question many times -- why not just make the acquisitions with cash? And the answer is that is not necessarily our prerogative. It is normally determined by the seller. And it is really a function of tax consequences. And in general the favorable tax treatment goes away if there is more than 20% cash in the mix. So in general our sellers, if you will, prefer at least 80% of the transaction to be in stock, which they can time the ultimate capital gains transactions around. Maybe you said this and I missed it, but did you say what the NearStore was in the quarter? And you kind of had been talking about maybe that wouldn't be as strong growth in the future? NearStore was 15% of mix. That was down a little bit from last quarter. NearStore had been ramping up really over the last several years. I think it reached a peak of 18 to 20% in our mix, and dropped a little bit last quarter to 18. And this quarter it dropped to 15. What we have observed is that the smaller configurations that NearStore customers used to buy under the NearStore brand are now shifted to the FAS 3000 Series with ATA. So I think up to about 6 terabytes kind of flipped in a hurry. And so the consequence of the NearStore configurations are higher capacity, and they are also higher ASPs. But the low end units, as I say, just kind of bled off right into the 3000 Series. We expect it to still be a very attractive product line going forward. 15% is a pretty good contributor. I just wanted to circle back on Decru. I am just kind of wondering if you could give us a little bit more detail on what happened in going forward? It sounds like there was, maybe not so much execution issues it is just you didn't forecast very well. Was there also some turnover on the sale side, or did you lose some people? And then secondly, just on the government -- I know a fair amount of the Decru sales and probably the pipeline was tied in with the government -- the federal government. Do you expect any impact from Katrina, budget issues, etc., did that have any impact? And then just lastly, all related to Decru? The Decru sales issue is really around predicting the sales cycle. And the federal government, as I indicated, there are DoD mandates that really are fairly proscriptive around what data has to be secured, and what are the access rights associated with various personnel in various positions. And what we found in the commercial sector is it is just a lot more decisions to be made on the part of the customer as to where they want to deploy it? What day do they want to encrypt, and how they want to structure the access rights? And that has taken a longer time than certainly we would have thought. The DoD mandates obviously streamline the adoption process for the government. And there is no such framework like that in the commercial sector. So we were a little optimistic on sales cycles. But I have got to tell you, the funnel is pretty wide. And I believe it is still going to be a significant producer for us. We're not backing off of the objectives we had for next year. I think it is going to be accretive within a year. Let me add to that. It is Tom Mendoza. First of all when we acquired Decru their primary salesforce was into the federal government. They had just started to expand out of that. The interest level outside of that is intense. I personally just finished a five-week trip all around the world. All around the world people have come to a couple of realizations. One, the FBI put out a report in the last 60 days that 50% of all data theft comes from inside the firewall. Everyone agrees they haven't protected that well. Secondarily, Gartner Group put out a report advising all enterprises they should be encrypting their tape. Decru, because it is an appliance, and you can do it at wire speed without changing a wrap -- everywhere I go they are considered the leading force to do this. So we are in many, many, many accounts that are non NetApp accounts. We have a lot of partners working with us to sell Decru into non NetApp accounts. I think the entire field is so open that it is creating a lot of excitement. We're very, very focused on maximizing this opportunity, but I don't think federal will necessarily the big play over time. I think financial services is going to be huge. And I think it is more of a broad application then the original Decru emphasis was. And we're going to take advantage of that. This is Dan. The other part of your question was about salesforce attrition. We didn't lose anybody that we were interested in keeping. And in fact, employee turnover at Decru in general has been very low, almost nil. That said, I will point out that Dan Avida, the former CEO, has decided to move on. And that that was not unexpected. It was a little earlier than we had thought, but not by much. And he has been replaced with somebody I think most of you know well, Suresh Vasudevan, who used to run all the core systems of product management, is now the General Manager of Decru. One other point I will make, to give you some sense in terms of numbers. Decru is actually less than .5% of revenue this quarter. We expect that to double next quarter to the 1% range. And probably go up to 1.5% the subsequent quarter. So it is on a pretty good growth clip. We were just a little more aggressive at the original outset than we think was warranted at this point. The other thing I would tell you is a lot of the trials we're doing the vast majority are on very, very, very high profile accounts -large accounts. And what they're going to do is they're going to test it. They're going to deploy some of it. And then they going to deploy a lot of it. It is kind of like the early days of the pilot. But the interest little in all the major accounts that I have called on -- literally all are interested in what Decru is doing. And specifically because they are owned by NetApp. Because almost all of the encryption companies that are out there are very small companies, and people are concerned about that. So I think that we gave them a validation and a comfort feeling that they can do this because NetApp is behind them. Congratulations on great results. Can you go back a little bit to the issue of shipping more filer (ph) heads than disks this quarter. Why well that return to a point where balanced level in the future? Just kind of what factors at work there? This is Dan, and thank you for the congratulations. I want you guys to remember that we are proof positive that there is such a thing in Wall Street as a one quarter problem. That said -- I was waiting for the congratulations from somebody, just so I could use that line. The phenomena of the head upgrade I think is what drove that particular mix. We saw a significant number of system units shipped without disks, which are primarily intended for one of two purposes. Either field upgrades of existing systems like 940s, or alternatively the addition of a second head to an existing system for purposes of clustering. And that is the kind of thing that happens fairly quickly in an installed base. It was pretty fast. And I would expect that mix to shift back to a more normal mix next quarter. Yes, many stand-alone configurations, they were clustering -- let's say 940's with a stand-alone configuration. They would upgrade that not just to a single stand-alone 3020 or 3050, but to a dual. Any update on the competitive front with -- EMC have been -- had some fairly aggressive tactics of bundling software and services. Any life of out of the HP? Just kind of wondering anything in incremental that you have been seeing out there are over the last three, three to four months? No, nothing of that level of drama and intrigue. In terms of frequency of competition, Hewlett-Packard was up in the mix this quarter. Our win rate stayed very consistent against both EMC and HP. So, yes, there wasn't really anything dramatic in the change. I think the most notable statistical difference had to do with the frequency of engagement versus Hewlett-Packard. I also think that -- and we said this before, but I can't tell you how many customers have said that they now believe it is a two horse race. It is NetApp and EMC. They are the two companies innovating. And many, many of the wins we had this quarter into new accounts simply were customers turning to us and saying, using our technology, how would you accomplish my business problem? We have have reached a role of many of our customers. We are no longer just talking about gigabyte prices and things like that. They are allowing us to use our creativity. And that goes back to Dan's point, why the petabytes were down. We are using our new technology, showing them -- giving them higher utilization rates. And that has given us major wins. I would say that the competitive landscape hasn't changed, except we're starting to tilt it in certain ways because of product. An interesting to phenomena that is going to occur in the metrics is that you are going to see I think a flattening of the cost per gig, because the customers can achieve their business objective with fewer gigabytes. And so even though we can come in under in terms of the dollar value of a deal, it is with less starch because of the utilization rates being higher. So it is going to be an interesting transition over the next few quarters. Could you give us a more color on the overall spending environment in the enterprise and SMB markets for storage? How much of this trend this quarter was pent-up demand due to the product transition versus maybe share gains, or maybe some kind of a seasonable seasonal uplift in demand that you are seeing out there? This was a typical Q3 from my viewpoint. So seasonality was such that August was very weak, and we saw a pretty good strength in September and October, particularly at our federal, which always surges in the end of the fiscal year for the federal government. So September -- that trickles into October from our viewpoint because the lag time through the system integrators. But you saw the federal business really surge in the mix. I didn't see anything relative to pent-up demand, other than the end of the year buying rush in federal. It seemed like a very normal kind of model. I would say that on our federal team too, it was a spectacular execution by that team. A quarter ago after we didn't do well, (indiscernible) came here and said there was some very specific issue where things had shifted. And by God, they went and got them this quarter, and they did it. Another thing I would point out to you is I really think what we're taking real advantage of some of our key partnerships. I had the great opportunity to speak in front of about 14,000 people at Oracle World last quarter. That paid off for with a lot of deals this quarter, where people were not looking at NetApp. Dan is doing a lot of speaking at major events at companies like Symantec, SAP. Microsoft just did a cross country tour with us over the last two quarters. Those type of things really are giving NetApp a whole different visibility and profile in the market. And I think that has helped us. Again, again as long as we get to engage in more deals, given our win rates, things are going to go better -- continue to do well at the rate we're looking at. Getting back to the essence of your question, I think most of this is share gain. And I think federal, as Tom was pointing to, is a pretty good example. Our federal business is outgrowing the market by a lot. And if you look at this particular quarter as compared to one year ago, roughly 30% of the booking this quarter came from civilian agencies, whereas last year it was a very small percentage. So as we have continued to expand our focus on different segments of the market, we have continued to gain share. I think is just that simple. Yes, financial services continues to be pretty good. And actually the energy sector this quarter -- it is really going to be in this quarter. Somebody asked about Katrina, we shipped an awful lot of equipment to our customers in the oil sector in the wake of Katrina and all the rest of the storms. But that didn't show up materially in last quarter's revenues. I think it may have a spillover effect into this quarter's. The oil sector continues to do well. The financial services sector continues to do well. We're continuing to do very well in automotive. And it is -- there are not many weak sectors right now. I think based on the numbers I saw the tech sector is still 18% of mix. And they are continuing to buy and doing well. So it is pretty strong across the board. A real quick question. You guys had talked about FAS 3000 Series ramping, and the fact that is driving some increased software -- add-on software rates. You have now seen three quarters either at or above 35% contribution. Should we think about that contribution continually expanding as you continue to ramp the 3000 Series, as well as new high-end solutions going forward? I don't think so. The advice I would give you is to model about 35. There is probably an error bar around that of plus or minus 1 or 2%. I think we're getting to a zone where you are going to see some oscillations just based on normal fluctuations. But I really don't think there's a lot of upside over the 35%. Steve? Let me be the second person to congratulate you on the nice quarter end, guys. The product margins have jumped almost 100 basis points to 67.5. What are your expectations for the product margins going forward? And how does it change as IBM contribution increases? This is Steve Gomo. If I look going forward, here is kind of my anticipation. We're looking for, as I mentioned, next quarter our margins in total for the Company to come down more to the 61% level. I think there's several forces at work here. First, I think that service is going to back off from its current level, as I mentioned. We're not going to have the benefits that we saw this quarter. I think software, as we just talked about, we're modeling 35%. And I think that based on our analyses we could see some fluctuations around that number. So to go above 35% is to, I think, take a risky profile with the model, because it could end up just slightly below 35%. If you take the software back to the 35% level that is half a point based on what we did this quarter. And finally, I think if you look at the ratio of our system heads to our disk capacity, if you will, while it may be a little bit more favorable than it has in the past, it is not going to as favorable as we saw this quarter due to the onetime events that Dan was alluding to earlier. Those are other half a point. I think it is pretty reasonable to assume that we get back to about a 51% Companywide gross margin for the next couple of quarters. Actually, just a clarification. In the prepared remarks I believe you indicated that petabytes shipments grew. But I believe Tom suggested they actually declined in the Q&A a minute ago. I just want to make sure I'm not crossing wires in my model here. Which one was it? Petabytes grew by about 2 petabytes. We saw more efficiency -- that is the amount of storage a customer has to buy for a particular business purpose declined somewhat. Yes, average configuration sizes went down a little bit year-on-year. But what you see is the utilization rates go up. So the growth rate is going to slow in terms of petabytes. I think this quarter it was 8% sequential, whereas in most quarters it has been running around 15 to 20, even higher. And it is just because of higher utilization rates. I just had one question on the tax rate. It was a little bit lower than it was. And what should we expect on that going forward? And maybe what are the reasons why it is lower? This is Steve Gomo. The non-GAAP tax rate did not change. It is still 18%, and we're projecting 18% going forward. And you should be using 18% for your model. They actually GAAP tax rate, particularly with the new accounting conventions, will tend to be a little bit more variable, as basically we have to take discrete items in the period that we recognize them. In the non-GAAP tax rate we are spreading those items over an annual period so they have less of an impact. On a GAAP basis now we are required to take them as we discover them. This particular quarter we had a -- we completed a R&D tax credit study, and indeed confirmed that we're going to get everything that we thought. So we took an adjustment against our tax reserve as a result. And then there was a transfer pricing analysis that was also done that caused another minor adjustment. That's what drove the GAAP tax rate down this quarter. One of the questions that I know will come from customers is you guys had indicated, based on the timing of beta units, that there might be some spillover effect from last quarter into this quarter. Can you maybe help quantify that a bit? See, I really think there was much spillover. The backlog coming into this quarter was very similar to what we had seen in the exit of prior Q1s. I understand that speculation. I read a lot about it. I've got to tell you, it was not true. It was not well founded. So there was no spillover affect whatsoever. I wonder whether you could expand on the decision to not do the R210? And perhaps comment a little bit more on the Spinnaker delay? The R210 was intended to be kind of a low end of the NearStore family. And obviously the low end of that was the addressed adequately by the 3020 with ATA drives. So it really became kind of a redundant product. They would have overlapped too much in terms of the marketplace, probably created some confusion in customers minds. So we just said we've got that space adequately addressed with a 3000 Series, and there is no reason to have a separate product in the portfolio. On the delay on the Spinnaker thing we continue to make good progression, and I'm very pleased with the progress. However, this is an enormous undertaking to create a new version of our operating system. It is the integration of millions of lines of code into a single base. You have two separate code bases kind of being merged together. And so we have found that the time required to finish the project is about three months longer than we had originally forecast, which on a 24 month plan strikes me as not too bad. Again, I would like to thank you all for joining us in this conference call. Before we end, I would like to really extend my thanks and appreciation to the people at Network Appliance. At the end of last quarter I kind of sent out some messages saying we have got to pick up our game. And I would like to thank them for increasing their focus this quarter. I think you see it in the results, and I surely am appreciative of the way they reacted. We will look forward to seeing some of you maybe at the NASDAQ opening on the 21st, our tenth anniversary of our IPO. And certainly I look forward to seeing you with us next February 15 for the results of our fiscal Q3. And at the analysts meeting, I would like to mark your calendar for March 14 in San Francisco. So again, ladies and gentlemen, thank you very much, and 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_233804

My name is Manachia, and I will be facilitating the conference call today. I would like to welcome everyone to UMC's Fourth Quarter 2005, Earnings Conference call. All lines have been placed on mute to prevent background noise. After the presentation there will be a question and answer period, please follow the instructions given at that time, if you would like to ask a question. This conference call is also being broadcast live over the internet. A replay of the call will be available at www.umc.com under the Investor Relations/Investor Events section. A telephone replay of the call will be available at 10.a.m New York Time and will run until midnight February 15th, 2006. To access the replay please call 888-286-8010 or 1617-801-688 if you are calling from outside of the US. The access code will be 563-477-64. I would like to introduce Mr. Chitung Liu, CFO of UMC. Mr. Liu, you may begin. Thank you. Welcome everybody, thank you for your continued interest in UMC. This is Chitung. Hopefully you had prior the chance to look over the earnings announcement that we putout earlier talking about the Q4 and overview of 2005 performance. In today's call, we will discuss the following topic operating results for the fourth quarter of last year, and update on our business guidance on Q1 2006. And we will follow with Q&A session. Before we conduct the call, I need to go over to present Safe Harbor policy. Certain statements made during the course of our discussion today may constitute forward-looking statements that are based on management’s current expectations and beliefs, and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including risks that may be beyond Company's control. For this reason, please refer to UMC's filing with the SEC in the US and SFE in the ROC. With that let me turn over the call to UMC's CEO, Dr. Jackson Hu. And then we will give you chance to ask a question. Thank you, Chitung, and thanks to all of you for joining our call today. First of all, I would like to start wishing by everyone a happy 2006. Next is the summary of Q4 2005. In our last conference call, we notice that we were expecting tremendous strength in the communication segment of the business, increase of demand for wireless communication, PC chipset and LCD drivers in the computer segment whereas the key drivers for the sensational growth in our first quarter. Higher shipments of the leading-edge technologies were also a primary reason for the 2% of sequential increase in blended ASP. As a result our Q4 revenue grew 15.5% and gross profit increased 68.3% sequentially. Revenue increased to 16.5% quarter-to-quarter to $27.47 billion of NT from $23.58 billion of NT in the third quarter of 2005, a decreased 2.7% year-to-year from 28.23 billion NT in Q4 2004. Gross profit was NT 4.97 billion or 18.1% of revenue compared to NT 2.95 billion or 12.5% of 3Q 2005 revenue. Operating profit for the quarter was 928 million NT or 3.4% of revenue. Revenue growth was the key driver for the higher profits and margin during the first quarter. Net income in 4Q 2005 was NT 3.04 billion, an increase of 40.6% compared to NT 2.17 billion in 3Q 2005. Earnings per ordinary share on EPS for the quarter were NT$0.16. Earnings per ADS were US$0.024. This compares with 3Q 2005 earnings per ordinary share of NT top ten and earnings per ADS of the US$0.018. Due to seasonal adjustments as partially in December, our 90-nanometer shipment accounting for 14% of revenue from 2% to 3% short of our earlier expectations. Although I was thinking however, we have had some great success in 2005, with customer’s engagement with 90-nanometer technology. In Q1 2006, 3 additional customers have started more volume protection. In fact, in revenue generation and utilization improvement will become more significant in Q2 and Q3 of this year. As we entered 2006, the big areas of focus are better understanding and meeting the needs of our customers in advance process technology. In mid-January, jointly with our customer Xilinx, we have achieved first significant success for a 65-nanometer FPGA product. This product uses its 3 Gig outside and the 11 layers of copper interconnect. We are continuing focus on improving yield, the quality and the customer satisfaction in the 90-nanometer and a 65-nanometer business. We believe this will be essential for us to improve the fast utilization. Turning into the first quarter we are expecting, wafer shipments to decrease by 7 to 8 percentage point. Wafer ASP in US dollars decreased by 1% to 2% percentage point. Due to the NT appreciation, the impact to revenue is estimated to be 5 percentage points. The capacity utilization rates will be approximately 75%, and we expect to have approximately breakeven into the operating level. Percentage of 0.18 micron and the below revenues is around 55% of the revenue for 90-nanometer is expected to be in a mid-teen percentage. The consumer segment is expected to be the strongest followed by computer segment and communication segment. The 2006 CapEx budget is US$1 billion. The single biggest factor affecting our performance in the quarter is likely to be the seasonal slowdown in the communication segment of the business. This business first to quarterly conference after I took the Chairman responsibility, I would also like to provide you my vision and directions of UMC. Moving forward UMC will think and act like a startup company, but our attributes that characterize the startup company, just made an appeal. Solid execution, low profile attitude, and among interest in superficial appearance has come focused on customers satisfaction, and its ability to quickly deliver the technology and the service that customers require. Startup companies usually have high pressure in the constraints in financial resources, fortunately UMC has accumulated the considerable among of financial strength over the years, through world use business trends wisely for aggressive research and development programs, capacity expansions and retaining and recruiting talented people. We will focus on our core officers making a complete effort to maintain and further strengthening our technology leadership, and the continuously improve our foundry service model. UMC has an excellent team. Over the last 2 years we have seen great improvement in many areas, including the developments of advanced process technology, the investments of production efficiency, the expansion of our customer base, and to the development of intellectual property. I am extremely proud of the achievement of UMC's world-class team. In UK, we expect to see a cost of impact on all operating results in the near future. With respect to the regulatory issues mentioned in the press release lately, we don’t anticipate any material impact to the updating our financial performance of the company arising other obvious issues. We believe that we are moving in the right direction and are quiet pleased that we were able to keep our focus in customer satisfaction. So I think we are ready for questions. Thank you sir, ladies and gentlemen if you wish to ask a question at this time please key "*" followed by "1" on your touchtone telephone. If your question has been answered or you wish to withdraw your question you may key "*" followed by "2". Questions will be taken in the order received. Please press "*' "1" to begin. Our first question comes from the line of Andrew Bates of Susquehanna International Group. Please proceed. Hi good evening, can you tell us how you expect depreciation to trend in 2006, you know was the percentage of revs or an obsolete terms versus 2005? Okay, great and then one follow-up given your communications exposure, can you describe those components to that business in Q1 and maybe tell us what stronger and what's weaker? Certainly just looking for an overall description of your communication business in Q1, so how is wireless versus wireline trending etc.? Hi, I want to get a better understanding of your revenue Chang leading-edge processes, if you could help me understand which would 90-nanometer and 0.13 micron account for in Q1, and what do you understood the trend to be as we go into Q2 and beyond? As we mentioned earlier the guidance for 90-nanometer will be around the mid-teen percentage points and or else the 0.13 micron, I think will stay the same as Q4. Okay and what could you expect 0.13 micron and below if you look like for Q2 and Q3, and what kind of trends do you anticipate? It's our estimate or expectations that by the end of this year, the combined 90-nanometer and 0.13 micron percentage will be 50% plus. Okay, and I had a follow-up question on your capacity plan, with the CapEx guidance that you have provided, what kind of capacity do you anticipate by Q4 of the current year? The guidance that we have is 1 billion and we expected to start to spend in Q2 and Q3 to anticipate for the demand in the second half of the year, I think that, that’s the situation that I can describe. Well, you can tell that 32% were both into equipments for capacity, tax drops to 830 million and that will give us roughly 10k also dropping towards our capacity. Yes, can you give us an idea of what you see as inventories that were out there in buy bank or in finished devices and what areas might have higher inventory, what might have lower inventory? Okay, and the guidance for Q1 being down, is that just customers being conservative not trying to build inventory or just more conservatives I mean in their build plans going forward? Hi, I wanted to understand as to the reasons as to why you understate the CapEx, its got a budgeted CapEx in 2005, rather than even that you underspending 4Q compare to various plans were? Yes, as the year went on in 2005, we gauged the customer progress in Advanced Technology product and some of them, you know start to show delay and therefore we adjusted our spending accordingly. May be its early on the 90-nanometer, do you still have some customers who are offered Bi based driving or across the Board it has now moved to rest of this? So could that be one of the contributory reasons that your colleagues are not yet up there where you feel comfortable enough to spend? No, that’s not the reason, it’s just we have several new customers, high volume customers that we engaged a year ago or a year and half ago, and they, we have to wait and until their product get ready, so as we start to see, comfortable sign for that then that triggers our spending. 15%, and when you buy the declines in Q1, I’m just trying to understand the reason because I compare with all against, all your fears, the guidance as being flat to mix single digit growth, so this decline is it largely because of one or two customers, or the customers specific rather than across the Board? Its hard for us to comment on the individual customers, basically the area we see weakness is mainly in the communication area that our few customer who start the inventory production in late Q4, and we won’t be able to comment on the individual customers related information, but as we said that our legacy capacity that you our admission rate, we are relatively higher nearly 40 utilize in the first quarter of 2006 Okay, one final decision on your 0.65 micron RAM, how do you expect significant you can give some guidance as to where do you expect to see 0.65 micron capacity like immediate? Okay, I think that we are in the qualification phase with the first customer, and we just had reported that our second customers Xilinx has been working on both and so from this year we basically will be in the preparation stage for 65-nanometer length, so the total revenue contribution in 2006 will not be very significant and we expect the RAM to happen in 2007 and however the equipment preparation will happen in the second half of this year. Okay, so what is the hike assumed at by mid ’06, you won’t have any volume going into 0.65 micron and it is only by end of the year that you would have certain capacity moved on fixed size. Yes, sorry JP Morgan, just a couple of questions, one was Jackson you mentioned that 50% of revenues from 90-nanometer by the end of ’06 did I hear that correctly? Okay 0.13 and 90-nano. I have a more of a long-term question and it pertains to the Fab 14 for UMCi, I am just wondering if you have considered any other alternatives for Fab 14, given it seems to be from the key reasons for a drag in your profitability. In other words if you would exclude Fab 14 you will probably have a much better operating model, I was just wondering I would like to hear your thoughts on. Yes, well based on customer demand and based on the number of product in advanced to note including both 0.13 micron and the 90-nanometer, we expected to feel the capacity by the end of this year, so that you know the concern that you have hopefully well the result we put at the end of this year. Right, but is there any you know that’s good, I guess is there any strategic I will argue that there is no strategic advantage to having a separate fab in Singapore, you know you have that capacity? On the contrary, the geographic location for Fab 12i in Singapore is preferred by naming American and European customers and that they consider is the neutral place as no earthquake, no typhoon and they can communicate effectively when they go there and many of them has established operation in Singapore. Right I guess I just wonder how your profitability would look if that business you are doing out of Taiwan and sort of Singapore? Thank you anyway. Good evening gentlemen, your CapEx numbers for 2005 and 2006 is pretty operations in Taiwan and Singapore, but its future operations in Japan, is this correct? Last year its about say about only US$22 million. This year it should be similar, there probably won’t be any major spending in Japan following on in 2006, although it is mainly for maintenance purposes. Okay. And then on your expected utilization rate of 75% for Q1, can you explain kind of how you divide this estimate if I am taking a look to your capacity it looks pretty flat quarter-over-quarter and I am just wondering how you get to 75%? This 7 to 8% increase in capacity, 982 in Q1 over 973 that’s of the few percentage increase and wafer shipment, and wafer out were declined by 7, wafer shipment were decline by 7% to 8% and there will be a similar range of numbers for wafer out. Well that 75% doesn’t factor into maintenance but there are a few ones who use maintenance at an adjusted basis that will take away about 5% of our available capacity. Excellent, and then just finally on your CapEx, how do you see that loading throughout the year, do you expect it to be more front half loaded versus the back half loaded? Okay so do you, if you started in Q2 or Q3, do you expect to spend at least 50% of the budget then by Q3? Thank you I have a follow-up question on your 90-nanometer mix particularly in Q4. You mentioned earlier that this coming lower than what you were earlier anticipating. Could you help me understand exactly what happened, why did it coming lower and I am trying to understand what it means going forward? Sunil, we are noticing that customers who started the seasonal adjustments in December, and that’s probably the best description of what happened. And based on your understanding of you know, based on your conversation with customers, is bulk of that correction of inventory digestion as you earlier, is that over or it have a long way to go? We consider the seasonal adjustments in Q1 2006 is normal compared with previous years, and therefore we expect in Q2 to started to increase again. Okay, and you also mentioned that you started production for two new customers at 90-nanometer. Could you help us understand what kind of end market applications are you focusing on? Yes, I have couple of follow-up questions. You mentioned that couple of your customers have inventory issues, if you can elaborate on which end markets those customers would belong to? And then, regarding the capacity mix of 90-nanometer as a follow-up to the previous question, I want you to dig in more and figure out what area of communications you're seeing that and its lower ramp for 90-nanometer. If you go back to what Texas Instrument, I assume one of your largest customers have to stay there. They have been constraining the capacity so, would that imply that, not the wireless, there is a coming in the below prior expectations and I have some other follow-up questions? Yes, definitely, we cannot comment on the customers’ situation and always that, they don’t there were a couple of customers, we didn’t mean, we didn’t imply that is the communications or wireless communication. And if you follow the industry report, look at the end user of claims, you can probably figure that out, and it's not proper for us to mention customers’ name, or the end of customers’ names. Okay that’s fair, and you mentioned, preparing equipments for 65-nanometer ramp in 2007, and you are going to prepare equipment by the second half of this year. I don’t see that part of the equipment preparation included in CapEx. So does that mean that you are going to place orders for 65-nanometer equipment in the second half, and that will be included in 2007, CapEx? Those order could be earlier, and the spending could be in the, the spending will be in the second half, the CapEx numbers always refers to the spending that we actually paid. Okay, and then I joined the conference call a little bit late, did you mention utilization rate, for Japan and Singapore plant? Hi, one question that I have is at the 3Q Investor conference, I remember, you have commented that, you are togging to strategy is to, give it up scale first, and from that we can talk about special price and margins. And in light of your reviews to CapEx and that sounds like a good thing for your P&L, I was wondering whether that philosophy have changed in the last 3 months? I remember also in the previous quarterly conference, I stated that our strategy moving forward for CapEx budget that will be depending on two factors, number one is our technology readiness, and the second one is the customers’ products readiness. So we will engage both factors and the trigger, the time and the pace for spending. Okay can you tell us the, I think in Q3, or Q2 you have talked about the law from UMCi, can you give that or speak again to us for Q4 and Q1? Yes, there is no longer UMCi exist, it has been merged into the operation of UMC since April 1st of 2005. So there is no separate financial data for UMCi anymore, it's been renamed to clarify one of the sales incorporate that UMC has. Thank you, couple of questions, firstly I guess could you give us your focus for the non-operating income for the first quarter '06? First quarter '06 due to that we sold two third of our investment in our companies Hsun Chieh in January, we book about $15.7 billion profit as a non-operating income in percentage and that’s likely to be roughly the ballpark figure for Q1 for non-operating income. The others will offset each other to be around even. Its quite complicated. It will be partially tax, and to answer your question due to the minimum tax implementation in Taiwan 2006 UMC is expected to pay about 5% to 8% of tax for the 2006 including this $15.8 billion non-operating income. Thanks. And now secondly on the NT dollar appreciation you have taken off the charges about 5%. So what is your NT dollar assumption so like I think I see your fourth quarter NT dollar is already $32.8, I think even if I take 5% on that, you are taking $31.2? The number you have quote is the quarter end number for translation. The weighted average number we use in Q4 last year was around 33.5, and the basic assumption for Q1 on a weighted basis is 32. Okay, now next one is on, I am holding some inventory for your customers as well under your balance sheet now? And, could you give us a little bit of idea about the progress on half-node 90-nanometer whether you are engaging any checkout activities out there? And could you also give us some idea about when you see like non-communication related customers will account to your 90-nanometer technology? I mentioned earlier that we have three new customers that is target risk production this quarter and that includes communication and a computer obligation. Hi, I had a follow up question on the CapEx of 330 million which stands for actually to understand what's the function of that is going to go towards 65-nanometer versus the 90-nano? Okay, also one question looking at your fabless versus IDM's mix on, if you look at the past six months UMC along with the whole industry has grown nicely quarter like quarter in the utilization of that expanded but fabless growth has been relatively lot lesser, your 9.9% this quarter versus 33% in IDM, given in the pervious quarter you have your IDM jumping by 46%, so well I am just trying to understand what is happening in the fabless space, of course in the inventory direction, the orders don’t have to come back with the same magnitude as in the case of IDM, so is there market share shift, are you seeing any customer losses there No I won’t see so, as a matter of fact that we've used - the marketing share of the major players been in the communication segments that you can tell and you cannot reach to a complete conclusion from the quarterly variation of fabless versus IDM and draw any conclusions there? Within the fabless segment if you could characterize that which are the segments where you are seeing weakness versus expense going forwards in Q1? Yes, I was wondering if you can help on the fab, explain as to within the fabless segment, which sub segments are you seeing related trends as you get into Q1 versus where you have seen the weakness? Well in first two quarter, the consumer segment is considered as a strongest for example LCD driver and followed by computer and then followed by communications. Hi, I had a question on your computer potential customer, there was a quite a bit of optimism about the possibility for advanced customer in the fourth quarter and that has been pushed out of, I was wondering what was causing that delay in the ramp of that particular product and what lead you to the confidence now, what's changed that, in fact you can ramp 90-nanometer for a computer related customer. Dan, what I can say is that actually the computer customer’s product was quite to normal actually, the results were slight good. Okay and then on the communication space given your pretty high concentration there was in IDMs, is there an opportunity to expand within that given customer, do you think there is market share opportunities or do you feel comfortable current with your - current percentage share of that, or TI for instance, do you think there is more opportunity against share there? Again, I cannot comment on any specific customer but I can tell you, it is our goal to expand our customer basis and so that we have more high volume customers in each of the application area, that way we become less vulnerable due to the marketing share shift among the customers. Right okay, so if you try to broaden out your customer basis at for instance on 90 and even now 65-nanometer, what you guys doing a little bit differently at 65-nanometer and what types of investments do you think you need to make to ensure that you do have greater diversity 65 versus 90? Okay that is a good question, actually the investments has been made in the last two years, as we factor in the people talent, and also in methodology that we have includes in the company and all those contributed to the development enhancements in new Process Technology development for time to market the reason that we must offer the advanced process technology the biggest in the industry, so that both high volume customers can invite them. So, for instance do you think that it will have more IP qualified current sense that 65 to 90 or could you give a few more specifics there? Yeah, as soon as the technology advance technology is available, then you can engage with customers, you can develop IP or customers can develop IT and then that will affect the – that will help customers to become ready for their new generation products. So that is where I think the answer is yes. Right okay, so and in this phase which you are seeing right now is your process is ready and people are developing, when that the sight, I mean your enhanced that’s now for instance in low power so. How much IP, how ready are you from IP standpoint to get into Q4 applications in your standpoint and how far are you on? Okay its hardly to quantify how much IP. IP in crucial send us a library, the memory compliers to I/O's and end of IP and also you in the last two years who have significantly improved our capability for developing IP in generally and also for working with other IP vendors, so that has become almost a none issue for us in this stage. Hi good evening. I have one question, this regarding your business resolution in UMC and you talked about UMC having to reinvest provident there lot of Company. I just want final, if you can, if you have such, your employee or quantitative target over the next 1,2,3 years, that Company would look through it, and they will help us to analyze whether the Company is between those profits or not. Okay, very good question and our new direction has been truly communicated internally, and the issue departments, down to each project agent program, has its suggested with the goal and that we attracting, or will be attracting them on the monthly and quarterly basis. So it's just like a start up Company, if you miss the major milestone, you are losing your customers, and that will affect the impacted the existence of the start up Company. It’s a life invested situation and that kind of mentality that we have established. We have internally and the stock profit to nation an numbers and also again, there are so many quantitative numbers that could be report to be in difference in manners. So it's not a proper to, and it giving content to answer that. Yes, I just doesn’t want strategic questions say if we see on the 19 nanometer side, you have started ahead of other foundry companies, but if we see today like your, probably is expected behind with a number of customers or you can percentage of revenue coming up from that particular technology. And going forward in 65-nanometer means, if there is a customers who is willing to use your 65-nanometer how that going to convince them that you will be able to deliver a good processing or capacity support such that they can come to you and use your new process most smoothly and that is I think that the questions to customer to let this point. Okay that is good question and you may keep all the 90-nanometer and many people give them notice that we have to do 90-nanometer size. First to start at 8 inch pack because at that time I will probably use inch pack was not as established and we didn’t have the equipment and moved in. So we have to do again twice and additionally equipment a differences doing probably inches like totally new efforts, so that was the reason for that you have just described. And in the case of 65-nanometer old R&D and the developmental efforts that is involved in the fact, and it is enough towards the manufacturing what happen, so therefore you will be much more loose condition And hasn’t great probably people go for final dis-angle DFM will come in to picture and if you see don’t have your own mass shop. Do you think that you will have some marketing out there even you get a data from customers you are not able to through the mask house? On the marketing house is not an issue, that we have working with the either us to leading mask house which have whole control of their investors not making and that is not an issue at all Yes we have been working with the mask house and also EBA tool venders. So address the DSM issues and we have poor control of DSM Hi, if you can give any guidance or any outlook on what you see certainly demand as in 2006 versus ’05, and also could you give some color on the current wafer stock environmental, thank you. Okay currently we don’t see any maximum factors that would effect the 2006 demand was the matter of fact that many customers are very bullish about the demand in the second half of this year. As far as the total demand according to some of the markets research organization and they expect to be see 10% to 15% growth this year I think last year was around 10% Okay what about the current wafer start environment are you, where you seeing any thing at normally can surprising one where the other Gentlemen we have no further question at this time, I would like to turn call over to Mr. Liu for closing remarks So, that’s concludes our call today. We thank you for joining for this conference and I we want go to the attention for few more items. A links of the replay of this will be available on until the end of Tuesday April 11th, 2006 on the investor relations section of our website and dial-in version of the replay can be heard at 888-286-8010 if you are in the U.S. or at 1617-801-6888 for international calls. The dial-in replay will be available until midnight on February 15th, 2006. The access code will be 56347782. If you have any additional questions, please feel free to contact us directly. Thank you again, and hopping a good day. Thanks to every one. That concludes our call you want to drive your attention for few more items and list replay of this call will available until the end of Tuesday April 11th, 2006 on our investor relation section of our website. The dial-in version of a replay can be heard at 888-286-8010, if you are in the US or at 1617-801-6888 for international calls. The dial-in replay will be available until midnight on February 15th, 2006. The access code will be 563-477-64 if you have any additional questions, please feel free to contact us directly. Thank you again and have a great day.

EarningCall_233805

Here’s the entire text of the prepared remarks from Shanda Interactive’s (ticker: SNDA) 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 today’s Shanda Interactive Entertainment Third Quarter 2005 Earnings Conference Call. At this time all lines have been placed on a listen-only mode and the floor will be open for questions following today’s presentation. It is now my pleasure to turn the floor over to your host Donglei Zhou, Shanda’s Director of Business Development and Investor Relations. Donglei, you may begin. Thank you and welcome everyone to Shanda’s Third Quarter 2005 Conference Call. I would also like to give a special thanks to our friends in the US who joined this call at a later hour. As always, we appreciate your participation. With us today on the call are Tianqiao Chen, our CEO; Jun Tang, our President; and Shujun Li, our CFO. After the close of the US market today, Shanda issued its Third Quarter Earnings Release. Copies of this Release have been sent to you for your information and reference during this call. A copy of the release is also available on Shanda’s corporate website at www.snda.com. The purpose of this call is to provide investors with some further details regarding our financial results and to provide a general update on the company. Following our formal remarks, we’ll be happy to take any questions you might have. Before we begin, I would also like to remind you that during today’s call, we will make certain forward-looking statements that are intended to qualify for the Safe Harbor from liability. For such statements established in the US Private Securities Litigation Reform Act of 1995. All statements during the conference call other than statements of the historical facts are forward-looking statements. Although we believe that our expectations expressed in our forward-looking statements are reasonable, we cannot assure you that our expectations will be correct. Risks and uncertainties would cause our actual results to be materially different from our expectations, including the risks set forth in our filings in the US Security and Exchange Commission. Now, with that, I would like to turn the call over to our CEO, Tianqiao Chen. Thank you, Donglei, and welcome everyone. Overall our third quarter results were solid on an earnings benefit and in the revenue performance of many of our games, as well as online net pricings. We posted strong year-over-year revenue growth of 41.4%, but a potential revenue decline of 7.4%, mainly affected by the revenue decline in Mir II, which was down 33.5% over the second quarter of 2005. Excluding Mir II revenues from all of our other games increased 21% quarter-over-quarter. Shujun, will talk about the second terms with Mir II in more detailed discussion of our online game operations. While our older game titles start to decline, we are pleased to see our other current game titles generate solid growing during the summer holidays in third quarters. At the same time, we continued to focus our investment in game development and in our home strategy making that generating sustainable growth in the future. As part of the investment in strengthening our foundation, we have increased headcounts in R&D in the sales and marketing department and also raised salary levels at various positions to be more competitive in hiring and retaining talents in the dynamic industry. Our sales and marketing expense also increased as we invest more in building Shanda’s brand name. As a result, our operation margin was lower this quarter. Shujun will discuss this development in more detail. Now, turning to discussion to some exciting new development in our home strategy and growing prospects. First of all, on the content side, we continue to build on our expertise in online game. We have built the most diversified portfolio of games in this industry and a very strong pipeline for the next 18 months. In addition to our core online game business, we have continued to broaden our entertainment ph payment content offerings. Through cooperating with various leading content providers and the service providers, we have prepared three major categories of the content offerings. The first is entertainment, which includes movie, music, TV and games. Second, living which includes finance, e-commerce and the communication programs and third, info-learning which includes news and education programs. Working closely, with our partners we are committed to bring more diversified content to our users. Secondly, we also made some notable progress on efforts to further improve and streamline our operation platform. For example, with the execution of unified user account and payments, we saw revenues contribute by direct online sales via credit or debit card payment increased to 17.4% of total revenue in Q3 up from 8.6% in Q2 2004, in 2005, sorry. This is a result of our active promotion of these payment methods and a very encouraging sign of how we could grow the easy payment methods into home user market. Another example is that QuanQuan, our integrated instant messenger in service, which starts to open testing at the end of August. Already, reached some 10 ph users; nearly up 126,000 by now without any advertisement. QuanQuan has multiple features built in that allow game users to interact, search and chat with other members within the game community. QuanQuan also has a 3D advertising system building in. As we transition from a pure online game operators to an interactive entertainment media platform and a service provider, we introduce EZ Center software solution as the unified software on top of the service platform. EZ Center software solution is an integral part of our home strategy. It integrates rich interactive contents from Internet and display them through our new user interface that has info intuitive menus with large tabs and clear graphics. It’s clearly the way people navigate media content from information base, which is the old internet portal model to an accreditation based new entertainment portal. I believe this would be the second generation portal. Our new EZ Series product, which includes EZ Station, EZ Pod and EZ Mini are all based on the same EZ Center software and are supported by Shanda’s unified service platform, including user accounts and security, billing and payment systems and customer service. Before I introduce our EZ Series products, I would like to reiterate that Shanda’s core competency is in operation of platform that provides interactive entertainment content and service. Our goal is to expand our service platform and ultimately grow user base by providing them with the best entertainment experience in the most convenient way. We believe the EZ Series products will help us to set the standards for perfecting user experience and initially consolidated different process along the value chain. Once the market starts to generate momentum we expect to focus on our core competency. First is EZ Pod, which is targeted at the PC users. It includes an EZ Center software and a remote control that together upgrade a normal PC platform to an interactive entertainment platform that let’s the user browse applications on the full screen as easily as operating a TV. Now, user can relax and sit back in their chair while enjoying entertainment on their PC. Recently Intel has entered into a partnership with us to jointly promote EZ Center or EZ Pod products and expect to distribute a half a million sets over the next 12 months. EZ Pod has already been rolled out in the market and in the price at RMB 458, about US$557. Users are then expected to subscribe to our various services on an a-la-carte basis for monthly package. Secondly, the EZ Station, also known as the set-top box, which is target at mainstreaming home new TV users. It is an entertainment PC based on Intel architecture with EZ Center software in package and operate on Windows XP or Linux. EZ Station comes with a remote control and connects to and displays via a normal TV set of all sorts. EZ Station brings rich editorial entertainment into living rooms through an Internet connection. We believe the EZ Station will appeal to a wider range of users in China because of its higher degree of user friendliness compared to a PC. While the products have not been commercially launched yet, we are currently conducting marketing trials. We expect we will allow users to choose between the monthly subscription fee that entitle them to unlimited access to content and service or pay per use fee for content and the service. Third is EZ Mini, which is targeted at user on the go. EZ Mini is a handheld online entertainment device that connects through WiFi or via PC to the internet and access Shanda’s content and service platform the same way PC or TV users in EZ Station would. The product is jointly being launched by Shanda and Mitac, a leading Taiwanese IT product developer and manufacturer. Mitac will be responsible for the design, manufacturing, marketing and the distribution of the product, whereas Shanda will include EZ Mini in its agenda, EZ brand series of product and product and provide content and services. EZ Mini users will pay for ongoing services through Shanda’s unified payment system via prepaid card instead of through mobile operators. In total, we expect cost incurred on or capital tied up to our EZ initiative to be less than US$20 million over the next year. However, as the market momentum picks up we intend to partner with other hardware manufacturers and then license to them the right to produce and then distribute the product independently. Again, our ultimate goal is to enlarge our user base and to promote content consumption. Because once users buy any of the EZ series products they are very likely to become loyal users to Shanda’s broad portfolio of content offering and contribute recurring revenue streams. In closing, Shanda has strategically grown and diversified its revenue base by building one of the largest portfolio of online entertainment content in China. We have a deep portfolio of offering and services as we have one of the broadest platforms over which to distribute them. A big part of our future is expanding both as advantage through the home strategy, as we challenging the way Chinese consumers entertain with our EZ series. Shanda is planning for the long-term and we are excited about the development that lies ahead. I will now turn the call over to Jun Tang, our President. Thank you, Tianqiao. I will discuss our online game business in more detail. Despite of declines in Mir II revenues in the user base, user ph numbers for this quarter. The majority of the games in our game portfolio have performed well in the third quarter. Total online game revenues were US$51 million, an increase of 35.5% year-over-year and a 6.1% decline quarter-over-quarter due to the decline of the Mir II revenues. Our total key concurrent users for the third quarter was 2.55 million, representing a small increase from the prior quarter while our total average concurrent users reached 1.4 million, representing 1.8% growth over Q2. As many of you know, Mir II is in its fourth year of operation, majority of which was without any technical support from the game developer. While, we have been extremely satisfied with Mir II’s performance over the past several years, it has now entered into the later stage of its life cycle. Along with the aging, the revenue decline was also attributable to the increase of competition in the online gaming markets, the effort of the hacking incidents, cheating programs and the parity to servers. Furthermore, the 33.5% in sequential decline was exaggerated because of the success of the expansion pack and related in game events in the second quarter. If you look at the Q1 2005 as a comparison without the temporary spike caused by the expansion pack, the revenue decrease of the Mir II in this quarter is as a much smaller percentage of 11.7%. Despite of Mir II’s decline, the underlying strength of our diversified game portfolio was clearly demonstrated through the fact of that War ph have become the leaders, posting strong revenue growth in the third quarter. It’s now our largest game in terms of revenues. In addition, Magical Land and RO are off to good starts in the game market as their user base grows. Overall, peak concurrent MMORPG users grow 1.5% to 1.03 million in the third quarter while the Mir II saw a 19.5 decline in peak concurrent user numbers. The decline in Mir II PC was mainly offset by the user interest in War, in our other concurrent current titles, including the newly commercial launch of the games. Average concurrent MMORPG users in the third quarter declined 17.4% from Q2 to 630,000. That also includes a 38.9 decline in average concurrent users for Mir II. Casual games revenue for the third quarter including revenue from Bianfeng and Haofang was $13.2 million US dollars, an increase of 95.5% year-over-year and an increase of 1.9 quarter-over-quarter. Peak concurrent users for casual games declined 3.7% quarter-over-quarter to 1.5 million, while average concurrent users for casual games increased 24.4% to 807,000, as compared to the second quarter 2005. In September we launched The Three Kingdoms, an in-house developed casual game. Going forward, we remain very confident in our pipeline of upcoming games. We plan to launch three other in-house developed casual games, Shanda Rich Man, NAB Card and the Kung Fu Kids ph through the remainder of the 2005. We also have a few more development projects of the various type of casual games that have recently been established. On the MMORPG side, Dungeons & Dragons is on track to begin beta testing in first half 2006. We are pleased with the early test of versions we have seen. In addition, Actoz has recently unveiled three exciting new games that will be added to our game portfolio and launched over the next year. The first is a side screen 2D casual games with cute characters and a charming decoration. The second is a 3D MMORPG with a fighting in the sky story line and a cutting edge graphics and scenery. The third is an adventurous 3D casual game. All three of these three games will broaden our content portfolio and allow us to reach the fastest growing youngest market in China. With that, I will now turn the call to Shujun. Thank you, Jun, and welcome everyone. Q3 total net revenue was US$61.7 million representing a 41.4% increase year-over-year and a 74% decrease quarter-over-quarter. Our core online game business delivered revenue of US$54.1 million up 35.5% year-over-year and down 6.1% from the previous quarter. Revenues from MMORPGs increased 23.3% year-over-year, but decreased 8.4% quarter-over-quarter to US$40.9 million due to the softness in Mir II revenues as discussed. Average concurrent users for MMORPGs was 630,000 in Q3 compared to 763,000 in Q2. Active paying accounts declined 9% to 3.2 million where average monthly revenue per paying account grew 12% quarter-over-quarter to Reminbi 11. We are pleased to see ARPU growth in both, our casual and MMORPG games as well as good performance from our other games excluding Mir II. We believe that our expanding roster of games will gradually help diversify our revenue base. Other revenues from Q3 was US$7.6 million, an increase of 105.3% year-over-year and a 15.4% quarter-over-quarter decrease. While online advertisement revenues continue to grow D.O.’s slowing sales have caused other revenue to decline sequentially. Other revenues accounted for 12.3% of our total net revenue. Our gross margin was 68.9% of net revenue this quarter, up from 62.7% in the third quarter of 2004 and 68.4% in the second quarter of 2005. The increase is related to the decline of ongoing license royalties from the decreasing revenue of Mir II and the increasing revenue from in-house the other games. As Tianqiao talked about earlier, in the third quarter we continue to invest in the areas that we have to generate future growth. This has resulted in operating margins decreasing to 30.4% year-over-year from 40.2% and quarter-over-quarter from 45.2%. The decline of operating margin was attributable to increment of payroll costs and sales and marketing expenses. Payroll costs increased because of the increase of headcount, as well as a 20% on average wage increases granted to existing employees in various positions to be more competitive in this industry. The total headcount increased 6.5% quarter-over-quarter to 2,363, mostly due to the increase of employees related to new game projects and other initiatives. Sales and marketing expenses in Q3 was 15.7% of our net revenue compared with 7.1% in the previous quarter. The increase is mainly because of continued investment in Shanda’s brand name, as well as marketing activities relating to the launch of the new games during this quarter and the upcoming launch of the Shanda EZ series. In addition, Shanda has made some contributions to social causes to improve public perception of the gaming industry. We reported income before taxation and minority interests of Reminbi 243.3 million, representing a 38.8% increase compared to Reminbi 175.3 million in the third quarter of 2004 and 80% decrease compared to Reminbi 264.6 million in the second quarter of 2005. Income before taxation and minority interest for the third quarter of 2005 include other income was Reminbi 89.1 million, which mainly comprised government financial incentives of Reminbi 50.4 million and the foreign exchange gain of Reminbi 43.5 million. The foreign exchange gain aroused from the revaluation of monetary and assets and liabilities denominated in US dollars following the appreciation of Reminbi in July 2005. We have posted net income during the third quarter of Reminbi 251.1 million, up 58.1% year-over-year and 17.1% quarter-over-quarter. The income tax benefits in the third quarter of 2005 is still to receive government approval by one of our operating companies irrespective the preferential tax incentive, but has income tax liabilities totaling Reminbi 34.2 million for the first two quarters of 2005 and credit as a benefit in the third quarter of 2005. Shanda’s effective income tax rate for the first three quarters of 2005 after receipt of the tax benefit is 9.3%. This rate is expected to be maintained for the next several quarters. On per share basis, third quarter net income per diluted ADS increased to US$0.44 year-over-year from US$0.26 and quarter-over-quarter from $0.36 per diluted ADS. The number of related average ADS outstanding for the third quarter was 73.5 million, compared to 75.1 million a year earlier and 72.6 million for the previous quarter. That concludes my formal comments. Thank you everyone. I would now like to turn the call back to Donglei. Thanks you, Shujun. Before I turn the call over to the operator I would just like to note that shortly after today’s call we will post a slide presentation on our investor’s relations website that takes a further look at the strategy around our EZ series and also displays some of the exciting features of the EZ series products. The presentation can be found on the investor’s relations portion of our corporate website at www.snda.com under presentation. 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_233806

Here’s the entire text of the Q&A from SanDisk’s (ticker: SNDK) 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. Yes, good quarter. A few quick questions. First of all, the 70, 30 split in calendar year '06, do you intend to maintain that, and if so, why? Yes, we intend to maintain that because we see very strong demand growth in our markets that we will not likely be able to meet across the year, even with a very aggressive ramp. Now, that may fluctuate from one quarter to the next. There may be quarters where we go below if necessary and quarters where we go above. And we will use that as part of our planning schedule. No. Because, let me say, in next year we're also going to have a lot more availability of MLC from our primary non-captive supplier. And we think that that will be a very advantageous type of capacity use. So, no, I would say, no, it has not changed. I think it's a very good strategy. It has served us very well in the past. And we think it's a very, very, very flexible approach. You've been asked this before, but do you think there's any exposure that SanDisk has to the ongoing dispute between Lexar and Toshiba? And what kind of gross margins do you realize on your licensing? I mean, are there any costs associated with it? We have substantial legal expenses that are not, I guess, not directly counted as part of gross margin, but they're quite substantial. Well, in terms of our published financial statements, there are no costs in costs of sales related to our licensing revenue. As Eli said, there are costs in G&A, legal costs. You gave some granularity in terms of bundling in the handset market. Could you give us a sense of what you're hearing from customers, what you may expect in the fourth quarter, and, kind of, what '06 looks like preliminarily in the handset market? The handset market is moving very strongly, as I've said, to music applications, as well as two megapixel becoming, kind of, the baseline in terms of cameras, TV applications, and so on. So we're seeing, across the board, just about all, like I say, literally the top dozen handset makers are moving very aggressively to have flash storage, 512-megabyte to 2- and 4-gigabytes. In fact, there's a significant move away from on the high end, the Microdrive in handsets towards flash products like the iNAND. We're also seeing very, a tremendous amount of interest from the mobile network operators to introduce subscription services and also to start selling cards through retail outlets. As I pointed out, the U.S. is a little bit late there, but it's beginning to pick up. Europe is very strong, and, of course, Japan and the Pac-Rim. But I think 2006 is, in my opinion, going to be, really, the year of flash in handsets really picking up. And as I've said in my prepared remarks, by 2007, I would not be surprised if flash in handsets become the dominant application. Okay. You talk about 40 to 50% bit growth in the fourth quarter. I'm just wondering, if you weren't gated what type of growth do you think you could have this quarter? And to what extent are you either turning OEM customers away or moving the business away from USBs and from MP3s? We could do a lot better, that's for sure. I think that, I don't have an exact number. You've heard from Samsung and Toshiba that they're not meeting more than about 70% of their customer requirements. On the high-density side, there is no product to be had from any source. And I would say that we are definitely not capturing the opportunity internationally. There are geographies where we have 2, 3, 4% market share where we could easily have 20, 30% if we just had the product. In MP3 players, we certainly don't have enough capacity and in USB Flash Drives, we don't have enough capacity. But, by quite a big margin, I would say. Could I just ask, on bit growth, my calculation, based on the 50%, you're up something around 170% year-over-year. Would you expect next year to be able to grow your bits at a faster pace? Yes. If we execute well as currently planned on that accelerated plan in Fab 3, and if Samsung delivers on their MLC transition, I would expect the number to be north of that number. Just one last quick question. Any impact or what is the impact from the ST commentary on any potential litigation going forward with Hynix or Micron or others? Well, it's too early say. Of course, we will appeal it and we really do believe that they're infringing. So this is a little bit of clearly disappointment. The same court, with the same patent, with more or less, we believe, the same NAND designs with significantly different outcome. At the very least, the patent is declared valid and enforceable, and we're going to fight on the infringement. We do believe that we're going to prevail over time. Can you talk about the OEM growth in Q4, Eli? You've seen big growth in Q3. Is that still continuing in Q4? What kind of growth do you see? Yes. We expect continued growth in Q4, but we, again, are somewhat limited in our ability to respond frankly to the outside. Primarily there, it is on the high-capacity, very-small form factor card microSD particularly where we could sell a lot more 512-megabyte and, frankly, 1-gigabyte when we introduce that. But we just don't have nobody forecasted this kind of a rapid growth. And we are, frankly, scrambling to put in place the stacking assembly capacity. And that ought to be improving on a weekly basis. But if we could do better there, then it will be even stronger. But it's very strong. Okay. Judy, question for you. Just one follow-up, if you don't mind. In terms of pricing, I heard captive is 39% in Q3 and you're guiding to 45% in Q4. 35? Historically, that put a lid on your gross margins. I know you walked through some of the startup costs and so. How is the Q4 with 35% non-captive still in the range of 33 to 35? Can you give us, walk through the thought process there? Well, we had 39% non-captive in the third quarter and reported 37% product gross margins. So we've clearly built the 35% into our 33 to 35% estimate for Q4. But the key factor in the product gross margins for Q4 being down somewhat from the 37% in Q2, excuse me, in Q3, is really that in Q4, we will be selling through a sizable amount of product that was built with the very early 300-millimeter wafers, which due to normal early production and normal early yields, are a bit higher cost wafers than what was built into the products that were sold in Q3. Thanks. I just have one clarification and one question. I did some clarification. The gating to your bit growth in Q4, is that due to the front end or more due to the back end? It's really due to both. We are faced with capacity constraints at the back-end subcontractors, in terms of getting product out and getting it shipped into retail for the holiday season. But, in addition, our non-captive purchases are coming later in the quarter than we would ideally like. The timing of availability is not as early as we would like. And of course, our own Fab 3 is ramping very rapidly across the fourth quarter. Okay. Great. Just one question. The Matrix acquisition, the 3-D memory and the One-Time Programmable memory, what does it actually replace in terms of applications? What kind of memory will it repace, and in what applications? Today, it's really, it really replaces, in video games, it replaces, basically, mass programmable. In blank card application, it will replace our shoot-and-store card. And, of course, we're looking to new applications. Once this technology moves down its own technology road map, we think it can become applicable in quite a large number of content distribution, content storage both music and video, in time. Great. Thank you. Just a quick question. Eli, you had mentioned, I think, previously that you had expected to reach cost parity with 90-nanometer at the 70-nanometer 200-millimeter wafer production in the fourth quarter. Are we still on that schedule? Yes. We are a little bit ahead of that schedule. We are now, I said in my prepared remarks that the 70-nanometer, 90 sorry. So 70-nanometer 200-millimeter 8-gigabit cost per megabyte, or cost per bit, is now lower already than the more mature 90-nanometer 4-gigabit. We've crossed over. And what in terms of impact of cost, should be expecting the same kind of cost reductions moving faster than your guided ASP declines? Yes. The cost structure is, should improve steadily at a hefty rate in the fourth quarter that would still, really, translate to first quarter next year benefits. Remember that the majority of our revenue comes from retail, which is recognized based on sell-through. So, for example, in the fourth quarter, we are recognizing revenue from a significant amount of product that was actually built in the third quarter. You're welcome. Eli, we clearly, in the third quarter were on a much more benign price per megabit decline pace than 50%. When would you expect to see an inflection back towards that 50% trend line? I think that the fourth quarter is essentially behind us, as far as any pricing. I don't believe there's going to be much change, and it will be benign, and there is, definitely, demand is exceeding supply. On the other hand, you've seen that in retail our average capacity only increased by 4% on a, in retail, and clearly, that is very, very much tied to this benign pricing environment. In 2006 I expect that in the first half you're going to start seeing some catch up on the price reductions in order to stimulate the demand and to move the market faster towards the 1-gigabyte. At that time, I believe we will be very well-positioned to compete in that market because of our cost structure. For the fourth quarter we've said, I think Judy has said, it's 15 to 20% ASP decline. But this is, of course, not the, it's really mostly promos rather than the elastic stimulation that I think you are talking about. Okay. Great. And, then, as a follow-up, you have so much capacity coming on line between the shrink and the 300-millimeter startup. Is it possible that with all that capacity coming online in the first quarter that you can actually grow sequentially from the fourth to the first quarter? We're so focused on the fourth quarter that honestly, we have some forecasts for the first quarter that actually, I'd rather not comment on the first quarter. But I am very optimistic about 2006. Let's put it that way. A question, first on the Matrix acquisition, my recall on the 3-D memory, it does have some cost advantages when you're going to higher capacities. Is there a plan to potentially use their technology in your future road map? Or is it pretty much the focus here is on the One-Time Programmable stuff that, basically, the shoot-and-store and et cetera? Good question. Well, they have terrific engineers and we have terrific engineers. So I expect we are going to put them all into one room, shut the door, throw the key, and have them come up a road map that takes advantage of their strength and our strength. But it's premature, really, to speculate on that. Okay. And in the meantime, if I recall, they used TSMC. So is that pretty much is going to continue, or is anything changing there? At least for the time being, we're going to leverage their relationship with TSMC and other relationships that they have, as well as with their customers. Hi. Let me add my congratulations as well. Question here is following the last question from the Matrix acquisition. With the new technology, do you think the cost reduction curve will continue at the 50% range? Or do you think it's a giant leap, like an MLC? I guess, and another way I can think about it is, How do you compare the cost of One-Time Programmable technology versus, maybe, a future MLC road map? Yes. MLC OTP, One-Time Programmable, of course, does not have the functionality of NAND/MLC, and, therefore, really is more complementary than competitive. There have been people talk a lot of discussion in technical publications talking about 3-D read/write. And that is a very challenging technology and, certainly, something that everybody is we're going to definitely look at. But I would say for the next several years, really, it's the OTP that's the biggest opportunity. I would say, maybe, well, definitely not 10%. However, it could grow into a sizable market for distribution of content. It will take several years. This is definitely a strategic move on our part, and not something that's going to very quickly contribute to, we talked about 60 to $90 million in revenues next year. That's not a big deal next year. There's nobody that's doing 3-D OTP. The market for OTP today is, as I've said, is very small. So they do have pretty fundamental IP, a very strong IP, and you could say this is a revolutionary technology. But I think, as far as challenging NAND and NAND/MLC, I think that, I don't believe that that's the case for the next several years, I think. Thank you. I'm calling on behalf of Alex Gauna. And I want to, first of all, congratulate you on the strong quarter. In terms of COGS, given the much publicized polysilicon shortage and how that's driving wafer prices higher this year, and especially into 2006, what are your expectations for cost increases in NAND wafers purchased from your joint ventures? And, also, I guess do your joint ventures have a pretty adequate supply of ingots or wafers procured for the first half of next year, and, maybe, in the back half of next year also? Toshiba is, I believe, the largest semiconductor manufacturer in Japan, and they have very, very good, very close relationships with the silicon wafer suppliers. I've not heard about any problem. Okay. Great. And, last question, if I may. In terms of microSD, are you currently factoring any royalties from microSD at this time? MicroSD will be offered, is being offered through the 3C, basically Toshiba, Matshita, and SanDisk to other manufacturers. I do, over time, expect it to begin to generate royalty for us, because I see it really becoming the de facto standard. Yes, hi, there. Well done, as well. A couple of questions, please. Just trying to understand the dynamics between your impressive relative ASP performance, some third-party data shows down 20%, Hynix and Samsung were down, sort of, 18, 19% respectively. Could you just, maybe, explain, they had some density changes, MLC, whatever. What contributed to what seemed to be a much better environment for you? I don't know. I think the dynamic for Samsung and Hynix are very different. Hynix is still at the 2-gigabit chip, which is different than the 4- and 8-gigabit chip. For Samsung, there may be some of the iPod pricing impact. I don't know. But I don't know. You have to ask them. We are vertically integrated, and we do have greater leverage in selling cards rather than components. We've always said there's a diversity in what we do. We sell Ultra, for example, and Extreme have higher margins. Memory Stick PRO Duo has higher margins. MicroSD has higher margins. So we have this ability to retain some of the costs coming down. We don't have to always bring the cost, price down. And, certainly, there's no point in doing so when we can't meet the demand. Do you think there might have been less, just simply less NAND sold into the removable market as a lot of Samsung's incremental capacity was sucked up with the incremental embedded demand and just created a perfect environment for you? From what I hear, Samsung's customers, other than the ones that are under contract, or under agreements, long-term agreements, definitely are bearing the brunt of the huge iPod, what do you call it? But we're still reporting 35% of our fourth quarter bits are going to be non-captive. So we're okay. But the timing is not good for us either. Yes, okay. And, just, then, the follow-up question I had. Any estimate for the MLC proportion of your non-captive in '06? And when I think about the, if you like, the tradeoff between the royalties you would receive if Samsung is selling to other parties, MLC parts versus, maybe, some implication on the gross margin you can derive from reselling Samsung? We would be more inclined to take the product if we can sell it, than to collect royalty of somebody else having it. That said, I think we do pretty good either way. Okay. And will it be, just, sorry, this is the last one. Do you think the gross margin on the MLC, all else being the same, obviously, because some prices can be structurally different to what it's historically been for SLC? Well, we at the 70 nanometer, I, we are practically 100% MLC. We're not wasting too many wafers, maybe one or two, very few percentage on SLC for 70-nanometers. It's just the margin difference is so soft. This is Hugh Cunningham for Daniel Gelbtuch. How do you view M-systems, MegaSIM, and Mobile Disk-On-Chip versus your iNAND and microSD? Very good product. I think they'll do very well. I think that the market, we don't really feel ourselves competing with them. We have iNAND, which is the embedded handset market, is more focused on higher capacities than where they are focused, and, of course, on secure applications. We are also targeting iNAND to non-handset markets as well. We don't really, we think that they'll do very well. With regards to MegaSIM, I think it's early. I think it will depend if it catches on. And, of course, we're trying to convince the market to go with microSD rather than any other solution. Okay. Well, thank you for joining SanDisk today. We continue to be very excited about our markets and look forward to seeing you all in the coming meetings and at our investor conference. Thank you, very much. 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_233807

Here’s the entire text of the prepared remarks from Expedia’s (ticker: EXPE) 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. Executives March 1, 0000 ET Good afternoon, ladies and gentlemen, and welcome to Expedia Inc Third Quarter 2005 Earnings Call. At this time all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the question and answer session. If anyone should require operator assistance during the conference, please press the “*” key followed by the “0”. I would now like to turn the conference over to Stu Haas, Vice President of Investor Relations. Please go ahead, sir. Good afternoon and welcome to Expedia Inc.’s financial results conference call for the third quarter ended September 30, 2005. Joining us on today’s call, are Barry Diller, Expedia Inc Chairman; Dara Khosrowshahi, our CEO, and Mark Gunning, our CFO. The following discussion and responses to your questions reflects management’s views as of today, November 3, 2005 only. As always, some of the statements made on today’s call are forward-looking, including our comments on guidance. Actual results may differ materially. We do not intend to update or revise these forward-looking statements until our next quarterly call. Additional information about factors that could potentially impact our financial results is included in today’s press release and the Company’s filings with the SEC including IAC Interactive Corp.’s 2004 annual report on Form 10-K, as well as Form S-4 and amendments thereto filed in relation the spin-off transaction of Expedia Inc. During this call, we will discuss certain non-GAAP financial measures. In our press release and our 8-K furnished to the SEC today, each of which is posted on the IR web site, at www.expedia.com/ir, you will find additional disclosures regarding these non-GAAP measures including reconciliation of these measures with the most comparable GAAP measures. We strongly encourage you to review the section entitled “Basis of Presentation” in today’s earnings release for more details on how we are presenting results for the period ended September 30, 2005. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2004. Well, I add my welcome to this, the first Expedia Inc conference call. We all know about the dislocating nature of a spin-off. But for both IAC and Expedia, it’s been mostly a frictionless process, both entities hitting the ground truly running. And Expedia’s operations are off to a fine start as a stand-alone company. Under the hood, Expedia has begun to significantly transform itself over the last 18 months. And I’d say in every respect it’s the better for it. Maintaining stability during change is always difficult as is undertaking lots of new initiatives. It’s a testament to Dara and his leadership; together with the truly talented executives he’s recruited to the cause, as well as to the great Expedia team in place that we are able to report solid operating results amid all this combustion. The earnings season thus far has certainly been fascinating for Internet companies, something for every species of bull and bear with plenty of volatility to go around. But apparently lost in the cacophony of who beat or missed consensus by a penny and who raised or raised yet lowered guidance, is the fact that they are continued to be some amazingly durable companies being built in this space. Companies who share sizable markets, operating leverage, expansive global reach, the inexorable push of online penetration, most importantly, technology and innovation at their core, which certainly defines Expedia. We did not make Expedia a stand-alone company out of weakness, weakness about the travel sector or our own operations. We did it because we believed it was worthy of being judged solely in its space, both big enough and with enough runway ahead to make it compelling to any constituency. We have the size, the substance, momentum, to claim leadership and strength in online travel services. While micro conditions always contain volatility, I and my colleagues are convinced we have a truly great and enduring business model, to report on that, Mr. Khosrowshahi. Thanks, Barry. And thank you to everyone for making the time to join us on the call. I’m going to spend a portion of my call talking more specifically about Expedia’s continued innovation during the quarter. And then turn things over to Mark to review some financial highlights. Innovation has long been a compelling differentiator for Expedia. And our third quarter was no exception, as we continued to improve our service for our customers and for our supply partners. Let me start with Hotels.com. As we mentioned in our release today, Hotels continued its efforts to transition from a brand based exclusively on price, to one anchored by expertise. Most notably, the brand’s web site was re-launched in September with a meaningful upgrade in content and functionality. If you haven’t visited Hotels.com lately, I really urge each of you to check it our and book, of course. There are many great innovations on the new site, but one feature that stands out is the compare feature. If, for example, you’re considering a trip to Las Vegas, you can quickly line up the Palms, the Wynn Las Vegas, which is a great new hotel, and the Bellagio and compare those properties on a single web page across several different dimensions. Amenities, prices for your state, prices for your stay-by-room class, customer and star ratings, strip location, and so on. This is on top of several other great features like enhanced pictures, virtual tours of the hotel rooms, mapping capabilities, and much, much more. And, I should point out that Hotels.com operates 28 international sites. And during Q3, our European team improved their sites as well including integrating photo-browsing and cleaner tab display options. Now, I’ve heard some investors express skepticism that customers care only about price when it comes to making travel decisions or choosing a travel service provider. While we’ve always felt strongly that content is a key factor in the choice of the hotel, the Hotels.com team validated this belief with extensive research ahead of the re-launch. And their findings indicated that content was a very significant factor in customers’ rating of a travel site and their propensity to return to the site. Of course, the proof of progress is ultimately in results and while it’s still early days in Hotels.com evolution, their early returns are quite encouraging. Q3 ‘05 gross bookings for Hotels.com were up 9% year-on-year, its highest year-on-year growth since mid 2004 and early results in Q4 show a similar, positive trend. Transitioning to the Expedia.com brand, we re-launched our homepage and category landing pages last month. While our booking wizard remains prominent, we’ve moved toward more prominent merchandising of the real estate around the wizard, stressing our most popular destinations, and highlighting compelling offers, such as our $150 discount on the trip you really want to take in ‘06 by booking travel on Expedia this holiday season. The discount is intended to drive incremental behavior from customers since the discount is only valid on package travel, hotel and air for example. We want customers to think of Expedia as their travel agent of choice for all their travel, not just an occasional rental care or airline purchase. The site redesign builds on the success that we’ve had in adding rich hotel content this year, including over 75,000 qualified traveler reviews of actual hotel stays, which is unique to Expedia, a 50% increase from the figure we discussed on last quarter’s call. And we found that user reviews are the most visited content feature immediately prior to checkout indicating their importance in driving purchases. As the base of reviews grows, this becomes a unique asset for Expedia to leverage more prominently in our customers’ experience. In an effort to improve our email targeting, we also debuted our air shopper email campaign in Q3. The first iteration targeted customers who shopped for a flight with Expedia but did not purchase. We sent those customers outstanding hotel and car offers for those travel dates for that destination as well as updated flight purchases for their date of travel. We think this is a great product. As Barry mentioned in his open, there’s a lot more innovation ahead for Expedia. And I consider these developments at Hotels.com and Expedia.com to just be the very initial steps, in driving greater personalization, more effective merchandising and a broader definition of value for our customers, and as a result for our suppliers. While we’ve certainly built a strong base of business as Expedia, we also recognize that we have a lot of upside. 75% of all people who buy travel online according to our statistics visit our site at least once while shopping for their trip. Most of our customers, however, still spend a fairly modest portion of their annual travel spend at Expedia. And we’re setting out to change that. We also continued to innovate this quarter on behalf of our suppliers with a significant increase in the number of properties we’ve direct connected. We announced today that over 5,000 properties, approximately 20% of our merchant hotel base, are now fully direct connected. With full Direct Connect, we relieve the hotel properties from having to load availability and pricing into an Extranet. We also provide real-time purchasing data to the hotels, eliminating the delay of accompanying faxed reservations. In turn, we save our suppliers a great deal of time that would otherwise arise in processing the nearly 300,000 rate and inventory changes per day, we now receive from Direct Connect hoteliers. While we’re on Direct Connect and Hotels, investors often ask me what a Company like Expedia gains for its size and scale advantages versus its competition. When it comes to hotels, this manifests itself in several ways. But one is the network effect of a content feature like traveler reviews. The greater a traffic advantage, the more high quality, and more recent reviews we post on the site, the more high quality reviews, the higher our conversion, which means a greater pool of reviews and so on in the virtual cycle. Our size and global reach means that we can invest more and provide better content to our customers as we amortize that cost over a larger sales base than our competitors. And we plan to expand our content’s advantage going forward. Our size also allows us to approach hotels with valuable assets, including the ability to fill significant room volume at their properties with our targeted merchandising, as well as offering significant free advertising and the marketing intelligence for their properties. This scale hopefully affords us better room allocation at better terms against our competitors. While Expedia drills considerable innovation during the quarter, we expect the pace in significance of innovation and the level of technology and content spend across our sites to pick up in 2006 and 2007 as we expand our software and engineering teams. We believe that we are still in the early days of our evolution as a consumer service. And we have considerable growth, both local and global ahead of us. Now you’ll hear from our CFO, Mark Gunning. Mark joined us in July and brings over 20 years of significant expertise to bear, in the areas of financial controls, operations, analytics, and forecasting from senior financial leadership experience with AT&T Wireless, Nextlink, and AirTouch. Mark is one of several top shelf executives Expedia has brought on board over the past 12 months to help transition the Company from a leadership position in online travel transactions, to becoming a world class retailer of travel experiences. We’re very pleased to have Mark on board. And now I’ll turn the call over to him to touch on our financial performance. Mark? Thank you very much, Dara. And, thank you to those listening in today. This was a solid quarter for Expedia Inc. Gross bookings a quarter grew 21% to over 3.9 billion, the domestic growth of over 16% and international growth of 39% versus the prior year quarter. Our domestic gross bookings growth has been fairly stable throughout 2005 in the mid-teens; our international gross bookings did see a drop off in the third quarter from 66% growth in the first half of the year down to 39% in Q3. Certainly, terrorist activity in London and foreign exchange affected growth rates, but also saw an impact from economic conditions in Germany and UK as well as strong competition from supplier direct sites. These impacts were more pronounced on our air business than on our merchant hotel business in Europe. Revenue rose 16% during the quarter or 14% excluding the impact of foreign exchange movements and acquisitions. This organic topline growth rate is the Company’s highest in 4 quarters and represents acceleration over the 11% we witnessed in the first half of the year. And our international growth, excluding the impact of FX, was 47% in the third quarter, versus 62% in the first half of the year. Revenue margins, basically, our take rate on bookings was 14.8% this quarter, down 58 basis points versus last year. We continue to see airline pressuring distribution costs and hotels enjoying above historical average occupancy levels. But this decline in revenue margin is a lower year-over-year decline than we saw in the second quarter. I do want to spend a little time talking about our overall hotel business. As I know there is quite a bit of focus externally on the concept of raw margins and continued pressure on those margins. But occupancy levels continue to be tight with attendant pressure on hotel deals. We also encourage investors to look beyond just raw margins in assessing the fortunes of this business for Expedia. Specifically, revenue growth for merchant hotels was 15% in the third quarter, our highest rate of growth since Q3 ‘04 and the third straight quarter of accelerating growth. This is due to the healthy pace of nights stayed through our various points of sale. It’s also due to the flip side of high occupancy. Increased room rates in the form of ADRs have translated into a higher level of revenue per room night despite the raw margin pressure. Going forward, our over-arching goal at Expedia is to deliver outstanding hotel performance to our shareholders, regardless of where we might be in the macroeconomic and occupancy cycles. Our gross bookings of revenue are critical metrics in evaluating our business. As most of you know, our Company’s primary metric for measuring success is operating income before amortization or OIBA. OIBA strips out large, non-cash items such as amortization of intangibles and stock-based compensation, which aren’t particularly useful in assessing our future cash earnings prospects. During the third quarter, OIBA grew 15%, the same rate of year-on-year growth we saw in Q2. OIBA grew; OIBA growth exceeded 20%, excluding the impact of acquired companies, the negative impact from foreign exchange, and a $4.4 million net adjustment primarily for the reversal of an excise tax reserve. Year-to-date, we’ve expanded OIBA margin 121 basis points despite an 85 basis point drop in revenue margins and despite a necessary increase in G&A costs as Expedia moved toward becoming an independent public company. Turning to cash, net cash provided by operating activities for the 9 months ending on September 30 was over $940 million while free cash flow, operating cash flow less capital expenditures was over $900 million. We expect free cash flow in the fourth quarter to be negative as we process increased hotel payables, meaning trailing 12-month free cash flow at yearend will be lower than the $940 million through the first 3 quarters of 2005. We have begun implementing some recommendations from Project Apollo, which as you’ll recall, was focused on better leveraging and integrating our brand portfolio and removing redundant costs. We’re undertaking several initiatives, including call center integration, improving customer service and fulfillment processes, and moving our financial and operating systems to common platforms. As part of this movement to common infrastructure as well as a spin-off from IAC, we are examining accounting policies among our various brands and businesses. As such, we recently reclassified certain operating expenses to be more in line with how we want to report our results, now that Expedia is an independent public company. I want to emphasize, this re-class had no impact on overall expenses or OIBA. We also had one-time items during the quarter, which impacted GAAP results, specifically, a $30 million pre-tax net credit primarily due to a change in our forfeiture rate assumption for equity awards and a $23 million pre-tax write-off of an investment. In addition, we reported a derivative liability for obligations related to Ask Jeeves convertible debt assumed by IAC, which gave rise to an unrealized pre-tax gain of $12 million for Q3. These 3 items combined increased GAAP net income by $8 million and GAAP EPS by $0.02 but had no impact on our OIBA or adjusted net income measures. Looking ahead to expectations for Q4 and full-year 2005, we have seen the growth rate declines in Europe I mentioned earlier in the call continue into the early part of Q4. The hurricane activity in Q4 is having an impact on our domestic results. Lastly, we have indicated in prior calls, compared to last year we are pushing more marketing spend into Q4 of this year, which will pressure Q4 OIBA growth. As such, we are maintaining our prior expectation of low to mid-teens growth in full-year OIBA for 2005. Great, thanks Mark. Let’s move on to the Q&A portion of the call with Barry, Dara, and Mark. As a reminder, please limit yourselves to 1 or 2 questions. Operator, will you please remind our listeners how to ask a question? 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 Altera’s (ticker: ALTR) 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 guys could help us dig into those two numbers you threw out, the 40% number in program ends and the 10% in terms of competitive loss, help us put those in historical perspective and give us some comfort, or let us know what your thoughts on those 40% program ends? What percentage, for example, of the dollars do you expect to retain with your new products? How much of it just goes away? Well, the 40%, specifically, Michael, refers to program ends where Altera secured win on the next generation platform. And the 10% program ends is where we lost the socket on the next generation platform to either an ASIC or a competitor. I think if you just look at that, that says of those program ends, we gathered 80% on the next generation and that's a good result. And those are just, a dollar figure or a percentage of wins? And is there a difference between the two, a big difference? That's a dollar-weighted figure and I can't answer your second question because I don't have it and the quantity of programs win/lost at my fingertips. I guess another question on the gross margins, do you think that, perhaps, you might have been pricing a little too aggressively and would you consider some sort of change in pricing? And does this have anything to do with the HardCopy product lines? This, really, Chris, to answer the question is, I would not say, is a product-specific function. It's more of an end-market focus. So in other words, volume-oriented markets like consumer, automotive, some of the customer-premise equipment for communications where the volumes are in the hundreds of thousands to millions of units per year are going to be priced more aggressively and will carry a lower gross margin than, for instance, business that we're selling into the military, large parts of the industrial and some of the communications infrastructure market. So we have said, as a company, that longer term we were targeting 65% gross margin on our portfolio. Some of the business that we will get will be higher than 65%, some will be lower, but on average we've been targeting, as a company, to drive to 65%. As Nate pointed out, this quarter we did have the ramp of some, this quarter being Q3, the ramp of some aggressively priced business, but in forecasting those sorts of programs into next year, also forecasting the higher gross margin platforms into next year, we do expect that our margins will be in the 64% to 66% category, which is roughly in line with what we've been saying that our long-term margins would be. No. We're not changing future pricing strategies at this point. It remains, as we've discussed before, an aggressive industry for new sockets. Generally once you've won that, of course, you've priced in with the customer certain declines that you have quoted, but you generally are not in a position where you have a socket-compatible device, as, for instance, in the memory industry, which can result in continued pricing pressure. So we're not really changing our overall pricing strategy as a company and, again, we will continue to pursue both business in the high-volume segment, as well as continue to pursue business, for instance, in the military segment, which we now are number two in that market, having surpassed Actel last year, but are pretty far behind the leader in that industry, having really exited military 10 years ago. And so we see that as being a high growth area for us. It obviously carries much higher gross margins, as well. So, again, we see the ability to continue to balance the business on a portfolio basis and we'll continue to drive forward with the strategy that we have. Any color you can offer up on the backlog entering this quarter and how business has been early on through the quarter? And then I have a followup. Backlog, as we said, Orders-to-Resales or book-to-bill in the quarter was slightly below 1, so our backlog coming into Q4 is slightly behind where it was coming into Q3 and business quarter to date has been roughly in line with our guidance. Okay. And then in terms of the inventory at Altera, up a little bit. I know you said total inventories, including distribution, not up that significantly, but can you help us understand why the Altera inventories were up on a days basis? Sumit, I guess what I'm going to say is I'd rather not get into the details. What I've been trying to provide for the last couple of quarters in my guidance is overall months supply on hand for the total pipeline, including our inventories and distribution inventories. And at 3.4 months, that number is flat, quarter-to-quarter and right in the range of our overall target, which is 3 to 4 months. I am anticipating a minor decline likely here in Q4. Inventories held here at Altera have different characteristics, obviously. We tend to keep them in die form, so they're more generic in nature and are also generic in nature in terms of where they're physically located. So they can go from here to any distributor in the world. So we make those decisions tactically based upon the mix of business and how it's running and I would say that within the deviation that you experienced this quarter that it not so much as a result of strategy as it is a result of tactical rebalancing that we're doing on a weekly, if not daily, basis. Okay. And then one final quick question. Your gross margin outlook for '06, I guess it's the second time you've effectively ratcheted it down in a couple of months. And half of the portfolio you just reported in September quarter was attributable to certain specific programs, et cetera. So is this really a function versus the higher target you had entering the September target a function just of being aggressive in terms of winning design sockets? Or how shall we think about what is effectively a 300 point delta versus where your margins were a quarter ago? I think we're off 180 points in terms of where we closed Q2 and, as John mentioned previously, 65% is our long-term model and we see staying within a reasonable range of that model for the next five quarters. Keep in mind that there is very little that we could do to affect margins either up or down in the course of a quarter. The pricing that we're experiencing this quarter is a result of ongoing engagements where the business was done some period of time ago. So I am disappointed and somewhat chagrined that we did not do a better job of seeing this fall-off coming, but some of it's just the statistical noise of serving a broad base of customers and, I think, somewhat an adverse and difficult-to-forecast swing in the mix of our business. So there isn't anything that we did aggressively or in reactionary mode to pricing in the last 90 or 180 days that led to this sudden decline. If you just think about an 18% sequential decline in mainstream products, which we believe is largely independent of any inventory correction or adjustments out there in the channel, that's a pretty big deal. It doesn't happen very often and, obviously, the forecasting mechanism that we had in place did not see it coming. I guess my question related more to your '06 outlook as opposed to what happened in this quarter. Because it seems like, versus at least what the assumptions were for '06 a quarter ago, there's a big delta. And I understand what happened in the September quarter. I'm just trying to reconcile the big delta versus expectations a month ago and I'm talking about '06 specifically. Sure. So mid-point of guidance now versus the point I believe I gave at the end of Q2 is off 200 basis points. And, yes, we're getting there sooner than we thought we would, but this is no different place than where we were intending to get. I don't have that answer at hand. We took a look at the business or elements of business that, on a sequential change basis, led to the big decline in margins quarter to quarter. We did not, or not as, I don't have at hand the total business by strata of margin. Okay. And would be the profile of that business? Is it a certain customer group? Is it certain volumes? How should I think about that? Well, I think if, we've talked about two large programs. They were in communications, not surprisingly. But we've also talked about a broad base of accounts that really cover the gamut geographically and by end application segment. Yes, because as I look, the problem I'm having trying to understand this is that, one, when you've talked about the profile of gross margin, it's generally fairly consistent from generation to generation, I mean, as it goes from mainstream, advanced to mainstream. And then you've talked about products where you have higher gross margins being in the industrial segment. Yet in this quarter, it's the upside in industrial and the decline is on the mainstream, but I would have thought that, again, from a consistency standpoint, possibly the industrial might have a little better margin and offset, no? In general, industrial does have better margins. And so you will, my answers in terms of rationalizing why the sequential change in the margin has been talking about programs because I think the fall-off in this business in the mainstream hurt across a variety of end markets. And with the exception of consumer, where we have said Cyclone does a disproportionate amount of business in consumer, we have not tied, you're right, product families to margin percentages. Two observations, if I could, Seogju, if you look at an area like communications, communications includes everything from very high margin infrastructure equipment all the way through CPE equipment, which can be lower gross margin. And within a quarter, even though communications was down, you can have one part of it up and you could have another part of it down. So don't necessarily read into, Okay, industrial was up, therefore gross margins were up, because you can always get a mix shift within these larger categories. Number two, if you look at our mainstream products, some of those products are actually pretty old now. And we're overdue to do a remix or a reclassification between new, mainstream and mature and are really looking at doing that in the first calendar quarter. Because if you look at the FLEX 10K series, as an example, that was a product line which was really sold in the late '90s. It is more in its mature phase and should be, along with some of the MAX products, moved over to the mature category. So I think maybe also some of the categories of what we call new, mainstream and mature products are a little bit out of whack and, again, at this point we plan to go back and relook at these categories and reclass them, probably in Q1 at this point. Okay. Just one last question. If I go back and look at your gross margins, prior to 1999 your gross margins were pretty consistent in the high 50s, low 60s range. All right, post 1999 you shot up quite significantly and your current margins were running at sort of peak margins levels. Can you talk about what changed within the company, your strategy and how you look at that change that'll keep the margins consistently above in the mid-60s going forward? Thank you. I think you're covering a lot of timeframe there, Seogju, so I'll try and do it, cover it fairly quickly. I think late '90s early part of this decade margins floated up because you were in a bubble. Part of the reasons that margins have stayed high in the last several years are that coming out of the telecom bubble, we strategically decided to be more stubborn in terms of pricing on legacy business. And the other thing I would say is that as a company, not only with respect to gross margins but other elements of our P&L, as well, due to the decline at the top line, we have been very focused on cost structure and holding margins. And while I would not link the higher operating expenses that we've had over the course of the last couple of years to higher gross margins, the fact is, is that we have had and knew we would have higher operating expenses until the company grew and we looked at, tactically, again being stingy on pricing as a way to offset that with improved margins. A couple other tactical items I'd throw in is, number one, as you know, we've had the benefit of the written-off material from 2001, which we said would go away at the end of this year. Obviously, that has a drag on the gross margins from a GAAP basis. Number two, we have talked about in the past that we have had, really in 0.13 micron and through 90-nanometer been well ahead of our expected curve on the yields and, therefore, that's a had positive benefit to us. Of course, over time, as those products begin to mature, you don't get the yield benefit any more that you've gotten and for 0.13 micron we've basically, I think, ridden down that curve pretty strong and are done. There's still enhancement that could go on, but it's not as significant as it was in the past. 90-nanometer we're well ahead of the curve and there's more to come there. So I'd say it's a combination of a large number of events. We're only mentioning a few. Certainly our manufacturing organization, our product design organization, yield enhancement organization and some of our subcontractors have had a big portion of this. I was wondering, with respect to the com area, it was down 5, I think, how did that break out between wireless and networking and wireline and then going forward? I think you said that the wireless was expected to grow. Any color on the other areas, though? It's roughly 40, 40, 20, 40% in telecom, 40% in wireless and 20% in the enterprise area. We had growth last quarter in enterprise. Both wireless and telecom declined, as you would expect with the summer holiday seasons, particularly in Europe. This quarter, again, we expect wireless, as well as enterprise, to grow. I would point to the fact that we've said we are or have been behind in terms of market share in the enterprise segment. We said probably about a year, maybe a year and a half ago, that we expected in the second half of 2006 we'd start seeing enterprise grow with some of the design wins that we had back then and we are now seeing that play out. So we, again, expect enterprise to grow this quarter. So, John, the change you had the two large programs in com, which moved lower than you'd expected. They were wireless programs, were they? Or telecom, wireline? Let me redo that. One is in telecom. One some people would consider telecom, some people would consider wireless. It's more of the back-end infrastructure within the wireless space. I don't know if that helps or not. I'm sorry to cut you off. No, that helps. And then you said that in the consumer area you were expecting it to be lower, although I noticed last year it was up in the fourth quarter, but maybe you don't have the to how you see the seasonal pattern? And you said that somebody had come in lower than expected, but maybe you could just add some color on that? Yes, so I think the last several years we've seen actually Q4 be down and then we've seen Q1 start to grow again with some new programs that we've ramped into production. Typically, if you think about the builds for the holiday season, anything that customers would take now, it would be hard to assemble and get on the shelves and so you will see the spike traditionally in consumer in the third calendar quarter. So we have anticipated, both based on history, based on typical seasonality for consumer, that this would be a down quarter. As well, we mentioned that we do have one customer who's come back and lowered their forecast for this quarter based on an inventory position they're in. I, again, at a top level am assuming that this could possibly be a trend, simply because there was a very, very strong build for the industry in consumer in the third calendar quarter. And we'll just have to see what sells through. And so if sales during this holiday season are slow, we may get customers who come back and say that they've got more inventory than they thought and push out more orders for us, knowing that they've got inventory carrying into the Chinese New Year's season that they don't need to take more product. So that's, again, why we're basing the consumer number being down, is a combination of one, having some data and, two, making an assumption that it may be bigger than just one customer. No, we can't provide that. Typically that allows people to triangulate too much to a set of customers and in areas like consumer where it's much more concentrated I'd hate to go there. Lastly, the 70% turns number that you're looking for on flat revenue, it seems higher than, certainly than the other major player in this space is looking for. Any sort of color on the high turns number with a low book-to-bill? Yes, so I guess what I'd throw out, Tim, is two data points. Number one is about half of the quarters for the last two years have been in the low 70s. The other half have been in the high 60s, so it's not necessarily different from a traditional pattern from which we've seen before. And, in fact, I think every Q4 we've gone into it, Q4 and Q1 requiring in the 70s. Part of the reason is because you get the summer holiday series, or pattern in Q3. Obviously bookings are going to be lower. You're going to have to have higher turns in order to do Q4. Number two, the only difference that I could suggest, based on the data that I heard from one of our competitors, is that they mentioned their lead times shifted out. Our lead times have remained stable. So, therefore, we don't see a pattern whereby people are having to book well ahead of time because our lead times are moving out. We've really seen no shift in that overall pattern and traditionally we, as a company, don't really see our lead times move around a lot. We've been pretty good about making sure that we have the material when customers need it. Regarding the mainstream products, you've been at the $103 million range, plus or minus. I know you had a blip in '04 that came down in Q4, but generally you've been at that range. Why is it now that you're calling the inflection point downwards and saying this is the end of the line or this is the long-term decline for mainstream products? We wouldn't characterize it as a long-term decline, Steve. I mean, I guess in one sense we are, but certainly not of the magnitude that we saw in the last quarter and frankly we did not see this coming to that magnitude, clearly. But, I mean, part of the reason that we may have seemed a little bit less than forthcoming a month ago is because we needed to get out and engage in excess of 50-60 customers to try and really understand what was happening with their programs, to understand whether this was an aberration or a harbinger of a more significant trend to come. And as I said in my prepared remarks, we believe that we've found at least a temporary holding pattern and, in fact, looking for a little bit of solidification on mainstream for the next couple of quarters. Longer term, though, I think mainstream, parts of mainstream are in a decline and will be in a decline, because you've got some fairly old products in that sector now. FLEX 10K designs that were done in the late '90s, we have customers that are redesigning those platforms that are going to go into the Cyclone series or the Stratix series for that. And so you will get, as new programs ramp and replace some of our older generation systems, we will get a natural flow of business from one generation to another. You do always have a long tail of business. Note that in our mature products is our original Classic family, which is probably 16 years, 17 years old now. So there will be a very long tail to some of this business, particularly in some parts of communications, industrial, military as examples. And finally we're doing a lot better in terms of market share now. So some of those products that we had in the mainstream area were not really competitive and did not have broad commercial success. So where we're doing really well on our new products, obviously, some of that comes out of our mainstream business. A lot of it comes out of either competitors, competitors being other PLD vendors, other ASIC vendors or other ASSP vendors. So we would expect to continue to grow because, in fact, we're not just treading water by replacing our own business. Okay. And on a different note, HardCopy it seemed like you kind of leveled off and Q4 looking like you're going to be light on storage and consumer. Do you still believe you'll hit your 5% goal this year? I think the numbers are 4.3% for Q3, roughly. So we're not that far off of doing 5%. It may be Q4, it may be Q1 at this point. Either way, the HardCopy family is doing extremely well. We have had very strong business in the third calendar quarter in terms of new design bookings and, in particular, in new product tape-outs. So I think the pipe is doing extremely well and we should see a continued strong ramp of the revenues over the next year in that product line. Your next natural question is, what's the target for next year and, as Nate mentioned, we're doing our plan right now and really building up the plan by product, as well, and I don't have any numbers from which to provide you today. Okay. I assume we'll hear more at the analysts day. Just one last housekeeping question. The amount of the written-off inventory this quarter? Nate, your memory is probably better than mine on this and I haven't had time to check the transcript in detail, but can you recall in the last two years having said at some point that there is no correlation of gross margin to product category? And based on what you've described, has this, therefore, changed? And I have a followup, please? Yes, because, Ben, my memory isn't that good any more, but I think I just said it in my prepared remarks. I said if you look at historical margins reported by Altera and try and link them to product maturity, you will find no correlation. So the point that I'm really trying to make, Ben, is that, yes, acknowledge that new products today carry lower margins than both our overall corporate margin and our 65% target. I'm pointing out that correlation does not necessarily prove causality and to that point, Stratix II is running above corporate average margins and therefore, by definition, above our targets today. So we have been aggressive in driving new products into volume programs and into new applications and we have been aggressive in price and are incurring lower margins as a result. Okay and just sort of a followup there, I think one of the arguments over the last few years has been, as PLDs migrate to 300 millimeter and advanced lithography nodes faster than ASICs that certainly this would accelerate the trend growth of PLDs versus ASICs. And, of course, you guys ultimately have a tradeoff between your growth versus gross margins through sort of the pricing mechanism. Can you just, maybe, and, again, sorry, I don't want you necessarily to repeat some of the things you've said, but why aren't we seeing that benefit, theoretical benefit, through either margins at least staying stable or with lots of other moving parts or your growth rate certainly accelerating versus the industry? Well, again, I'd point out that while our margins have, obviously, come down pretty significantly in the last quarter and in general for the last year that was, in general terms, anticipated and that we have constantly iterated that our target margin is 65%. I think your earlier comments on the transition to 300 millimeter and 90-nanometer giving programmable logic a lower price point against which to go compete against ASIC and ASSPs, as well, is exactly on the mark and I think we are doing that. I would also point out, though, that some of the business that we have had historically at higher margins are now being served by lower price point products and to some extent you can explain subdued growth rates in the industry by what has been backward cannibalization with the lower ASP of our lower-priced product families. I don't think that is going to continue forever, because those product families were like Cyclone were introduced about three years ago and now we've been through most of the major design cycles where Cyclone can affect that, as I would call, cannibalization. Ben, just a couple of colors to throw in there. We're planning to go through a lot of the detail of what Nate just said in the December analysts meetings, really to kind of look at our overall business and the shift in that, as he discussed, in a lot more detail. So please look forward to that sort of discussion. Number two, just going back to an earlier comment, I think we also have said, quite consistently, that our margins really don't vary by product but they do by market segment. And we have said historically that consumer is lower, industrial is higher and then the other two, being communications and computer and storage, are more in the middle. Obviously, as Nate pointed out, where we have a product like Cyclone, which has more of its revenue in consumer than the other products that we have, we have also pointed out that that product will be lower than some of the other products. But it's not really the product as much as it is the market segment and the end volumes within those market segments that we are pursuing. So I think I wanted to throw that one out. And then finally, on the overall revenue growth, I think if you look at it this year, the industry, based on various forecasts, is due to grow between 4% to 5%, I think, is what I've seen. Altera, I believe, is due to grow somewhere in the 10-plus range, so I'd say certainly we're growing at a much faster rate this year than the overall semiconductor industry, certainly than any of our competitors. Two questions. For starters, kind of triangulating based on your comments about the profitability for Stratix, mathematically it seems to me like Cyclone has to be carrying lower than corporate average gross margins. Is that correct? Okay, just confirming. And then the second question, just in terms of the predictability of margins and I thank you, Nate, for your very detailed explanation, if we're going to be in an environment where lead times, in general, don't go out that much and where you guys are having to maybe push a little harder than you have historically to generate growth, is it possible that there's just going to be more margin volatility and less predictability to this business going forward? Joe, I've asked that question myself a number of times in the last 60 days or so as we've started to dig into what happened to us here in Q3 and the statistics are actually pretty impressive when you see a large number of shifts occur simultaneously, which is really how I characterize what happened to us here. And I have tried to identify causal links that caused these things to be proximate in time and I cannot. And so my view is that this transition happened quickly, that it was anomalous versus certainly anything that we've experienced in recent history and I find no basis to conclude that it's going to happen again any time soon. Now that's the best look I've got at this point in time. I just, I don't, I'm not saying that that hypothesis is necessarily wrong, I'm just saying that I haven't found any data to support it. Okay. And then just the last question and this is, obviously, sort of a perennial one, looking at the sequential comparisons and what fairly apparently happened downstream from you and your competitor here in the fourth quarter. Any additional round of tunes in terms of how you're sizing your end market and looking at your customers and trying to keep from over-shipping, which apparently you've done again here? Unfortunately, I think that the cause of overshipping really isn't an Altera-specific one as much as a customer may pull in too much or their inflection in their industry may change. Because if you look at it, our lead times have been very stable, quarter after quarter. So we have not created opportunities where customers felt compelled to establish a buffer stock because they thought that Altera, as a customer, would have issue in shipping product. So generally, we've not had those sorts of issues. What it can be in any quarter, though, is one customer takes too much because they thought they were going to get more sales of their end systems or they thought they were going to get more market share and it can be either one customer or a group of customers and, in general, that happens every quarter, whether we have a strong growth or not a strong growth. There's always somebody out of mix that we see a delay in. This quarter we happened to have a few more than we otherwise would have liked. But it really isn't anything that we can control because at the end of the day with turns in the high 60s to low 70s, customers are really pulling the product when they think they need it rather than Altera saying here, get in line, this is all you get this quarter. And so I would say it's more of an issue of the customers than it is anything that I see that we could control. I would also say, Joe, as tempting as it is to look at comparative growth rates and draw the conclusion that you've drawn, we, at least internally, have identified a number of programs that are giving rise to softness in Q4 that had nothing to do with what our Q3 business was. They're just program transitions and they happen to be lining up at the same point in time. This is John Kartsonas for Glen. I just wanted to ask specifically about the wireline business and the DSL segment, because last quarter you guys mentioned it as an area of notable strength and I'm just wondering, one, did I hear you guys correctly that the wireline is expected to be flat in the fourth quarter? And then if you can just give some color around kind of what you're maybe seeing in terms of activity in equipment providers and carrier spending? So in access, DSLAMs were down in the quarter. In particular, what we've seen is the ramp-down of the ATM-based DSLAMs. And there may be some amount of ATM-based DSLAMs that ship in the future, but certainly not of the volume that we saw over the last couple of years. And the transition has been to IP-based DSLAMs. And so in the third calendar quarter the IP side did not make up for the sort of final downfall that we saw of the ATM-based DSLAMs. However, what I would tell you is that in the IP side the good news is we have, again, a majority market position within the leaders of the IP DSLAMs and additionally we have more dollar content in these than we had in the ATM-based systems. So it's all a matter of timing of when these systems ship. Obviously, the, the business has been much stronger in Asia than it has been in the U.S. where the RBOCs are, for instance, talking about upgrading to VDSL or one of the newer standards from ADSL, but have yet to really do anything with strength. Am I correct in understanding that the replacement activity on the IP side is not offsetting the shipment activity have historically seen? Well, I think what we saw within the third calendar quarter is the ATM side was kind of in its final throes of decline. And so we have seen a lot of strength out of IP, actually, over the entire year, but aggregated together the two resulted in business being down in the third calendar quarter. But, again, there's going to be puts or takes on the various pieces of business. If I look at it overall, the key for us is are we continuing to establish very solid positions and if you look at 3G as an example, I think we now are the leaders in terms of programmable logic in 3G systems. If you look at ATM-DSLAMs we were the leaders. We're now the leaders, also, in IP. So I can't control when these things shift, but certainly when they do I think Altera's in a very, very strong position. Got you. And then if I can have a final question here, last quarter, Nate, you made the comment that if end markets were flat we'd only see growth out of new products and I'm just wondering, it looks like that's certainly the case, and I'm wondering is that, in fact, a valid statement? And I look at your year-over-year revenue growth. You guys have been, your year-over-year comps are good, I'm just wondering on the mainstream side, is it looks to me like it's going to take more than flat to get mainstream up. Is that correct? I think, as John said earlier, and I would agree, that the long-term trend for mainstream, given how it's presently categorized, the products that currently make up that category, is down whereas historically I'd say with a, as we reclassify this next year and you've got a fresher set of products in mainstream, that I would characterize mainstream as moving with the end markets, which is not different than the comment that I made at the end of last quarter. In a flat world, then mainstream products would be flat. Before we end today, a reminder. Altera will host two meetings with the investment community in December. We'll be in Boston on December 5th and New York on the 6th. If you're interested in attending but have not yet received an invitation, please contact us. Also in December, we will present at the Lehman Global Technology Conference on Friday the 9th in San Francisco. 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_233809

Good afternoon ladies and gentlemen, and welcome to the drugstore.com quarterly results conference call. At this time, all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded Wednesday, February 1, 2006. I would now like to turn the conference over to Brinlea Johnson of the Blue Shirt Group. Please go ahead, Ms. Johnson. Good afternoon. Welcome to the drugstore.com fourth quarter and fiscal year 2005 earnings call. With me today is Dawn Lepore, Chairman and Chief Executive Officer; and Bob Barton, Chief Financial Officer. Before we get started, we would like to remind you that the information on this call may include forward-looking statements. Words such as "targets," "expects," "believes," "anticipates," and similar expressions, are intended to identify forward-looking statements which involve risks and uncertainties that could cause drugstore.com’s actual results to differ materially from those discussed in the forward-looking statements. In particular, comments about drugstore.com’s anticipated future revenues, earnings, and growth rates are forward looking. Factors that could cause actual results to differ materially from anticipated results are detailed in our periodic filings with the SEC. I would also like to point out that during the call we do mention certain non-GAAP financial measures which will be explained during the call. A reconciliation of these non-GAAP measures and most comparable GAAP measures can be found in our earnings press release which was made available prior to today’s call. Adjusted EBITDA is an example of a non-GAAP measure used in this call. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, and amortization of intangible assets, non-cash marketing, and soft based compensation and adjusted to exclude non-cash charges for impairment of goodwill and other intangible assets and non-cash litigation settlement. I would also like to note that as previously disclosed, drugstore.com operates on 52/53-week retail calendar year with each quarter and a 52-week fiscal year representing a 13-week period. Fiscal year 2004 was a 53-week fiscal year, with the fourth quarter representing a 14-week period. Fiscal 2005 was a 52-week fiscal year, with the fourth quarter representing a 13-week period. All year-over-year growth rates noted in this call have been adjusted to reflect the extra week including the fourth quarter of 2004 unless stated otherwise. Non-adjusted growth rates can be found in our earnings press release. Finally, today’s call is being recorded and will be available for replay on drugstore.com’s web site at www.drugstore.com under Corporate Information. In addition, the earnings press release for the fourth quarter and fiscal 2005 including a summary of our financials and supplemental financial information discussed on this call will be available on our web site also under Corporate Information section. Thanks, Brinlea. Good afternoon, everyone, and thank you for joining us. Today I’d like to provide an overview of our fourth quarter results and an update on the important strategic changes we’re making to achieve adjusted EBITDA profitability during 2006. Following my remarks, I’ll turn the call over to Bob to go over the financials in more detail. Let me start with our results. Total sales for the fourth quarter were an all-time high, up 10% sequentially to $106.4 million, bringing fiscal year 2005 sales to just under 400 million. We reported strong progress in our core growth businesses, with OTC increasing year-over-year by 26%, excluding wholesale, and mail-order pharmacy increasing year-over-year by 19%. OTC is our fasting growing category and we reported our highest ever sales of 50.8 million this quarter, excluding our wholesale OTC business. We continue to see steady growth across our product categories, but in particular we’ve seen strong growth in our natural and nutrition and wellness categories, which are up over 90% year-over-year, and our beauty business which has grown by more than 40% from Q4 of 2004. Sales growth has continued to cross a broad range of SKUs, ranging from strong sales of the Phillips Heart Start defibrillator which retails for just over $1200 to selling over 30,000 toy marshmallow shooters during the quarter which retail at $19.99. Mail-order pharmacy sales were also an all-time high at $20 million this quarter as we reached a record $151 net revenue per order. We continue to look for ways to improve our Rx mail margin and advance new partnerships and have seen evidence of success with our agreement with Medical Services Corporation, which has grown by 80% from the third quarter of 2005. In our other business segments, sales from local pickup pharmacy and vision were relatively flat when adjusted to the extra week in the fourth quarter of 2004, at 23.8 million and 11.3 million, respectively. The fourth quarter is our seasonally strongest sales quarter and we reported a number of impressive key metrics. During the quarter, we acquired 351,000 new customers, our largest ever volume of new customers acquired in a single quarter and had over 2 million customers active within the last 12 months. Repeat customers drove 80% of sales this quarter and repeat OTC revenue increased by 35% year-over-year. Gross margins were 21.4%, our best performance in almost two years. That brings me to the bottom line. Adjusted EBITDA loss was better than we expected at 1.8 million and reflected both 2.6 million in brand spend and a $560,000 write-off of internally developed software. Clearly you can see that we are close to being profitable and I believe we will be profitable on an adjusted EBITDA basis for the second half of 2006. I am particularly pleased to be talking about profitability on this call. We are absolutely committed to achieving adjusted EBITDA profitability during 2006. When I started a little over a year ago, the Company was very focused on a topline story. We were focused on getting profitable through obtaining additional scale and in order to get that scale we felt we had to be competitive across as many markets and as many products as possible. We are still focused on our topline. Make no mistake about that, and our OTC business will be one of the key drivers of our growth. We will continue to targeting OTC growth rates of 25% or more, and I believe that growth rate is sustainable. But in addition to growth, we have increased our focus on the profitability of each and every order going out the door. That analysis has led us to refine our strategy, focusing on our core profitable customers and making sure that we are charging adequately for value-added services. We have made and will continue to make important changes that may modestly impact sales growth which should increase profitability and accelerate us toward our goal of driving positive cash flow. These changes are very consistent with the strong value proposition that our customers have come to expect from us. During the fourth quarter, we adjusted our shipping policy for hard to reach locations like Alaska, Hawaii, and overseas. We’ve added shipping surcharges to these locations in order to address the high transportation costs associated with serving these loyal customers. The surcharge is modest but allows us to turn unprofitable orders into profitable ones. Also in the fourth quarter we eliminating three upgraded shipping on orders of $99 or greater. Our customers are very interested in being able to earn free shipping, currently earned at $49, and we’ve seen a positive impact on baskets from the $49 free shipping hurdle, but the return on upgraded, or three-day shipping, has been less compelling and didn’t justify the expense. We believe this change should save us roughly $500,000 in 2006. As explained in our last call, effective November 9, 2005, we terminated our partnership with Amazon. While this resulted in year-over-year fourth quarter sales impact on $4 million, we eliminated a management distraction and ended a low margin business. In addition, we resolved our dispute and restructured our partnership with Weil Lifestyle, a partner in our customized vitamins business. The new Weil agreement should benefit in a number of ways, including eliminating 500,000 of marketing spending. Under our new agreement, Weil has taken on responsible to grow and market this business while we will active as an exclusive fulfillment partner. This will allow us to continue to serve our customized vitamin customers profitably. Those are the highlights of the changes we made in the fourth quarter of 2005. Now I’d like to cover some of the changes we’re making in 2006. First, we will be adjusting our backorder shipping policy to give consumers the opportunity to get the products they want without drugstore.com incurring all the additional packaging and shipping costs. We believe this should save us approximately $400,000 this year. We will also be implementing a surcharge for heavier orders, although only a small percentage of our overall volume of orders, these orders have been very challenging from a profitability and we continue to edit SKUs and refine prices. Over the last month, we have been performing a full profitability analysis of all of the SKUs and have reached the conclusion that as many as 4000 of our more than 25,000 SKUs can be eliminated or price adjusted, providing a benefit to our bottom line without a real impact on our product collection or value proposition. In addition to reviewing our OTC partnership, we’ve been looking at all of our pharmacy contracts and agreements. In the pharmacy area, Medicare Part D is one of the biggest changes in the industry. After much analysis, we’ve chosen not to participate in Medicare Part D due to the very low margins, high customer contact costs, and complexity around managing this benefit. While some of our customers who are over 65 years of age will migrate to Med D and may have some impact on our revenue growth, this impact has been factored into our 2006 plan and guidance. We believe we will continue to see double-digit growth in our mail-order pharmacy business in 2006 and produce a much stronger bottom line, and we will continue to serve customers who participate in Medicare Part D by providing access to low-cost medications that fall out of the customers Med D coverage. In addition to looking at each order, and each partnership, we have been carefully scrutinizing our marketing expenses. In 2005, we tested a number of marketing vehicles to accelerate our growth and gain valuable insight into which program drive customer behavior. As part of our 2006 budgeting process, we did a very careful analysis of each and every marketing program examining the effectiveness, return, and relative performance of each. Our goal was to identify programs that provide the greatest growth at the lowest cost, to identify which programs help us drive to profitability, and which will be deferred until we have the cash to self-fund. Our analysis confirmed that search both free and paid is a cornerstone of our new customer acquisition and continues to show very high ROI. In addition, the changes we’re making to our site and shopping experience has driven significant changes to customer conversion and our personalization effort both on the site and in e-mail shows very strong returns. By comparison, catalog, direct mail, and in-box inserts have proven to be more expensive. Our primary goal in 2006 is profitability; therefore, I’ve made the decision to wind down our brand campaign and eliminate our catalogs, direct mail, and in-box marketing spends. I believe that we can still deliver strong topline growth in our OTC business in 2006 and making these adjustments should allow us to reduce our marketing expense as a percent of sales to a 6% to 7% range by midyear. In addition, our customer acquisition costs should return to the $19 to low $20 range. Once we are profitable, we will look at increasing our investment in marketing and will be well positioned to spend those dollars effectively. Of course, one of our biggest initiatives in 2005 was our brand campaign. We launched the campaign on September 1, 2005, and as promised we’ve taken a detailed look at the results of the campaign over the last four months of the year and here are the highlights of our results. We saw incremental new customer orders in all three cities, New York, San Francisco, and Chicago. In addition, when customers were aware of the advertising it positively improved their perception of drugstore.com and made them more likely to shop drugstore. For example, brand consideration increased from 49% to 68% in those customers who aware of our advertising. These results tell us that the ads were effective vehicles of communicating the brand position and persuading customers. Lastly, both aided brand awareness and aided advertising awareness saw a statistically significant increase. There were some metrics, however, that were not as strong as I would have liked. For example, the increase in new customer traffic was not consistent over the four-month period. In addition, there was no improvement to repeat customer behavior due to the campaign and no apparent improvement in new customer order size. The bottom line of our analysis is that our core brand positioning and strategy resonates with customers and once they are aware of the ads they are effective at convincing customers to purchase from us. The ads were effective and advertising can drive growth in our business. But in my mind the real issue is about speed of payback. Four months is a relatively short duration for a campaign and the indications are that with time we would see additional lift. However, when we started the campaign we targeted a greater lift and a faster payback than we achieved. So given the results, and our focus on profitability, I’ve made the decision to defer our campaign until we are generating cash. This will reduce our brand spend during Q1 to about 1.7 million and we are not forecasting any brand spend in Q2, Q3, or Q4 of this year. To summarize, we had a strong quarter. Solid growth in our key businesses, record new customers, record baskets, and progress on the bottom line. Most importantly, as I said at the beginning of my remarks, I am very pleased to be talking about profitability. During the last quarter, we’ve made some important strategic shifts in our basic model, and I believe we can make each order profitable while continuing to grow our topline. We expect to continue to see strong 25% to 30% growth in our OTC business and double-digit growth in our mail-order pharmacy. And we are targeting adjusted EBITDA profitability for the second half of the year. We have established a clear path to the goal I outlined when I joined the Company, sustainable profitability. Of course, I look forward to answering any questions that you may have, but first Bob is going to review the details financially. So, go ahead, Bob. Thanks, Dawn. As reported, fourth quarter net sales are our seasonally strongest and were an all-time high at $106.4 million, bringing fiscal year 2005 sales to 399.4 million, just short $400 million. Over the next few minutes I’ll walk you through some of the details driving our fourth quarter sales and then I’ll review expenses, provide an update on the balance sheet and review our guidance for 2006. I’ll also discuss the results including our wholesale OTC business, which we terminated, effective November 9, 2005, and have adjusted growth percentages to reflect the extra week in 2004, as Brinlea noted in the opening. With that as an outline, let’s get started. On a segment basis, OTC sales for the fourth quarter, excluding wholesale OTCs, grew by an adjusted 26% year-over-year to $50.8 million. Wholesale OTC revenue, which are net sales generated by our December 2003 agreement to provide fulfillment services to Amazon.com, was down 89% year over year to 468,000, impacting our overall growth rate. We terminated this agreement effective November 9, 2005, and you should no longer anticipate any revenue in 2006 from this relationship. Mail-order pharmacy net sales grew 19% year over year to a record $20.0 million. Local pick-up pharmacy sales through our Rite Aid partnership and our Vision segment were relatively flat year-over-year at $23.8 million and $11.3 million, respectively. Now, I’ll walk you through some of the key customer metrics that drove our fourth quarter sales. Starting with overall order volume, which was 1.3 million and grew by 8% year-over-year and 16% when excluding the impact from the termination of the Amazon fulfillment agreement. Average net sales per order was a record $80, up from $78 in the fourth quarter in 2004. On a segment basis, average net sales per order for the fourth quarter in our OTC segment increased to $60 and when excluding wholesale OTC average net sales per order for OTC was $61. Mail-order pharmacy baskets grew by 7% to $151. Local pick-up pharmacy grew by 5% to $112 and finally average net sales for order for the vision segment were up 3% to $83. Repeat revenue in the fourth quarter made up 80% of total sales and 79% for the fiscal year ending 2005. We saw repeat revenue in our OTC segment grow by 35% year over year for the fourth quarter, 33% for the full fiscal year. During the quarter, we added a record 351,000 new customers bringing our total life to date customer base to approximately 7.2 million unique customers since inception. And in 2006 we look forward to reaching important milestone of fulfilling our 25 million customer order. Importantly, our trailing 12-month active customer base grew by 10% year over year to over 2 million, while the trailing 12-month spend for active customer grew by $10, or 6% year over year to approximately $192 and reflect both growth in basket size and increased order frequency. Please note that both the active customer base and average annual spend numbers exclude net sales and orders associated with our wholesale OTC fulfillment relationship with amazon.com and reflect only the activity of customers making purchases through web sites owned by drugstore.com and our subsidiaries. Now we’ll move on to gross margin. As Dawn had mentioned, gross margin was our best in almost two years at 21.4% for the fourth quarter, an increase of 150-basis points over the third quarter of 2005, and was up 120-basis points from the fourth quarter of 2004. On the year, gross margin was 20.5% and grew by 20-basis points. Absolute gross profit dollars for the fourth quarter increased by 17% year-over-year to 22.8 million. For fiscal year 2005, gross profit increased 14% year-over-year to 82.1 million. We’ll move on to expenses and we’ll start with marketing and sales. Marketing and sales expense for the fourth quarter as a percentage of net sales was 9.4% reflecting an increase from the fourth quarter of 2004, and as expected up from 9.1% of net sales in the third quarter of 2005. In absolute dollars, marketing and sales expenses for the quarter increased to $9.9 million and reflected 2.6 million associated with our brand campaign. For the fiscal year 2005, sales and marketing expenses were about 8.2% of net sales. As Dawn mentioned earlier, we are winding down our brand campaign and plan to spend approximately 1.7 million on continued out-of-home and magazine brand activities during the first quarter. We do not have plans to continue to spend in the quarters that follow. Marketing and sales expense per new customer was $28 for the quarter, up from $19 in the fourth quarter of 2004, but down from $31 in the third quarter of 2005. A significant amount of the annual increase reflected money spent during the quarter on a brand development efforts. We anticipate that marketing and sales expense will remain around 8% to 9% of net sales in the first quarter but improve and decline to 6% to 7% in the remainder of 2006. Next, fulfillment and order processing expense, which includes customer care and credit card fees. For the fourth quarter of 2005, fulfillment, and order processing expenses were 9.8% of net sales, which is down from 10.6% in the fourth quarter of 2004, and down from 10.1% as reported in the third quarter of 2005. For the fiscal year 2005, these expenses were 10%. We expect fulfillment and order processing expensing in 2006 to show continued improvement with volume and anticipate expenses to run in the 9.5% to 10% range. With that, we’ll move on to other operating expenses. Technology and content expenses for the fourth quarter 2005 were $3.5 million and general and administrative expenses were $2.7 million. For fiscal year 2005, these expenses represented 3.2% and 3.5%, respectively, of net sales. On a net loss, on a GAAP basis, net loss for the fourth quarter was 4.5 million, or $0.5 per share, which was better than our previous guidance of a net loss range of 6.4 million to 7.4 million. For fiscal year 2005, net loss was better than expected at a loss of 20.9 million, declining drastically by 56% year over year. On an adjusted EBITDA basis, we reported a $1.8 million net loss which was also better than our EBITDA than our guidance of an adjusted EBITDA loss in the range of 3.7 million to 4.7 million. Of importance, during the quarter we spent $2.6 million on our brand campaign and we wrote off $560,000 associated with internally developed software. For the year, our adjusted EBITDA loss was 9.6 million and included 5.5 million of brand and personalization spend. Adjusted EBITDA is defined as earning before interest, taxes, depreciation, and amortization of intangible assets, non-cash marketing and stock-based compensation and it is adjusted to exclude non-cash charges for impairment of goodwill and other intangible assets and a non-cash litigation settlement. Head count. In regards to head count, we ended the fourth quarter with an employee based at approximately 800 full time equivalents. On to the balance sheet, with regard to our cash position, we ended Q4 with approximately $46.5 million in cash, cash equivalents, and marketable securities, which is up slightly from Q3 as we generated cash from operating activities this quarter. Net of planned capital expenditures and applicable lease financing, we expect to end 2006 with at least $35 million in cash, cash equivalents, and marketable securities. In regards to inventory, our annualized turn rate for the quarter was approximately 14. With that, we’ll move on to our outlook for the first quarter and fiscal year 2006. For the fiscal year 2006, we are targeting a net sales range of 440 million to 460 million. We believe this will reflect continued strong growth from our OTC and mail order pharmacy segments, even with our strategic decision to focus on only the more profitable sales opportunities. We also believe this focus on long-term sustainable profitability will allow us to reach adjusted EBITDA profitability in the second half of the year. For the full year, we are targeting an adjusted EBITDA loss of $4 million to an adjusted EBITDA profit of $1 million. From a GAAP basis, we are targeting a net loss range of $15 million to $20 million. Please note that this GAAP net loss range reflects stock option expense associated with the adoption of statement of financial accounting standards 123R which we anticipate will result in stock-based compensation expense approximating $5.5 million. For the first quarter of 2006, drugstore.com is targeting a net sales range of $102 million to $107 million, a net loss range of 7.2 million to 8.2 million and an adjusted EBITDA loss range of 3.5 million to 4.5 million, which reflects $1.7 million in brand campaign expenses during Q1. That concludes our prepared remarks for today’s call. At this point, we’ll open the call up to questions. Thanks. A couple questions. On the surcharge for heavier orders, you guys had mentioned that your backorder shipping policy would save about 400 K. Would the surcharge for heavier orders, is that included in that 400 K or have you done some analysis about what that would save you and then I have a couple follow-ups. No. The $400,000 was just for the backorder change policy and on the weight based shipping, those heavier orders, we are completing, we are finalizing the plans for that as we speak and are doing that analysis right now. But the $400,000 was just for the backorder the policy change. Okay. And then on the Part D, you mentioned that you more participate in it that would possibly some orders but you would be filling orders for ones that sell out of the Part D schema. Is your assessment kind of neutral to your business going forward impact wise? Well there is some impact to our business but my point about there are some drugs that are not covered by Medicare Part D and there is some coverage that people don’t get from Med Part D and that’s where we would continue to fill those orders. That was my point. In terms of the adoption of Med D, I think it’s too early for any of us to tell. We’ll obviously give you an update as the year goes on. Thanks. Aside from maybe being a little conservative to take away the write-off this quarter and the brand spend relative to the quarter we’re in now, Q1, it would seem like you’d have an opportunity to do nicely better in terms of your adjusted EBITDA in Q1. I’m just curious if you can explain the guidance for the loss of 3.5 and 4.5 million relative to the 1.8 million adjusted EBITDA loss in Q4? Thanks for the question. I think the first thing you have to remember is the brand campaign is winding down in the first quarter. So we’re still anticipating, we are still planning to spend just under $2 million in brand expenses during Q1 and that will have, we believe, a fairly significant impact on our guidance and our loss impact during that quarter. You know, obviously going forward we’re removing the brand expense and that’s where we’re very optimistic in how the year can shape up for us. Okay. And just, I’m not too familiar with the business but I wonder if you could help me out here a little bit. The $2 million customers that have been active over the past year. I think you said that was a record number. That sounds great. Excluding the relationship with Amazon and any customers that may have gone away from that, what happens to the other customers that don’t come back? Where do they typically end up? Well, let me give you some context and Bob can add in some answer as well. There are some number of customers who will go out and search for a product, a particular product, come to drugstore and quite honestly maybe not even realize who they’re buying the product from. Buying that one particular problem and not feel that they have an ongoing relationship with drugstore and don’t come back. When we go out and do customer research and we have done that with those customers, they do not report any dissatisfaction with our pricing, with our service, with anything. They just say, gosh, I didn’t think of you guys. That’s why we have some personalized e-mail campaigns going on specifically targeted at those ones – we call them the 1x purchasers to get them to 2x, to remind them about drugstore. It’s a very personalized message. It takes into account what they bought from us, what their characteristics are and tries to convert them into an ongoing long-term customers. And we’ve seen some good early results but we will continue to monitor that throughout this year. We just started with that a few months ago. So it’s not dissatisfaction. Most of the time it’s just people just don’t think of us and that is what we have to continue to move the needle on. Okay. So it’s a little bit of a combination of I guess just awareness, which you’re getting out through the e-mail campaigns but maybe also is it kind of for customers the switching costs are relatively low and if you can find a way to develop customer loyalty beyond just the brand but whether it’s – I don’t know, you get points for a number of orders or something like that. Just some sort of program to develop a little bit more loyalty it would seem like you’d – And I absolutely agree. We in fact have a program called drugstore dollars which is very, very successful which gives people 5% credit back on their purchases that then they can use in a particular month during the quarter. January was a drugstore dollar month, for instance, and that program has been very successful. I think when, what we hear from customers when they don’t come back more often they’re just stopping at the drugstore on the way home, so our competition is the brick and mortar companies and everything we can do to make it easier for customers to order online, to think of us before they stop at home to click through an e-mail to do auto-replenishment. There are a whole lot of things that we are implementing that we think will make it easier and easier for customers to come back to us and remember us. I figured I would jump back here in the queue. On the, how much capacity do you guys have on the fulfillment side now that you’re not helping out Amazon anymore? That’s a great question. In fact, we’re spending quite a bit of uptime right now re-evaluating what that’s going to do for us. You know, I would say right now initial estimates would suggest we’re probably a year to two years away from a meeting a new one, but we’ll be able to give you an update as we get farther long in the year. So we have quite a bit of capacity left in order to grow our business and not have to add another distribution center. So you could maybe grow like 100 million a quarter run rate, you can maybe take that volume up 50% and still be okay on capacity, although at that point starting to get kind of tapped out? Well, again, I think, you know, I’m going to defer on any exact numbers until we finalize the analysis in terms of what the additional capacity Amazon is going to give us versus what we were planning. What I would tell you is, what we have to manage to are the peaks. So right now on an ongoing basis we’re probably at 60 to maybe as much as 65% utilization of the distribution center and what we’re taking a hard look at again is there’s a couple week time period during the December month that we get spikes pretty hard from holiday sales and so again it looks like we’ll make it through another year at least. You know, the question is it two years or is it three years that we can survive and again we’re in the middle of finalizing that analysis now. Okay. Great. And just one more, if I could, since there don’t seem to be too many questions, maybe I can ask kind of a real basic one. Who do you view as your sort of primary competition I guess, and I understand that it’s sort of everyone but when you’re really going after new customers. Take that 2 million active customer list to 3 million, who do you really intend to kind of grab customers from? There is a wide range and, the brick and mortar companies, so the customers who shop at the Walgreens and SafeWays, etc., on the way home. So that is a piece. But with changing that customer behavior and moving the customers online for these purchases. In addition, it varies a little bit by segment. So for in our beauty business, sephora.com would be a competitor for example. So it’s pretty wide range but a lot of it is about changing customer behavior and getting more people to think of purchasing these things online. I had one other follow-up. In terms of you mentioned that out of 25,000 SKUs you’d be eliminating or refining prices on 4000….. They’re across the board, although there are some areas where we’ve looked particularly closely to make sure that we understand the profitability of each item. So as you can imagine, things like incontinence and diapers and formula and laundry detergent and things like that are more challenging from a shipping perspective, so you have to look very carefully at the total cost to understand. In addition, there are a number of areas where it’s just a matter of having more assortment than we need whereas maybe a six-pack of toilet paper is great and we don’t necessarily need to carry the eight-pack as well. So a lot of it is about looking at assortment as well as some of those categories that are more challenging to ship. Hey. Thanks for taking my question. A couple quick things. You said, Bob I think you said that you were cash flow positive fourth quarter. Could you quantify that amount? Yes. So we were actually, we ended Q3 at 46.2 million and we ended Q4 at 46, just under 46.5 million. So as you guys look out over ’06, I mean, obviously, there’s some seasonality in here in your business. Do you think that Q2 is going to be cash flow break even or should we look at EBITDA? You know, I think what, the guidance, what you should follow is the guidance that we’ve given today and from an EBITDA perspective what we’re very focused on is the second half of 2006, and that’s where we believe we’ll start to drive positive adjusted EBITDA number and I think from a cash perspective again, I think what I shared on the call, is that we believe we’ll end the year with at least $35 million in cash. You know, what I would tell you is as you think through the process as a profitability, we are very, you know, we don’t plan on stopping in terms of we reach EBITDA, adjust EBITDA profitability and we’ve succeeded. It’s how do we get to the point where we’re earning free cash flow and that’s the next piece of the agenda, if you will, and again, right now our current focus is reaching the first step and achieving positive EBITDA. Okay. That’s helpful. And then just one other thing real quick. You had a nice improvement in your gross margin in the fourth quarter. Would you expect to see kind of continued year-over-year improvement as you get more volume across your distribution center? Well, you know, gross margin is going to be largely impacted by a mix of our OTC business and if you actually run the numbers for Q4, we saw a nice lift in the mix of our OTC business relative to where it’s been in the past and the OTC business is actually our highest margin segment. So where we will have upside as we continue to accelerate the growth of that business relative to the other segments in our business. So, you know, that’s where the upside could reside. Ladies and gentlemen, this does conclude the drugstore.com quarterly results conference call. You may disconnect, and thank you for using AT&T teleconferencing.

EarningCall_233810

Here’s the entire text of the prepared remarks from Electronic Arts’ (ticker: ERTS) Q2 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, welcome to the Electronic Arts Second-Quarter Fiscal Year 2006 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to Miss Tricia Gugler, Director of Investor Relations. Please go ahead. Good afternoon and welcome to our second-quarter fiscal 2006 earnings call. Today on call we have Larry Probst, Chairman and Chief Executive Officer, Warren Jenson, Chief Financial and Administrative Officer and Frank Gibeau, Executive Vice President and General Manager of North American Publishing. Before we begin I would like to remind you that you may find copies of our SEC filings, our earnings release, and a replay of our webcast on our web site at investor.ea.com. Shortly after the call, we will post a copy of Warren's remarks on our web site. Throughout the call, we will present both GAAP and non-GAAP financial results. Non-GAAP results exclude charges associated with restructuring, asset impairment, other temporary impairment of investment and affiliates, apart in process technology, amortization of intangibles, employee stock-based compensation, and certain non-recurring litigation expenses and their related tax effects. In addition, the Company's non-GAAP results exclude the impact of tax adjustments. A supplemental schedule to our earnings release provides the reconciliation of non-GAAP to GAAP measures. In addition, a supplemental schedule demonstrating how we calculate ROIC will be included on our web site. All non-GAAP measures are provided as a complement to our GAAP results and we encourage investors to consider all measures before making a decision. All comparisons made in the course of this call are against the same period of the prior year unless otherwise stated. We have included our trailing 12-month platform shares in our 2005 estimated market outlook in a supplemental schedule that will be posted on our web site. During the course of this call, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you that actual events and results may differ materially. We refer you to our most recent form 10-K and 10-Q for a discussion of risk factors that could cause our actual results to differ materially from those discussed today. We make these statements as of November 1, 2005 and disclaim any duty to update them. Now, I would like to turn the call over to Warren. Thanks, Tricia. Good afternoon, everyone, and thanks for joining us. Our second-quarter results were solid, netting the ins and outs of title moves, particularly FIFA in Europe, we extended the top end of our revenue guidance and soundly came ahead on the bottom line. Sports, is off to a great start. Our North American segment share is a record 75%, up 7 points from this time last year. Of the top ten sports titles, we have nine on the PS2 and eight on the Xbox. Madden NFL '06 took only three weeks to become the number one console title for the year in North America. Through the end of the quarter, we sold an excess of 4 million copies. With 12 weeks of retail data, we estimate sell-through is up in the high-teens year-over-year. NCAA Football 2006 has sold over a million and a half copies, and we estimate sell-through is up over 15%. FIFA ‘06 launched very strongly. So far we estimate our sell-through is pacing more than 30% ahead of last year, FIFA was at the top of the charts in Europe for three consecutive weeks. The competition is heating up, but we are very pleased with our performance and like our prospects. NBA Live 2006, while only a week's worth of industry numbers are formally in, we estimate that we are outselling our nearest competitor by a factor of 5. NBA Live has now surpassed the billion-dollar lifetime sales mark becoming EA’s fifth billion-dollar franchise. Burnout Revenge sold more than 1.8 million copies and joins Battlefield 2 as the top ten rated title for the year. Year-to-date, our overall quality rating as measured by Metacritic leads all major third-party publishers, roughly 50% of our titles have been rated 80 or higher, double the industry average of 24%. On the PSP, we were the number one publisher in North America with a 27% segment share and four top ten titles. In Europe, we estimate that our segment share was approximately 16% and that we were the number one third-party publisher. Now while we are pleased with our overall title performance in the quarter to be balanced, we have also seen some recent softness at retail in North America. On mobile phones, we continue to build our foundation. We have recently entered into a distribution agreement with Vodafone to deliver games in Europe, Egypt, Australia, South Africa and New Zealand. In addition, during the quarter, our games did well. For September, we have four top 20 titles on Verizon mobile handsets, Madden 2D, Poppit, Madden 3D and Need for Speed Underground 2. In the UK, FIFA is already the number one title on the Vodafone platform. We are also pleased this quarter to have announced a groundbreaking partnership with Steven Spielberg for the creation of three new intellectual properties. In summary, we think we are off to a solid start for the year. For next few minutes, I will focus my remarks in two areas. First, I will review our Q2 financial results. Second, I will go over our outlook and financial guidance. Following my comments, Larry, Frank, and I will open the call to your questions. Q2 performance. Net revenue was $675 million down 6% from a year ago driven by lower PC, console and co-publishing related revenues. Partially offset by a significant increase in revenues for mobile platforms. Remember that last year, we launched Sims 2 on the PC. This quarter we released 37 SKUs in the quarter, of which seven were associated with mobile platforms. Last year, we launched 33 SKUs, two of which were mobility based. Six titles went platinum in the quarter versus four a year ago. Madden NFL ‘06, NCAA Football, Burnout Revenge, FIFA 06, NBA Live and The Sims 2 Nightlife. As compared to our Q2 guidance, product shifts added approximately $30 million net to our top line and approximately $.05 as GAAP and non-GAAP EPS. Console revenue was $467 million down 5% year-over-year. While there were single-digit declines on both the PS2 and Xbox, the most significant decline was on the Game Cube. PC revenue was $91 million, down 35% due to the strong launch of The Sims 2 last year. This decline was partially offset by the continued strength of Battlefield 2. Mobility, revenues were up fivefold to $62 million. The increase was driven by the PSP and to a lesser extent the NDF. The European PSP launch was solid. In Europe; Burnout Legend and the Need for Speed Rivals charted in the top five games. Co-publishing and distribution revenue was $32 million, down $17 million year-over-year, driven by the reclassification of the Battlefield franchise to PC. Internet services, licensing and other was $23 million, flat to last year. As of today, Club POGO paying subscribers have reached 1 million, up 75% from a year ago. Geographically, North America revenue was $443 million down $30 million or 6% year-over-year. All console platforms in the PC were down in the quarter while overall mobile revenues were up significantly. Essentially the improvements in mobile did not completely offset the prior year strength of Def Jam Fight for NY and The Sims 2. Europe revenue was $191 million down $19 million or 9%. The decrease was driven principally by lower PC and co-publishing related revenue which was partially offset by sales on the PSP and PS2. Console revenues for the quarter were flat year-over-year given this year's launch of FIFA. Asia revenue was up 24% year-over-year, driven primarily by the PSP and PS2. Changes in foreign currency rates had no significant impact on our top line in the quarter. With that said, we continue to expect currency movements to negatively impact the back half of the year. Moving on to the rest of the income statement. Gross profit in the quarter was $391 million, down 9%. Gross margin was $ 57.9% versus $60.3 a year ago. The decline was driven by higher licensing royalty rates and a higher mix of royalty-based titles. These negatives were partially offset by lower development royalties. Last year we accrued for royalties on Burnout. This year we own the IP. Marketing and sales. Marketing and sales expense was $107 million flat to last year. G&A. G&A was $52 million, up $10 million year-over-year and relatively flat with last quarter. The year-over-year increase was primarily driven by increased headcount, a slight increase in litigation cost, and slightly higher bad debt expense. While this increase is significant, we continue to expect G&A for the full year to be up in the mid single-digit range. R&D. R&D was $182 million, flat to last quarter, and up $25 million from a year ago. The increase was driven primarily by higher staffing levels, resulting from the development of next generation tools, technologies, and titles. This increase was partially offset by lower third-party development advances in the quarter. R&D related headcount was up 39% to roughly 4700. Acquisitions account for approximately 12 points of this increase. Please remember that we are investing ahead of next generation revenue. We record the expense today, but the revenue comes later. Diluted earnings per share, was $0.16 versus $0.31 a year ago. Non-GAAP diluted EPS was $0.15 versus$0.31. Our effective tax rate was 15% versus 29%. Our Q2 rate includes a $9 million favorable net tax adjustment. This amount was excluded from our non-GAAP result. Our trailing 12-month operating cash flow was $592 million versus $664 million for the comparable period. We have now completed our $750 million share repurchase program, buying a total of 13.4 million shares. Our diluted share count was $314 million versus $316 million a year ago. On to the balance sheet. Cash, short-term investments, and marketables were $2.4 billion down 686 from March. The decrease relates primarily to the repurchase of our common stock. Gross accounts receivable were $465 million versus $502 million a year ago, a decrease of 7%. Reserves against outstanding receivables totaled $137 million, up 11% from a year ago. Reserve levels were 13% as a percentage of trailing six-month net revenue, up two points from last year. As a percentage of trailing nine-month net revenue reserves were 9%, also up 2 points. Inventory was $74 million, up $8 million from June, driven by the inventory build for the launch of FIFA 06. Other than FIFA no one title represented more than 4 million of net exposure. Now on to our outlook. Before we get into the numbers, let me just stop and mention a few things. First, we are ready for the Xbox 360. We will be supporting the launch with five great titles including madden NFL, Need For Speed, FIFA road to the world cup, tiger and NBA live. By year end we plan to release three additional 360 SKUs, Fight Night Round 3, Battlefield Modern Combat, and Burnout Revenge. Currently we are actively developing over 35 SKUs for the Xbox 360, PS3 and Revolution. Second, we are ready for the holidays. Need for Speed Most Wanted and Harry Potter looks great and we expect will be solid hits. These titles will be bolstered by FIFA, The Sims 2 on console, Battlefield Modern Combat, and James Bond From Russia with Love to name a few. Our titles will be supported with marketing campaigns second to none in the industry. When you consider the absolute dollar amount we invest in marketing versus that of our competitors, the breadth and depth of our reach is unparalleled. Third, we have a strong lineup of new titles. In the second half of the year, we expect to launch several new first-time titles including Godfather, Black, Arena Football, NCAA Baseball and NFL Head Coach. Owned intellectual properties. For the year, we expect revenues from owned IP will exceed $1.3 billion, an increase of 15% year-over-year. And finally, a final word of caution. Expect the unexpected. We are in transition. We could experience production or development snags or abrupt changes in pricing or demand. In addition, as I mentioned earlier in the call, we have seen some recent weakness in North America. I'll conclude my portion of today's call with our market outlook and financial guidance. Our overall market outlook is essentially unchanged. As Tricia mentioned you can find a detailed summary on our web site. Now on to our financial guidance. The following forward-looking statements reflect our expectations as of November 1, 2005. Our actual results may be materially different and are affected by many factors such as consumer spending trends, the popular appeal of our products, development delays, current generation and next generation hardware availability, the seasonal and cyclical nature of our industry, the overall economy, competition, changes in foreign exchange rates, our effective tax rate, and other factors detailed in our earnings release and in our SEC filings. Now to the numbers. For the full year, we expect revenue to be between $3.25 and $3.4 billion. GAAP diluted earnings per share to be between $1.40 and $1.55. Non-GAAP diluted earnings per share to be between $1.45 and $1.60. Please note that our GAAP results include up to a $.05 charge associated with the European reorganization and establishment of an international publishing headquarters in Geneva. We expect the charges to be split roughly evenly between our third and fourth quarters. For the quarter ending December 31, 2005, we expect revenue to be between $1.475 and $1.575 billion. GAAP diluted earnings per share to be between $1.15 and $1.25. Non-GAAP diluted earnings per share to be between $1.18 and $1.28. Specifically in the third quarter, we expect to ship 54 SKUs. Our expected lineup for the third quarter includes Battlefield Modern Combat on console, Modern Combat Mass Expansion Pack on Xbox, Battlefield 2: Special Forces Expansion Pack for the PC, Black and White 2 on the PC, Burnout Legends on NDF, FIFA '06 in North America on four platforms, Half-life 2 on the Xbox, Harry Potter and the Goblet of Fire on seven platforms, James Bond From Russia with Love on three, Lord of the Rings Tactics on the PSP, Marvel Nemesis on two platforms, NBA Live '06 on the PSP, NCAA March Madness '06 on the PSP, Need for Speed Most Wanted on seven platforms, Need for Speed Most Wanted Collector's Edition on three platforms, The Sims 2 on console and hand-held, The Sims 2 Holiday Expansion Pack, Sims bundle for the PC, Total Club Manager '06 on the PC, SSX on Tour on four platforms. On the Xbox 360 we plan to launch five titles, Madden NFL '06 , NBA Live '06, Tiger '06, FIFA "06 Road to the World Cup, and Need for Speed Most Wanted. In addition, on mobile phones we plan to launch seven games. In North America and Europe, FIFA '06, NBA Live 06, Tiger Woods Golf, Need for Speed Most Wanted and Sims 2. In addition, we plan to launch POGO Harvest Mania and POGO Word Whomp in North America. I will now conclude with a few closing thoughts. First, we are very fortunate to be in the middle of one of the most exciting global growth trends in entertainment today. Second, while there is plenty of risk and we certainly can and will make mistakes, we believe there is no company in a better position to take advantage of this opportunity than Electronic Arts. And third, rest assured, as the team and as a company, we are investing for sustained long-term leadership and we are intent on winning. With that, Larry, Frank and I will open the call to 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_233811

Good afternoon, ladies and gentlemen. My name is Christy, I will be your host operator on this call. Your lines will be placed on a listen-only mode. At the end of the presentation, management will be available for questions. If you have a question, please press '*' '1' on your telephone, and you will be placed in the question-and-answer queue. At this time, I would like to introduce Nancy Shipp, Director of Investor Relations of Blue Nile. Good afternoon, and thank you for joining us on our conference call today to review the fourth-quarter and full-year 2005 financial results. With me today is Mark Vadon, Chief Executive Officer of Blue Nile; and Diane Irvine, Chief Financial Officer. During this call, we will discuss non-GAAP free cash flow which is defined as net cash provided by operating activities or operating cash flow, less capital expenditures including internal use software and website development. We report this measure to provide additional tools to evaluate our operating results and financial condition. Please refer to our website at www.bluenile.com to obtain a copy of our press release, which contains a full reconciliation of free cash flow to GAAP financial measures. As a reminder, during the course of this call, we will make forward-looking statements including without limitation statements regarding expectations of future financial performance, including expectations of net sales, gross margins, expenses, net income, operating cash flow, capital investment and other financial statement items, as well as statements about our future plans and objectives, beliefs, expectations, targets, goals, outlooks or predictions for the future. These statements are only predictions based on assumptions that are believed to be reasonable at the time they are made, and are subject to significant risks and uncertainties. Actual results may differ materially and adversely from any projections and forward-looking statements given by management. Our quarterly reports on Form 10-Q, our Annual Report on Form 10-K and other forms on file with the SEC identify important risk factors and uncertainties that you should consider when making an investment decision regarding Blue Nile, and they may affect whether our forward-looking statements prove to be correct. We undertake no obligation to publicly update or revise these forward-looking statements. At the conclusion of the call, we will conduct a question-and-answer session. During the Q&A session, we ask that you please limit yourself to one question out of courtesy to others. Now, I would like to introduce Mark Vadon, Chief Executive Officer of Blue Nile. Thank you, Nancy. Good afternoon everyone, and thank you for joining us today. I would like to start the call by recapping our fourth quarter and the full year 2005 and discussing our business priorities for 2006. During the fourth quarter, we continued to demonstrate our ability to deliver strong profitability despite a challenging sales environment in jewelry retail. For the quarter, we achieved net sales of $73.2 million, up 13.5% from the prior year, and net income growth of 15.9% to $5.3 million. Earnings per diluted share totaled $0.29, and were up 20.8% from the same period a year ago. We focused on balanced profitability during the quarter, and in the process we delivered to our earnings guidance. At the end of the quarter, cash and marketable securities totaled $114.8 million. These results add to our history of growth and consistent profitability. Our fourth-quarter results capped off a great year for Blue Nile strategically, operationally and financially. In 2005, we strengthened our competitive position as the leader in online diamond and jewelry retailing, and enhanced our exclusive supply chain relationships. For the full year, our revenue totaled $203.2 million, an increase of 20% over 2004. Earnings per diluted share for the full year were $0.71. Free cash flow for the year totaled $30.2 million. These results underscore the way in which we are capitalizing on the unique elements of our business model to achieve profitable growth for our shareholders. We offer a compelling value proposition to our customers while utilizing a unique exclusive supply solution and maintaining an efficient cost structure. With minimal capital investment required for growth, this leads to the ability to generate strong cash flow, as evidenced in our 2005 results. We create great customer value and solid growth and profitability, and we remain focused on all three of those measures. We have an exceptional team that is executing a better business model and has driven our success in becoming the leading online diamond and jewelry retailer with revenues of over $200 million, just a little over six years after the initiation of the business. I would like to give some color on sales trends during Q4. We started the quarter well and had an excellent November with sales growth beyond expectations. During December, we experienced three weeks of sales that were below our expectations. We believe there were two main contributors to our slow December sales. First, the jewelry industry at large performed poorly this holiday season. According to SpendingPulse, a retail sales data provider for MasterCard, jewelry sales this holiday season were down 4.6% from the holiday season of 2004. Second, during December, we saw extremely aggressive increases in the cost of online advertising. Our cost per click on Google, for example, rose by over 50% from a year earlier. While the cost of online marketing grew significantly in Q4, we remain disciplined in our spending in order to maintain profitability on new customers rather than to chase unprofitable growth, as some of our competitors have done. Our marketing efforts during the fourth quarter were skewed toward search engine advertising. Given our experience over the past few years with paid search, this seemed like a prudent decision entering the quarter. However, with increased costs for paid search in Q4, we were unable to drive as much profitable traffic as we would have expected. Given these results, we will be looking to broaden our marketing efforts beyond search in the future. As we seek alternative marketing vehicles to complement our efforts in paid search, I would expect growth to be relatively conservative as we ramp our efforts toward broadening our marketing outreach. This is the right long-term solution for our business. As I've stated before, throughout all of our marketing efforts, our focus is on the maximization of gross profit contribution, in keeping with our overarching objective of free cash flow generation. For the quarter, repeat and referral sales showed excellent growth, which is a strong testament to the value of our efforts in continuing to obsess over the customer experience. This also points to our ability to monetize customers following acquisition. Turning to the operation side of the business, customer service performed extremely well during Q4, delivering an excellent customer experience while simultaneously driving down unit cost. Our customer service group improved its cost per order by 13% from the fourth quarter a year ago, while continuing to deliver industry-leading performance by answering 82% of calls to our call center in ten seconds or less. Our fulfillment operation maintained an astounding on-time shipping rate of 99.87% of all orders. We achieved this level of performance with shipping timeframes that are among the most aggressive in all of e-commerce. I'd like to provide an update on our share repurchase program. During the fourth quarter, we repurchased 103,000 shares for an aggregate purchase price of $3.4 million. From the start of our share repurchase program in February of 2005 through the end of Q4, we have retired approximately 3.3% of the outstanding shares of the Company for a total purchase price of $17.4 million. Since Q3 of 2004, we have reduced the number of diluted shares outstanding every single quarter. We announced today that our Board of Directors has authorized a share repurchase program of up to $100 million over the next 24 months. We believe tremendously in our business and in the strength of our business model. As you know, one of the most attractive characteristics of our business model is our ability to generate strong cash flow. The demonstrated success of our business model provides us with a strong balance sheet, as well as financial flexibility. This repurchase program is in keeping with our stated intention to maximize free cash flow per share overtime, and underscores our commitment to enhancing value for our shareholders. I would now like to discuss our priorities for 2006. First, we will continue to do what we do best, that is, to expand our core domestic business with exceptional execution. In 2005, Blue Nile reached an approximate 3.0% market share of the estimated $4.7 billion US engagement ring market. Obviously, there is tremendous room for growth in this market. We will also continue to focus on growing our non-engagement jewelry business. Our non-engagement business showed robust year-on-year growth in 2005, partly due to very strong increases in repeat purchasing from prior Blue Nile customers. We have enormous growth potential in this area of the business as well. International growth will remain a priority in 2006. While the US market remains the main growth engine of our business, we have begun to develop a presence in international markets, specifically in Canada and the UK. We believe that our value proposition to consumers is even more compelling in the UK market than it is in the US. At the beginning of the fourth quarter, we introduced customization tools for diamond jewelry on our UK website, providing customers with the ability to choose from more than 60,000 loose diamonds and customize their diamond jewelry products such as engagement rings, earrings and pendants. And this offering clearly resonated with UK customers during the fourth quarter. We are particularly encouraged by the early success and development potential of the UK business. For the year, we generated approximately $3.3 million in net sales through our international websites. While this is still a modest base of sales, it represents over 370% growth from 2004 levels. In 2006, we will continue to obsess about the many details across our business that define the Blue Nile customer experience, and to execute with excellence throughout our operations. Perhaps most importantly, we will also continue to invest in our people. We will focus on attracting and retaining the right team of people as we build our business for the long-term. I believe we are still very early in the process of developing a dominant brand in the retail jewelry category. With exclusive Internet rights to a vast selection of diamonds, the most efficient cost structure in the jewelry retailing industry and a growing base of customers who are ecstatic with their Blue Nile experience, we are positioned for long-term success. As a business, we are growing and financially healthy, and we will continue to strive for annual growth and free cash flow and free cash flow per share, while investing in the long-term opportunities of our business. We have high expectations for ourselves overtime, and we constantly drive for excellence on behalf of our customers and our shareholders. Thank you, Mark, and good afternoon everyone. For the fourth quarter, net sales were $73.2 million, a 13.5% increase over last year and a record fourth-quarter net sales level for Blue Nile. Gross profit for the quarter was $16.2 million, compared to $14.1 million in the fourth quarter of 2004. This represents a 14.7% increase in gross profit year over year. Our gross margin for the quarter was 22.2% as compared to last year's fourth quarter gross margin of 21.9%. This year-on-year expansion in gross margin of 30 basis points is primarily due to product mix, with non-engagement items consisting of a higher percentage of our overall Q4 product mix compared to a year ago. These products carry a higher overall gross margin, as compared to engagement products. A key metric for our business is average order size, which was $1284 in the fourth quarter and essentially constant with the fourth quarter of 2004. Historically, our average order size is generally lowest in the fourth quarter of the year, as non-engagement jewelry, which carries a lower average unit price compared to engagement items is expected to be a higher percentage of the sales mix during Q4, based on seasonality. Income before income taxes for the fourth quarter was $8.3 million compared to $7.1 million in the fourth quarter of 2004, an increase of 15.7%. Our net income in the fourth quarter was $5.3 million, compared to $4.6 million in Q4 a year ago. Net income per diluted share grew 20.8% for the fourth quarter to $0.29 from $0.24 a year ago. For the full year ended January 1, 2006, net sales were $203.2 million, an increase of 20% from net sales of $169.2 million in the prior year. For the full year, the engagement category represented approximately 72% of our total net sales, compared to 74% in the prior year. Operating income for the full year 2005 was $18 million or 8.9% of net sales. This compares to operating income of $14.9 million or 8.8% of net sales for the prior year. Operating income for 2005 includes approximately $2.6 million in costs associated with being a public company, compared to approximately $1.2 million for 2004. The year-on-year increase in these costs relates primarily to Sarbanes-Oxley compliance work, which was required for Blue Nile for the first time in 2005. Net income and net income per diluted share for the full year 2005 were $13.2 million and $0.71, respectively, compared to $10 million and $0.56 per diluted share in the prior year. I would like to review our fourth-quarter costs in more detail. We're focused on earning a compelling profit for our investors. In order to do that, we need a high-quality, low-cost business model and great discipline in our business execution. We have both, and we are focused on maintaining an SG&A expense that is today one of the lowest in all of retail as a percentage of net sales. For the fourth quarter, SG&A expenses as a percentage of net sales increased to 11.9% from 11.4% a year ago. SG&A expenses totaled $8.7 million in Q4, compared to $7.3 million in the prior-year quarter. Increases in SG&A expenses year-over-year include increases in variable costs that move with sales volumes, such as credit card processing fees. Included in these types of costs are our marketing expenses, which increased approximately $515,000 in Q4 compared to a year ago, as a result of higher sales volumes as well as significant increases in online marketing costs. Costs associated with being a public company also increased during the quarter, primarily related to the implementation of Sarbanes-Oxley Section 404. In the fourth quarter, the most intensive period of the year for our Sarbanes-Oxley compliance work, costs associated with being a public company increased to approximately $700,000 as compared to approximately $380,000 for the prior-year quarter. Without the incremental public company costs, our operating margin would have shown year-on-year improvement in the fourth quarter. As we look ahead to 2006, we anticipate that our public company costs for the full year, including the costs of Sarbanes-Oxley compliance will not exceed the level of costs we incurred in 2005. As we have indicated in the past, with the absorption of public company costs in 2005, we expect our business to reflect continued leverage in SG&A expenses as we go forward. Interest income was $776,000 for the quarter, compared to $329,000 in last year's fourth quarter. The increase was due to our higher cash balance and higher interest rates compared to a year ago. We believe one of the most informative measures of our financial performance is non-GAAP free cash flow. For the quarter, non-GAAP free cash flow of $36.8 million grew 24.1% from $29.6 million in the prior year. The ability to generate strong cash flow is fundamental to driving shareholder value, and we therefore focus on free cash flow generation as a key financial goal throughout our business. Turning to the balance sheet, inventory at the end of the year totaled $11.8 million. Inventory consists of settings for our customized diamond products, customized jewelry that is in the process of being assembled for specific customer orders and finished jewelry such as pearls and sterling silver products. Our average inventory turnover for the trailing 12 months at the end of the fourth quarter decreased slightly to 15.6 times, compared to 16 times for the trailing 12-month period at the end of the fourth quarter a year ago. Our financial position remained strong at January 1, 2006. We ended the year with $114.8 million in cash and marketable securities, and we have no long-term debt. Looking ahead, I would like to review our earnings guidance for the first quarter and for the full year 2006. In accordance with our policies on guidance, I would like to emphasize that this is the first time we are providing guidance for 2006. For the first quarter, we expect net sales to be between 47 and $49 million. Net income for the first quarter is expected to be between $0.11 and $0.12 per diluted share. These estimated net income per diluted share amounts include the estimated impact of expensing stock options under FAS 123R of approximately $0.03 to $0.04. Blue Nile will begin expensing stock options under these rules in the current quarter. For the full year 2006, we expect net sales to be between 220 million and $245 million. Net income for the full year 2006 is expected to be between $0.62 and $0.72 per diluted share. These estimated net income per diluted share amounts include the estimated impact of expensing stock options under FAS 123R of approximately $0.14 to $0.16. To reiterate, this would equate to net income per diluted share of approximately $0.76 to $0.88 without stock option expensing under FAS 123R. Actual stock compensation expense for the first quarter and for the year may differ from these estimates based on the timing and the amount of options granted, the assumptions used in valuing these options and other factors. Capital expenditures for the year are expected to total between 2.4 million and $3 million. The effective tax rate for financial statement purposes for the full year 2006 is expected to be approximately 35.8%. Blue Nile expects to begin paying cash taxes for federal income tax purposes in the second quarter 2006, as we expect to fully utilize our net operating loss carryforwards. The estimated effective tax rate does not include any potential impacts from the exercise of stock options. Thank you, Diane. In closing, I want to thank our investors and analysts for participating on today's call. We are excited about the prospects for 2006, as we look forward to enhancing our position as the leader in online diamond and jewelry retailing and demonstrating how the unique attributes of our business can grow value for our shareholders over the long-term. This is the end of our formal presentation, and we will now open up the call for any questions you may have. Operator, will you please poll for questions? At this time, I'd like to remind everyone, if you would like to ask a question, simply press '*' then '1' on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question is from Mark Friedman with Merrill Lynch. Thank you. Good afternoon everybody. I was wondering, Mark, if you could talk about, you talked about the three weeks in which business softened. I was wondering if you could talk about the environment as 2006 has started, to give us a better sense if this is a continuing trend, both as it relates to the competitive jewelry nature as you see it and then also on the advertising side? Thanks Mark. Well, starting with the jewelry industry at large, you know, I don't think we have a tremendous amount of insight into what is going on across the industry. What we have heard from the supply base in general is that at the higher end of diamonds, that's very large sizes of diamonds, the market is pretty soft out there. We've just seen tremendous increases in pricing for large stones over the last couple of years. For perspective, if two years ago, you were shopping for a two-karat ring, so if you were going out to upgrade your wife's engagement ring and you were looking at a two-karat or three-karat stone, you might see it in the store for $40,000. That same ring in the store today, if you came in, would be 65,000 or $70,000. And the feeling on 47th Street is that the prices have gotten to the point where a lot of consumers are simply priced out of the market. So I think there is some nervousness in the diamond market about larger stones. And beyond that, I think we haven't seen a tremendous amount of data about what's going on in the market. As far as the advertising market in general, we continue to see search just priced very high. We were frankly pretty surprised by how aggressive pricing within search got during Q4. I think over the last few years, we had focused more and more of our budget into paid search, and in Q4, the prices really started to go up. In order to give you perspective, in our top five keywords, our cost per click was up over 80% compared to a year ago. To us, it looks like, frankly, some irrational behavior in the marketplace. I think, if you follow our business, you know that we monetize Internet traffic for jewelry better than anybody in the world, and if we are getting nervous about the pricing in search, it means there's some people out there who are deficit spending and perhaps are back to the mentality of 1999. But I think our reaction to that is to continue to play in search, but to be more conservative in what we are bidding, and then to take our money and look for other avenues to acquire customers. And we're doing that right now. So the guidance you see for the beginning of 2006 is really we're trying to be conservative as we go out and redeploy our capital into other avenues of acquiring customers. And if search becomes rational, we monitor that on a daily basis and where we see opportunities to increase our bids and it's profitable for customer acquisition, we'll do that. But I think, in general, the online market for advertising, at least in our space has gotten a little bit flossy out there. Hi, just more questions on the marketing. Do you do it yourself, or do you use someone like aQuantive or someone like that to help you? And if so, is that going to change going forward? And I guess the other question is, how efficient are you? My sense is that you have always been very efficient, and I'm just wondering what you can do to be more efficient on search, or if you're just going to have to find other mediums. And on the other mediums you know, does this accelerate your plans to start marketing offline? As far as the first part of the question, we don't use an agency; we do all of our own work on search. We've used agencies in the past, and overtime we've just built that capability up in-house. We feel it's strategically an important thing to have in-house. So we have, both on the marketing side and the technology side, resources dedicated to analyzing and bidding for online keywords. And we will continue to play in that market. If you look at the sources of new customers for us, our number one source of new customers continues to this day to be referral. It's all just driven off of delivering a tremendous experience. And we saw in Q4, the core of the business, repeat purchasing referral purchasing, did extremely well, as it always has. And beyond that, though, the number one source of customers for us is search, is paid search. And I suspect it will continue to be, but I think we can't, in Q4, we relied a little too heavily on search to continue to show the type of growth it had been, and where the pricing got to, we just going to do that. So I think we do measure efficiency continuously in that market and where it's efficient, when it's efficient to bid, we will. And if you go out there and check all the keywords, you'll see us up there. It's just at certain levels, we might choose to fall down to a lower position of the bidding, rather than slugging it out for the first position. And I think to some degree, people follow our bidding in the marketplace, people who are not analyzing things as robustly as we are. And so right now, we are backing off a little bit on search. What it means for us is we're going to need to go out, and I think this is an ongoing story with this business. For those of you who have followed this business overtime, if you go back to the original business, we went from zero revenue to $44 million of revenue in a year. And at the time, people who were following us put a straight line through those two data points and had us getting to a couple billion dollars within a few years. And obviously, that didn't happen. And as we went from 44 million, and last year we went from 44 million to 48 million, and plateaued. And people again put a straight line between 44 and 48, and we couldn't secure funding at the time, even though we were a profitable business in the private market, because people basically said, you are going to cap out at 60 million of revenue. That didn't happen. And what was going on at that period in time was portal pricing had gotten ridiculous. And we said, hey, this doesn't make sense. We backed out of it. We found a different way to redeploy the money. And from there, we grew from 48 to 72 to 129. And honestly, at that point, while we were on our roadshow with 129 million in trailing revenue, people were looking at 60, 70% growth. And we were telling people, don't expect 60 or 70% growth on this business. But again, I think people are quick to extrapolate trends very far into the future. Today, if you look at Q4 or our guidance for Q1, it's a little bit soft. But we believe it's just a matter of when we bring in a customer, we can monetize them quite well. And we're going to need to look at other avenues, and we are already doing that. Will we go offline? If the prices of online customer acquisition get high enough, offline at some point makes sense. And we're out there costing out some different avenues offline as well. And we may play with those in the coming quarters. So I think the overall story, though, for us is we feel we are still right on track to build $1 billion business. There maybe quarters where that growth is very rapid, as it were a couple of years ago, and there maybe quarters where the growth is rather soft, as it was in the year 2000. But overall, if you look at this, as we are trying to do, with a five or ten-year time horizon, we think there's tremendous growth. And just the online market continues, sorry for the long-winded answer, but the online market continues to evolve very, very rapidly. And so I think it means we just have to be willing, especially for a business like ourselves, where a lot of the business is still acquiring new customers as opposed to mining an existing customer base, we have to just be very ready to go out and try new things and constantly tactically change how we are acquiring new customers. So that's what we're doing right now in Q1, and that's the challenge as we go through 2006 is to find profitable, efficient ways to bring new customers in the door. And how much, if you can give us any kind of color on how much of your marketing budget goes to search, what you would like that to be? I realize it depends on what happens with prices. And then, kind of how long it takes to find more efficient ways of acquiring consumers? Search is, I'll just say it is larger than any other channel of marketing for us. It is much larger today than portals would be or affiliate networks or like that. And I'm not saying we are by any means going to stop spending in search. It will continue, I would think, for many years to be our largest channel of spending. But what I'm trying to say is we can't rely on that to be the only growth channel for the business. As far as cultivating new channels, it's something we do on an ongoing basis. Every quarter we are trying new things. It's just at this point, we're willing to go and invest more aggressively in some of those other things, rather than simply put the money into search. So we'll be working on that and we'll give you sort of progress as we go through the year. Hey, good afternoon. Any fallout during the quarter from the GIA scandal that you saw, in terms of deteriorating customer trust and confidence, particularly with the online buying process? Also, were there any added costs as a result to your own review and certification process? I'm also wondering if you can talk a little bit about the pricing dynamics in the industry and the impact on sales, given that I know you mentioned the large increase in prices over the last couple of years. But over the last year, really, my understanding is that prices increased a little bit more modestly. Sure. First, to the GIA scandal, just for people listening who haven't followed this, there was an issue with some GIA diamonds in our New York laboratory which, allegedly, the grades on those diamonds were inflated due to payoffs that happened to individuals who worked within the lab. From everything we understand, it was a very confined incident. And it dealt with a small handful of stones, all of them worth many millions of dollars each. As far as consumer reaction, there have been a few media reports on it. We've been monitoring our inbound calls to measure the reaction, and we've had a grand total of eight phone calls from it. So for consumers, I don't think there has been much reaction. I don't think many people are aware of it, and the people who are aware of it, I think, are pretty comfortable that this has to do with multi-million-dollar diamonds, and people are not paying off an inspector to change the grade on their $1500 diamonds. So we monitor that, and are out there actually talking to the press whenever someone is writing about it. But as far as consumers, I don't think it's been an issue at all. Pricing dynamics, I think there's different parts of the market. I think, overall, pricing has tended to stabilize. What we're seeing is for smaller stones, there's actually some downward pressure on pricing as we enter 2006. There seems to be a lot of those goods in the marketplace, and we're seeing backlogs. For larger stones, pricing continues to be very, very aggressive, continues to go up very, very aggressively. So it depends on which part of the market. It's not something that we think, over the last couple of quarters has had a material impact on our business, which is why we didn't call it out in today's phone call. Thanks. I had a question Mark for you, and then if I could follow up with Diane, as well. On the marketing spending, again, a couple of questions there. Is it mostly related to online larger competitors, or in terms of the excessive spending that you are referring to? When I do keyword searches under some of the more significant keywords that you do, it seems like the industry itself is competing with you. The Diamond Trading Company seems to be a pretty significant bidder these days. I'm wondering where the breakdown is in terms of, say, an Amazon versus industry versus some of these smaller merchants that are trying to drive traffic directly to their own sites, whether they be wholesalers or whatnot? And just to follow onto that as well, so you can answer all in one, as you drive traffic to your onsite, are you noticing any changes in the conversion rate? Sure. As far as who is out there bidding, it's slightly different in Q4 as opposed to Q1. I think in Q4, you asked about Amazon. We haven't seen them at all in the online search market. We saw a couple larger players; I think Zales was pretty aggressive, Macy's was pretty aggressive. And then we see just a tremendous number of small players, and these are very small companies. And they don't play for very long. They will come into search for a week or a couple of weeks. And I think there's just a lot of, and then I think they burn through their budget fairly quickly and fall off the screen. But we just saw a lot of those types of players coming out. And then, just in Q1, we're seeing some odd search behavior. A couple weeks back, you know I think, if anything, this is the time that there's a little bit too much aggressiveness in search. A couple of weeks back, we saw MSN Shopping appear on Google. And that's in our category; it's also in a number of other categories. MSN Shopping began bidding to take customers from Google over to MSN Shopping. And for those of you who understand the cost per click on a Google, which is very targeted, versus a shopping channel, those economics are not going to make sense. So we see things like that, and we just feel like there's something going on here; it's a little too frothy. As far as conversion rates, we continue to be able to convert quite well when we bring people in. I think, to some extent, there may be some downward pressure, and the conversion from every single channel is different. If you look at our overall conversion rate in Q4 versus last year, the conversion was quite good. But within channels it will differ. Within search, what we're seeing, a slight downward pressure on the value of any customer coming out of search, if that makes sense. If you look at, the measures we're looking at is revenue per visitor or gross margin per visitor over time, and then isolating that down to a single channel. So, for those of you don't follow the search market, as well, the way as a merchant you really try to understand your numbers is look at the gross margin or contribution margin per customer coming off the flow of traffic, and you simply weigh that against the price to acquire those customers. And as you go up higher in search, you're trading off perhaps more volume from higher placement with lower profitability from the stream of traffic. So an important matter is how well you can convert. Over time from search, we see slight declines, and it's not tremendous but slight declines in the conversion rate. I think, to some extent, that has to do with the search engines placing more ads. So, when you went to a search term a year ago versus going to it today, you are going to see more paid search placements today than you did a year ago. And as there's more people there competing for the same traffic, if one consumer is shopping, so if you're shopping for a plasma TV, you are probably going to go to many merchants, or at least a handful of merchants, before you make your purchase. And so you will be clicking on multiple ones of those, but only buying one plasma screen. And the more paid placements there are, probably the more click-throughs you're going to have. So what that results in for merchants is downward pressure on the value of those customers. So just as bidding is going up, you're seeing downward pressure in conversion. Again, this points to our desire in the channel to be less aggressive with our bidding. And if that means giving up some volume to other people who perhaps are not measuring that and doing that ROI calculation, as well, we will do that until it rationalizes somewhat. I think that answered, if you had other questions, I think I'd answered those, though. Yes, it did, thanks. Diane, if you could just update me on the remaining buyback? I may have missed that, in terms of what is remaining still from this existing buyback. And then also, if you're willing to throw a guess out there, in terms of free cash flow at the midpoint of your cash EPS range, just with the remainder of the NOL and the working capital. I'm struggling to get to a number. Sure. On the buyback, that program was a 12-month program that we entered into a year ago. So that program will end shortly. We have spent a little over $17 million; that was a $30 million program, as you recall. So there was a little under $13 million that was not spent. And then the new $100 million program over 24 months will begin shortly, so the old program will be replaced by the new program. On free cash flow, are you looking at this year? Yes. We, I guess, haven't given free cash flow guidance. But certainly, if you look at what we have always targeted, generally in terms of our topline growth, we have felt like 20 to 30% growth would equate to 25% growth on the bottom line. And certainly that will remain our goal in free cash flow. Now, as you see our guidance for the year, we are a bit more conservative coming into the year. Potentially, there's an impact, but we are all about driving profitability, driving our free cash flow. So, as Mark said, we have high expectations for ourselves, so we will be looking to drive every dollar of free cash flow. And we want to achieve those longer-term targets there. Yes, thank you. I have couple of questions. One, in terms of your organic traffic, can you give us a sense what percentage of your traffic is not coming through some sort of advertisement, but directly going to you through organic search or just as a brand reference, and how it has been trending over the last couple of years? And secondly, Mark, you talked about in terms of looking for different avenues of advertising. I was wondering if you have tested other side of advertisement. It seems like you are trying to delimit yourself to the online advertisement. And I think I talked to you a couple of months ago where it seems like marketing is not something you are a great fan of, so I was wondering what other areas you might look into, in the online advertisement side. And if you have tested them, and if you have tested, what kind of conversion you're seeing from those? On the organic traffic, I'll just say we haven't broken out the traffic before. I would just say, though, the way we think about the organic part of the business is the repeat buying and the referral buying that's out there. To some degree, that's hard to measure, because even referral customers use other ways in the front door. Not all of them type it in directly; they might use a search engine or such. When they use a search engine, it tends to be very cost-efficient, anyway, because your trademark is probably the cheapest term you can buy. But those two things together, repeat and referral, are just very ballpark, roughly half of the business. And they has shown just great growth over time. The repeat part has been phenomenal, and referral just keeps chugging along. So in quarters like Q4, they have increased as a percentage of the business. On what we are testing, we are running quite a few tests right now and have been. We are really reluctant to go into detail about what we are testing, partly because what we have seen in the past is a lot of our smaller competitors using this phone call and our 10-K as kind of their playbook for what they do. So we are doing things in the background. Ones that have worked historically we've scaled up; I think we've got some interesting things coming up in Q1. But we are really reluctant to articulate exactly what those are. It's Jordan Rohan here. I'm trying to interpret the topline growth guidance for the year, which, according to the numbers that I see before me, calculates at the high end to 20.5% revenue growth for '06 versus '05. And the specific question that I have for you is, does this topline growth guidance, this revenue growth guidance, tie to a situation where people continue, or small online commerce players continue to bid aggressively in search, and therefore you have to shy away from some of the keywords that you traditionally had prominent placement on? Or is this assuming some reversion to mean or historical performance, where people are acting rationally in search? I think what we are trying to do with the guidance we put out there for the year is put a relatively wide range of guidance around it, which you guys can see in the numbers we've given. Because I think it is relatively uncertain what's going to happen in the market. We are not making any assumptions behind the scenes about exactly what different people in the competitive set are going to do. We just feel the guidance we've given encompasses the range of outcomes that could potentially occur. And so we haven't made, in order to get to that top number, there's not necessarily any set of assumptions we've made about competitive behavior. I don't know, Diane, if you have other things? Yes. And Jordan, I would also say we haven't changed our long-term goals, in terms of our topline growth, which I was just mentioning in the prior question. So we are still very much about growth, and we will hope to come back to you this year and talk about greater growth. That's what we're all about here. So there was nothing in those numbers other than, I think, appropriate conservatism after Q4 results. When it comes to the results for your search engine marketing outside the US, particularly in the UK, can you speak to the competitiveness of those search bidding auctions for the keywords that you are interested in? Is your return on investment there any better than it is in the US? We do very, very little today in search internationally. Our website in the UK, we are quite happy with our website in the UK, by the way. It has got just a trickle of traffic coming into it, but it's converting very, very well and it has been scaling. Again, it's a relatively small base, and you can put out very large growth numbers when you've got a small base of sales. But we are very happy with how that has been happening. As far as competition, I think, as you get into some of the markets outside of the US, there's almost no competition. And that's one of the reasons we are in the UK trying to build that business. And I look back at 2005, and potentially in 2005, it was even early for us to go international. There was still so much left to be done in the United States. And, you know with limited resources as a company, it was a hard decision for us whether or not to go internationally. But a big push was there are not, there is no one who is doing what we're doing overseas. So when we go into a market like the UK and bid on search, there's not a lot of competition there today. So I think that is still a, that market is still relatively undeveloped, and so we have got a smaller product line in the UK. We've got much less brand awareness than we have in the US, but we are seeing good conversion, and I just think if we are in the early stages of the business in the US and the UK, we fairly have got started. Hi, guys. I have a followup question, Mark. I was just wondering, as you were talking about the higher-end part of the market being softer, if that meant that going forward, you might look in the near term to potentially rechannel some of your focus on the product and go after the lower part of the market. I don't mean lower meaning, I mean relative to where you have been in recent quarters? We have no desire to downgrade sort of the quality of the product or downgrade the brand. I think that would be very shortsighted, and we don't want to react to strength in one part of the market or strength in another part of the market to reposition the brand. We think, strategically, the brand is exactly where it should be for the long term. So, as far as what we're doing with the product line in general, over time we keep, within diamonds, we want to have that same focus, which is we won't let the quality slip. If you are buying a diamond from us, you can be assured that it's going to be an absolutely incredible diamond. And we do the work on the back end to make sure that anything offered on our site is exceptional. What we're doing with the product line beyond diamonds over time is continuing to develop and build that business. We still want to have a very edited selection. We don't want to have everything for everybody. But over time, as we have more and more repeat buying, we want to make sure that we have the right products there for our customers. Over time, as there's a lot of brides out there now walking around with Blue Nile rings who have a tremendous passion for the brand, because they associate the brand with their entire engagement experience, they are coming to the website and buying. They tend to buying lower price point items more as accessories, but we want to make sure we've got the right products for them, as well. So you'll see us doing slightly more fashion things. We've done a lot more in gemstones this year than we ever have before, and so we will continue to expand the assortment and add a little bit more flavor, a little bit more fashion. But certainly, we won't change the quality of the product or, strategically, where the brand is positioned. No, no, no. Far from it. What I really meant was to differentiate the 20,000 and up type of purchase versus where your average purchase is, in the kind of 6,000, $7,000 range. I was just curious if it seems like at times you have made some slight adjustments to the way you targeted your website and other things, because that business was so healthy in the past year at times, if, because there was more weakness in the fourth quarter, that you would make the slight adjustment to let's call it the upper-income market versus the super-wealthy. Oh, I got you. We are constantly sort of adjusting and tweaking the website to maximize the value of traffic coming in the door. And so we do that based on everything from seasonality; you know, there's times of the year where we are stronger. Both in the website presentation and in outbound marketing, there's times of the year where we will emphasize engagements. There's times of the year where we will deemphasize that and try to put sort of entry product lines on the website. So we'll move that around, but I think, really, our goal going forward is to make the entire website and the outbound marketing more personalized to the individual. That's something we have been playing with on the outbound e-mail front, is looking at your purchasing behavior. So if we have data in our database that's telling us that you are making purchases at the high end of the market, when we send you e-mails, the e-mails will feature, so we just sent out an e-mail. I know I've spent too much money with Blue Nile personally when I got the e-mail that's geared toward the highest-end customers. But I got an e-mail which was all products that were above $5,000 in ticket. There's e-mails like that going out. Simultaneously, there's e-mails to other customers if we've seen them buying at lower price points or we've seen them, you know, I think there's more we can do to target that. But if we've seen them not shopping for those high-end items, we will personalize that. I think, over time, we want to do that same thing with our website, is to try to understand, based on your behavior on the site, what you're looking for and then tune the site to you. Because I think the ideal, the greatest thing about the Internet over time is I think you can personalize it to the individual, rather then, we don't need one storefront for everybody. Hopefully, over time, we will have a storefront that's specifically geared towards Mark Friedman, and will show you what we believe you want to see, based on your behavior. Sure. I just want to thank everybody for joining us today, and we look forward to talking to all of you next quarter. Thanks.

EarningCall_233812

Welcome to TSMC's fourth quarter 2005 results webcast conference call. Today's event is chaired by Ms. Lora Ho, Chief Financial Officer and Vice President, and Dr. Rick Tsai, Chief Executive Officer and President. This conference call is being webcast live via the TSMC website at www.tsmc.com, and only in audio mode. Your dial-in lines are also in listen-only mode. At the conclusion of the management presentation, we will be opening the floor for questions. At that time, further instructions will be provided as to the procedure to follow if you would like to ask any questions. Please be advised for those participants who do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's quarterly review presentation. Once again, the URL is www.tsmc.com. I would now like to turn the conference over to Dr. Elizabeth Sun, TSMC's Head of Investor Relations, for the cautionary statement before the main presentation by Ms. Ho and Dr. Tsai. Good morning and good evening to all participants. This is Elizabeth Sun. Before we begin, I would like to state that the management's comments about TSMC's current expectations made during this conference call are forward-looking statements subject to significant risks and uncertainties, and that actual results may differ materially from those contained in the forward-looking statements. The information as to those factors that could cause actual results to differ materially from TSMC's forward-looking statements may be found in TSMC's annual report on Form 20-F, filed with the United States Securities and Exchange Commission on May 16, 2005, TSMC's registration statement on form F-3, filed with the SEC on July 5, 2005, and such other documents as TSMC may file with or submit to the SEC from time to time. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Now I would like to turn the conference call over to Ms. Lora Ho, our Chief Financial Officer and Vice President. Thank you, Elizabeth. Good morning and good evening to everyone. Welcome to the TSMC fourth quarter earnings conference call. I will first go over the fourth quarter 2005 results and then our first-quarter 2006 guidance. I will keep my comments relatively brief to allow as much time is possible for Q&A. We have prepared some slides on TSMC's website for you to reference as you listen to the conference call. The pages will be flipped automatically as I go through them. All dollar figures are in NT dollars in my presentation unless otherwise stated. On the heels of a solid third quarter, we were able to deliver another set of strong results in the fourth quarter. Q4 revenue came in at slightly over NT$81 billion, above the high end of our previous guidance by approximately NT$2 billion. The stronger result was mainly due to a stronger-than-expected demand across all major product segments. We also posted strong bottom-line results, with earnings per share coming in at NT$1.37. We achieved those results with a utilization rate of 104%, which was 8 percentage points higher than Q3. As a result of strong cash flow generated from our operations, we ended the fourth quarter with NT$132 billion in cash and short-term investments. Our return on equity continued to rise with Q4 ROE of 31.7%. Now let's take a closer look at our income statement. On a quarter-over-quarter basis, we posted 17% growth in net sales, driven by a 30% increase in revenue from computer applications, followed by an 18% increase in communications and a 6% increase in consumer applications. Gross margin improved by 5 percentage points to 49.1%, which was at the high end of our guidance. This was largely due to higher utilization levels and a more variable exchange rate. Operating margin was slightly above 42%, which was about 2 percentage points higher than our guidance. Income from non-operating assets, including investment income recognized on the equity method, was slightly over NT$1 billion for the quarter, reflecting better operating results from all manufacturing affiliates, gains realized on sales of fixed assets, and settlement payment received from SMIC. As a result of strong revenue growth and operating efficiencies, our net income grew 38% sequentially, while net margin of 41.8%. On page 6, our fourth-quarter results also compare favorably on a year-over-year basis. Let me just highlight a couple of key iteMs. Gross margin improved by 6.6 percentage points, largely due to a 16 percentage point rise in utilization. Operating expenses declined in both absolute dollar terms and as a percentage of sales. As we have increased our R&D spending on 65 nanometer, we have also reduced the need to spend on R&D related to 90 nanometer. In addition, we no longer need to carry any operating expense related to Fab 14. Income from non operating items improved due to gain realized from sales of fixed assets and settlement payment received from SMIC. Meanwhile, investment income declined, in part due to lower operating profit from WaferTech and Vanguard. Due to higher income levels, our net tax expenses increased by $1.6 billion. Now let me turn to our balance sheet. Our financial position remained very strong. On a quarter-over-quarter basis, we substantially increased our cash and short-term investments, in spite of paying down $10.5 billion in corporate bonds. In the meantime, we also kept our accounts receivable and inventory relatively flat on a combined basis. During the fourth quarter of 2005, we further improved our accounts receivable turnover days by four days from the level in the previous quarter, reflecting better collection efforts. Our inventory turnover increased by two days Quarter-over-Quarter, but it was still well within our normal range. The increase in inventory turnover days was largely due to the increased percentage of sales for advanced technologies. Now let me talk a little bit about our cash flows. We continue to generate strong operating cash flow. Operating cash flows generated during the fourth quarter was NT$49 billion. We also paid down NT$10.5 billion in corporate bonds and spent NT$13.3 billion in capital expenditures during the fourth quarter. As a result, our overall cash increased by NT$27 billion during the fourth quarter. Our installed capacity came in 1.6 million 8-inch equivalent wafers in Q4, and we expect a small net increase in fabs in Q1 as we continue to ramp up our 12-inch capacity. Now please turn to our capital expenditures. Our CapEx for the fourth quarter was US$396 million. Total CapEx for the year came in at about US$2.5 billion, which was within the range we guided at the beginning of 2005. Now let me quickly go through the sales breakdown by technology, application, customer, and geography. For more detailed information, please refer to our management report. We continue to make good progress on ramping up our 90 nanometers. Revenue from 90 nanometer accounted for 17% of the total wafer sales, up from 10% in the previous quarter. Revenue from advanced technologies was the same at 49% of total wafer sales during the quarter. In terms of applications, we saw strength in our major product applications across the board. Computer applications had the strongest momentum. As a result, revenue from computer applications increased from 30% in Q3 to 32% of total wafer sales in Q4. On page 13, let me turn to sales by geography. There was no significant change in this quarter. We saw a 2 percentage point increase for North America and a percentage point drop for Europe and Japan. During the fourth quarter, business from fabless and system customer accounted for 72 percent of all total wafer revenue, whereas IDM customers account for 28%. Before I go to the next quarter guidance, I would like to take a moment to do a quick recap of 2005. 2005 was another record year for TSMC. Following a very strong 2004, we managed to post another 3% top-line growth despite an inventory adjustment here in the first half of 2005. In the U.S. dollar terms, the year-over-year revenue growth was 7.5%, which was in line with the growth of the semiconductor industry, but higher than the growth of two key segment. Year-over-year, our 2005 gross margin improved by 0.6 percentage points compared to 2004, despite a drop of 8 percentage points in utilization rates for the whole year. This reflected our successful year ramp for advanced technologies and continued cost reduction efforts. At the end of 2005, our total assets exceeded NT$50 billion for the first time in our history. At the same time, we reduced our total liabilities by NT$27 billion. 2005 was also our eighth consecutive year that TSMC delivered positive free cash flow. We generated NT$150 million in operating cash flow and we also paid NT$46.5 million in cash dividends to our shareholders. With that, I will turn to our guidance for the first quarter of 2006. Based on our current business and foreign exchange rate expectations, we expect revenue to be between 73 to NT$76 billion. This represents a quarter-over-quarter 6 to 10 percentage decline. However, we anticipate the U.S. dollar to depreciate by more than 4% in this quarter, and that accounts for half of the decline in revenue if we take the midpoint of our guidance. Otherwise, our operating performance should be better than our average seasonal pattern. Our expectation for gross margin in the first quarter is between 46% and 48%. The operating profit margin is expected to be approximately 39%. Capital expenditures for the full 2006 will be in the range of 2.6 to US$2.8 billion. You probably noticed we did not guide in utilization this time. The reason is that since our last quarter earnings conference, we have received suggestions from two analysts asking us to stop giving out guidance on utilization. We pondered about this idea and have decided to try to experiment with the suggestion for this time. As you know, today TSMC runs a very complex operation and offers very wide back channel technologies. The value contribution from different products or different technologies may vary quite a lot. Therefore, it is no longer meaningful to give out an overall utilization rate, which is an average of all these many different technologies. Since we are now able to give more guidance on profit than we could do before, we think it is more useful to investors in general that we guided profitability and not the average utilization rate. Finally, we have also provided a recap of major TSMC events during the fourth quarter. I will list them for your own reference. This ends my presentation today. Thank you very much. Operator, please open the floor for questions. Ladies and gentlemen, if you wish to ask a question, please press '*' followed by '1' on you touchtone telephone. If your question has been answered, or you wish to withdraw your question, you may press '*' followed by '2'. Again, '*' '1' for any questions. And your first question comes from Bhavin Shah with JP Morgan. Yes, good evening. I want to go back to the question we discussed in the afternoon, if that's okay. And that is given 104% utilization, why were you not able to exceed your gross margin guidance? If you can perhaps explain that, that would be helpful. Thank you. Let me try this one. As you remember, our guidance for the last quarter profit margin is ranging from 47 to 49%. If you take the midpoint of that range, that would be 48%. And our actual result for the fourth quarter was 49.1%, which is about a 1.1 percentage point difference than our midpoint of our guidance. We also guided 100% utilization in the fourth quarter, which we actually achieved 104. So taking the 4 percentage difference in utilization, that is probably explaining the 1.1% in margin difference. I think the number is quite close. So in other words, you did not face any unusual circumstances, such as scrap wafers or any such other factors that separates the margin upside? Well, we have some scrap wafers among our fabs, but I think there should not be any scrap wafer that will hurt our margins. But I think the extent of the scrap may have a couple of tens of points’ impact, but definitely not to the extent of a 1 point type of impact. Actually, I had two things. Number one, it looks like you changed the historical capital spending number for the third quarter. I thought the number was 440, and it looks like it got revised down to 320. Is that correct? Third quarter CapEx. Just give us a second and let's see. CapEx for 2005, my number shows in third quarter our CapEx was 320 million in third quarter. But in second quarter we spent 460. I am not sure where the number you're looking at, it is for second quarter instead of third quarter? Maybe I had that wrong. I will have to go back and look at that. I guess my other question is, as you look at your CapEx in 2006, two things. Number one, do you think it will be more front-half loaded or more back-half loaded? And the second question is, relative to your overall guidance of 8 percent up year-over-year CapEx, if you focused on just the equipment piece, which is what is going to really add capacity, will that be up more than 8% or up less than 8%? Thanks. Okay, let me answer your first question first. You're asking whether the CapEx for 2006 is front-end loaded or back-end loaded. Actually it was quite evenly distributed within four quarters, probably slightly, just slightly higher in second half. Okay. And then relative to the equipment portion of that, will it be up more than the average CapEx or up less? What I am actually asking is, is 2006, is there a bigger percentage of equipment in 2006 relative to 2005, or is it a similar percentage year-over-year? Okay, let me see. I would say for both years, the percentage of equipment is very similar and also very, very high. I have just two questions for now. Firstly, can you perhaps give some idea what kind of, for sales mix you will see in first quarter, primarily what kind of leading-edge percentage would you expect going into the first quarter? Second question is, given that utilization now has exceeded 100% and given what you have said about customers' current stands, meaning that utilization could potentially be sustained at a very high level through 2006, do you expect, in your CapEx plans, are you buying enough capacity to meet all your customers' demand or do you think you are actually maybe taking a discount off your customers' forecast at this point in time? Let me answer your first question. You're asking about percent of revenue, is that going to be growth in first quarter or not? In my presentation, I have mentioned in fourth quarter our 90 nanometer accounts for 17% of our total wafer revenue, which is 7 percentage points higher than third quarter. Now, we see that trend is going to continue in the first quarter. So the percentages from 90 nanometer is going to continue to improve. We are definitely buying equipment for the 90 nanometer capacity such that we can meet all of our customers' demands. And we are also buying equipment for 65-nanometer production starting in mid this year, so that we can also in meet customers' demands. And we do have some difficulty in meeting all our customers' demand at the 0.18 -- 0.15 micron technologies. What we're doing right now is, of course, we have started some outsourcing work with some in Taiwan. And we are, of course, doing everything to add incremental capacity. And in addition, we do not rule out of looking for other capacity sources in order to fulfill our customers' needs. Can you just elaborate that last point on what you mean by, what other methods, what other ways would you think about, could you be looking for other capacity sources? Well, we will see what is available in the market. Basically, what tools are available which are cost-effective for our business needs? I'd like to follow up to my first question. If you look at 0.13 micron, will that be going up in percentage terms as well in the first quarter? No. 0.13 and 0.11 micron technology percentage probably would stay about flat or even some minor decline in the first quarter. Rick, I just wanted to follow up on one of the earlier questions about the margins. Since we have quite a bit of currency movement in Q4 and in Q1, could you help us understand what is that due to your margin, particularly in Q1, where I think you're factoring in about 4% appreciation in NT dollars? What does that actually do to your gross margin and does that dig into your guidance? We have mentioned Q1 we anticipate NT dollars appreciate by about 4%. Take a very simple rule of thumb, if you transfer that number to the marketing base, approximately 2%. That 4 percentage change in revenue will translate to 2 percentage points of margin change. Our guidance has already incorporated that impact. And my follow-up question is on your capacity. I noticed that when you provided the Q1 capacity guidance, your capacity at fab 5 and fab 8 has actually gone up compared to Q4. Can you give me any sense how are you achieving that? Is it more equipment that you're adding or the change in mix or debottlenecking? We continue to debottleneck and we've got incremental capacity adjustments, so we can optimize, let's say maximize capacity on the 0.18. That's what we have been doing the last year. And would you say that from the current level, do you have room to improve it further in the year, particularly on your 8-inch fabs? I would say yes. I cannot say exactly how much, but I would say yes, the fabs have the instruction definitely to begin to improve the throughput of the bottlenecked machine and also to improve the backup efficiency among different fabs in the HsinChu, I mean, in Taiwan. So the productivity improvement and the backup efficiency, I think, will give us incremental capacity as the year goes on. I see your forecast for 1.3% sequential growth in capacity in Q1, and I am assuming that is net of maintenance. I'm wondering what the actual number would be in Q1 in terms of incremental wafer starts over the quarter, or wafer capacity. We actually, now we do not have our annual maintenance all concentrated in the first quarter. And frankly speaking, I don't have all the schedules of our annual maintenance at hand. I believe now they are more spread out over the year, a period of two to three quarters. So I think the impact for one particular quarter is not as big as we usually have, say…… If you were to amortize that over the course of the year then, what would be one quarter of that? Another way to put that, what would be the percentage of your capacity that would be potentially off-line during a given year? The way you calculate, probably, I think the average days for the year, annual maintenance probably two to three days. You can just amortize that over the four quarters. A couple questions. Given that you have a full year forecast on the CapEx, I was wondering if you could maybe talk a little bit about what the full-year forecast could be for your depreciation and capacity as well. Okay. With the 2.6 to 2.8 billion CapEx, we expect the capacity will increase to 6.9 million pieces of TSMC managed wafer in total. This number compared to last year is about 1 million pieces increase, actually, representing around 16% increase in capacity. In terms of depreciation, we do not see any major increase in depreciation in spite of 2.6 to 2.8 billion CapEx investment. The reason is that we still have some 8 inch coming down from depreciation. Although the CapEx will increase depreciation somewhat, we also have some reduction in depreciation. So net of that, the total depreciation will remain at a very similar level to 2005. Okay. Could you also talk about looking at your CapEx on a quarterly basis, and we had very little spending in TSMC Shanghai. Maybe you could talk a little bit about what the spending outlook would be for that fab in 2006. We do not disclose quarterly CapEx, but I can tell you it is very much evenly distributed in different four quarters. Perhaps just slightly higher in the second half, but…. Let me see. For TSMC Shanghai, of the 2.6 billion, TSMC Shanghai is a very small number, it's only 13 million. So are you deemphasizing, then, the ramp-up of capacity there? Maybe you could talk a little bit about what is happening with that. Could you tell us about what you are seeing in terms of inventory out there going into the first quarter of '06, both die banks, finished goods, maybe if you could give us some idea by product type how that is holding up. It is difficult for us to really give you data from product type. What we are observing from our customers is after the fourth quarter, overall their inventory days have declined compared to three months earlier. And also, from talking to the customers directly, that's also the input we have been getting. I think there is also, there is some, of course, concern on the inventory at back end. I believe that that part is minor. So our outlook for the first quarter inventory is good. That is the major reason why we are looking, we are seeing a pretty good first quarter for us. Okay, I wasn't quite clear on that. So you think that the inventory level of semiconductors at your customers is actually a little bit lower in the first quarter than it was in the fourth quarter? I have a couple of questions. If you could elaborate on 65-nanometer capacity by the end of this year. And to that extent, would you expect capital intensity to increase as you bring on 65 nanometer? In other words, would you have to spend more for every increment of 1K capacity? Second question has to do with some of the commentary from your presentation earlier this morning regarding ASP trends into Q1 and ASP going down. So with these kind of utilization rates, why would ASP go down? And the third and last question, would you expect any kind of change to incoming wafer orders post lunar year? In other words, do you think that your customers are going to wait and see what the demand in Asia is going to be post lunar year and then, to that extent, make any changes? Okay. First question is about the 65 nanometer investment. Well, we will be starting the 65 nanometer production capacity investment in mid-year. The capacity at the end of the year is, I think, still in the 3K per month range, maybe plus somewhat. So it is here not a big capacity number. However, as you probably know also, for the capital intensity that is here, investment per 1000 wafer per month capacity. That number is much higher when the overall capacity is low. That is, on 3K or plus range, that is pretty high. But this number will go down very rapidly when we start to ramp into, for instance, 10K, 15K range. That is the first question, right? The second question asking about we have mentioned ASP going down, too now remember we have mentioned ASP trends. Actually since last quarter, we have stopped guiding any ASP trends. I think we certainly comment more. Of course, because you're asking whether, I think overall for the year, our industry, we do not raise prices when the capacity is tight. It is not a case like a DRAM. The pricing pressure, as we also said in act a couple of times. For instance, the pricing pressure for 90 nanometer remains high. It is still a very competitive environment in the industry. We are, so that is why we said our 90 nanometer gross margin is lower than the Company overall gross margin. However the price of the 90 nanometer is still good enough for us to maintain our better than 20% target of ROE. Your last question? The last question has to do with your expectation about incoming wafer start orders post lunar year. Do you think that your customers are going to wait to see what the demand is going to be and to what extent they would have to change inventories? And that has an impact on your Q1 revenue guidance, which is down 8%. The ordering pattern, if you think about lunar Chinese New Year, which is actually two days from today, or three days, the order for the Chinese New Year, the wafer out for the Chinese New Year, since this must be sometime late, the latest, probably sometime late December or at the latest early January. But the ordering pattern that we have been seeing through the Novembers/December into January time has been fairly steady, pretty good. So we do not seen an abrupt change in the ordering pattern during the last three months. If I may have a follow-up, does that mean that with flattish ASPs for Q1, your wafer shipment is going to be down about 8%? No, that is not what we said. We just give guidance in the range of 6 to 10% decline in revenue, and exchange rates roughly half of that number. I was curious that it looks like you're not, obviously, providing wafer ASP trends anymore, wafer shipments utilization. Can you at least talk about Q1, what you're seeing from the end markets? End markets? I think the Q1, as we all know, is the seasonally declining quarter for most of the applications. What we are seeing from the computer segment and for the consumer segment, our demand is better than the normal seasonal patterns. For the communications segment, both wireless and wireline, we are seeing a seasonal declining pattern, a normal seasonal declining pattern. So I would characterize a better-than-expected end market demand in this first quarter. I would not say majority, because in the PC segment, actually our largest demand has always been the graphic applications. Chipset of course is significant. We are feeling, I would say, pretty robust demand from graphics because of the many new product offerings from the customers. The chipset demand is also strong from our customer base, I believe mainly because of the change in the supply dynamic. As you know, one of the, not one of the largest chipset supplier has reduced their output for chipsets, and that creates a void which is actually quite difficult to fill. And then within consumer, we have been picking up DVD is a little bit weaker, but CMOS image sensors relatively strong. Can you comment there kind if those are the dynamics playing out in consumer in Q1? The consumer segment, we are seeing a very good demand from digital TV chips; we are seeing a strong pickup. We are seeing a pretty good digital camera demand. CMOS sensor (indiscernible) continue to do well. Even for DVD players, we're not seeing a weak demand. We're not seeing a weak demand. It is fairly good. It is pretty good, actually. And then in communications, and I will go away. Would you characterize the seasonality more acute on the wireless side or the wireline side? Both are showing the seasonal decline. Wireless, actually, some people were asking this afternoon, I came back and took another look. I noticed during the last, for both 2004 and 2005, for instance, the handset, first quarter growth rate for the handset has been net around minus 5% to -10% from unit point of view. We are, I do not have the very quantitational number for our shipments, but my observation is our shipment for the handset type of devices is declining at a similar rate. Rick, couple of questions. You know, '05 was a year where TSMC, after a long time, the growth rate was in line with the semiconductor growth rate, particularly in dollar terms. Do you see '06 as you go back to the pattern, where you will be basically exceeding the semiconductor growth rate because you're picking up some extra outsourcing, which previously had been talked about? And then I have another question. Yes, we do expect TSMC to grow better in 2006 compared to the overall semiconductor industry. Yes, we fully expect that and we are fully committed to make that happen. Okay. And if that happens, where do you think the upside is going to come from? Is it going to come from memory or come from a particular handset, 3G handsets, or maybe sort of segment, if you could give us the color. Probably not from memory. We are doing some memory but I think the margins are not big enough to have such a strong impact to our business. I think we will continue seeing the strong demand, but the momentum in the second half of last year basically will carry themselves into this year. I see them basically across the board. As an example, we were asked about here first quarter consumer products. We were quite happy to see that the digital TV chip demand as we come up quite nicely. My last question, the CapEx of 2.6 to 2.8 billion, is that a more of a conservative call at your part at this point or would we expect that to upside? Or is it just right? As far as we can see now, it's about just right. We are not trying to be conservative. As I've said several times, we are, we will be adding advanced technology capacity so that we will compete aggressively in the market. And we will meet all our customers' demands. And I was curious if you could give us a split on the CapEx spending between the advanced technology, the 65/90, and any spending that might happen in the older technologies in 2006. I probably cannot give you a breakout among each technologies, but I can tell you that 95% of our CapEx in 2006 will be 12-inch product related. That includes the capacity, the equipment, R&D, and everything associated with 12 inch. It sounds like you're not going to add much capacity in the older technologies at this point then. I'm curious if there's any explanation given the kind of high utilization rates. I think that is a very good question. The truth in margins, we had some discussion just earlier in the conference call. Right now, we are not budgeting much for the mature technology capacity, since we do not have a clear picture as to where to get them. But what I can say here is if we can find a reasonable force of the mature technology capacity, we will go and acquire those. So basically, is it your view that there is plenty of capacity outside of TSMC and you would be more inclined to acquire it than to put it in place? That is something we're not sure of right now. There is probably still some outside, but it is not plenty, I don't think. Okay. Can you just give us an indication on the bonuses this year? Are we going to be heavily cash oriented? Have you moved over to that strategy or will there still be a big stock component? For this year, it will be 50-50 percent for each. As we have said, the policy of two years ago is 50-50 is going to continue for two years. This is the second year. Thank you. Rick, I have two industry product questions for you, just given your whole array of the end markets. You mentioned earlier about pricing pressure at the leading-edge. And you said in the afternoon call it's sort of the normal kind of pressure that you have been seeing for some time now. On 90 nano and 110 nano, I also understand that given the whole range of services that you offer, you decided premium was kind of compared to also attempt to offer same services. So when you're talking about this pricing pressures, are you seeing the whole industry experiencing similar pressures or is it that in the premium pricing that you had or some of your competitors, that premium is mattering some more? I think we continue to get our, as you said, premium in pricing over that of our competitors. So I don't see that being impacted. I think we are getting probably in some cases better than our normal premium, as you said. It is just, I think you know, as well as we do, at least during the last year, many people were saying that they can do 90 nanometer production, and that definitely created the expectation among the customers, which, of course, in turn creates the pressure. Basically, I think, we have performed very well during last year, both in ranking and in yields, in achieving the excellent yields. As a result, I think the impact on our gross margin was not as difficult as we thought it might be, and we see this trend going into the year 2006. Okay, great. And another industry question just as a follow-up. You also mentioned earlier in the afternoon when you were asked about the industry outlook for 2006 that the global semiconductor market should grow by, I think, high single digits, low double digits. If I just take the 10% as maybe a midpoint, 10 or 11% a midpoint. Since you have talked to a whole range of customers, do you see any possibility based what you're hearing from your customers that the industry growth rate may turn out to be significantly different from this, such as maybe more than 15, 18% kind of a growth scenario? For the global semiconductor. You mentioned earlier that this could grow by say perhaps 10% in 2006. And I'm wondering is there a possibility that the growth rate may be significantly higher, say, more than 15%? What would be required for that to happen? We don't see that now. We looked at, we do have a model to look at these growth rate forecasts. You know, we still believe 2006 will be, 10, 11% is a reasonably good growth year, considering some of the macroeconomic factors, such as oil price and the interest rate impact on the housing industry in the U.S. So to answer your question, I do not really see a major upside to this 10% growth rate that we are talking about. Great. We keep hearing about the manufacturing production plans of the major equipment suppliers are ramping fairly aggressively. I'm wondering if you have heard anything from those suppliers to suggest that their lead times and their ability to get tools to you has lengthened in any way. My second question would simply be you're planning 2.6 to 2.8 billion in capital spending in 2007. Have you already gotten in line and booked a good, decent amount? How much of that 2.7 at the midpoint is actually booked in equipment at this point? I think to some extent the equipment suppliers during the past several years, to their credit, have improved their lead times. Not all of them, but many of them. For instance, we have had a very good progress, together with our lithography supplier. And this is something also we work very hard together to not only improve the lead time of the equipment shipment, but also improve the installation and the qualification time once the equipment gets to our wafer fab. So we are, I think from the capacity installation point of view, we are not seeing any real impact from that point of view. As to the ordering, I think that Lora mentioned earlier that our CapEx will be fairly evenly distributed throughout the year. So I do not have really a visibility right now about our ordering status, but you can probably extrapolate from Lora's comments. I was wondering if you could describe ordering patterns right now with customers, if you have any visibility, obviously Q1, but any look into the first month of Q2, what wafer starts have been doing lately. Thank you. Ordering patterns pretty much consistent with what our guidance is for our first quarter business. Our orders are coming in with sufficient lead time for us to meet our first quarter business guidance. I got on the call a little gate. Was there any guidance for Q1 capacity utilization, what you think that is going to do? Thanks. My first question is on your 2006 CapEx. Does this CapEx include some equipment for your new fabs, the fab 15? That means your 12 and 14 will be fully ramped up by end of 2006. In that case, when you are going to move equipment to next fab? Well, no. I don't think by the end of this year either 12 or 14 will be fully ramped up. Because keep in mind both fabs will be capable of doing 55 to 70,000 per month of capacity. However, we are planning on our next fab and we may start here some of the construction work for the next fab. Okay. And is it possible to give some color on that customer concentration now or just to give some idea, like how many of the customers are above, say, 5% at this point? Okay, fine. And in this 2006 you are ramping your capacity a little higher speed on the second half and slightly lower speed on the first half. Is it mainly due to some bottleneck on the back end of that industry or do how you read that part? Actually, it depends on the demand patterns, so we see capacity ramping based on the customers' demand. So it is not related to other things. Some of your customers have reported, at least one customer said they're facing some problem with back-end capacity. And is it affecting the front-end business because of the capacity constraint on the back-end side? I think the back-end capacity issue has been there since the second half last year. So I think that it may have some impact on the certain portion of the inventory. However, I don't think that is impacting the overall demand out of, because the end market demand has been quite strong since second half last year, and continuing into, we believe, the first quarter this year. Hi, Rick. I just wanted to maybe ask a little bit longer-term question. We have seen quite a bit of, as you've mentioned, pricing pressure at 90 nanometer. But if you look at profitability at some of your competitors and the technical challenges going to 65 and then going on to 45, at least at 65, what are your thoughts about what the pricing environment may look like? Again, it is a little bit further out, but if you could provide some insight on that, that would be great. Thanks. That is a bit further out. We hope that it is not at the tiers. I do believe you're right in saying that 65 nanometer is definitely more difficult. It is not just the shrink of the 90 nanometer. Especially from a transistor design and point of view, there are a lot of difficulties, technical difficulty there. So we are, I think, on the right track towards our schedule according to our road map, and we fully expect ourselves to be able to start and ramp this technology on time and fully. We have shipped some wafers already to our customers. Would you characterize maybe that the pricing, whatever pricing pressure you may face at 65 may be more driven by your customers than your competitors, as opposed to 90? I don't think I really can say for sure right now. Our price for 65 nanometer, I believe now, has the right parity compared to our 90 nanometer price. Hi, Rick, another long-term question for you. Right now, basically, we know that your 90 nanometer gross margin is below your Company's average. And I think recently you were quoted to say that the "Cost is growing by 20% Year-on-Year," in a conference in the U.S. I was just wondering, when you go to 65 nanometer and down to 45 nanometer, and that cost continues to rise at 20% per annum, how much of an impact would that have on your ability to meet your long-term ROE target of 20%? And of course, the following question is what can TSMC do about that? Well, I think the discovery tool, of course, is obviously one of the most competive investment. On the other hand, of course, at least our suppliers have delivered the throughput and the performance along the way. So far, we are pleased and together we have been able to migrate to the, for instance, 65 nanometer, at a cost structure that will meet the Moore's Law. Going forward, the only way is for our partners and the key suppliers to collaborate with us, just like what we are doing with our key customers, to continue working on the productivity, on the overall cost structure, on the leadtime, on the performance, so that both of us can succeed in our business. I must say, for instance, we've been working very closely and very well with our lithography supplier in that regard. It is a very high capital intensity, but I think TSMC, with our scale, this economy of scale affords us to continue in this very high, very heavy capital intensive business, and we can enjoy the return from such investment. And we view that as, naturally, one of our competitors' advantage long-term. So you're quite confident of getting the right cost structure that would allow you to, that would be similar if not better than 90 nanometer than what you have for 90 nanometer today? Hi, I seem to remember on this call last year as you were entering 2005, you had said that there was a pretty good portion of your full-year capital spending, I seem to remember some number like 40, 50%, that was already sitting in deferred payments to the suppliers, either in terms of down payment or in terms of full payments to your suppliers. I'm wondering is that a similar phenomenon this year? I would think the percentage is much, much lower than that, given the much shorter lead times. Thanks. Actually, last year's condition was kind of unique because we were paying for capacity increase to support early this year demand. This year, the pattern is kind of more normal, and we do not see it will be a similar situation like last time. Hi, thanks. These are easy, just a little housekeeping. The net non-operating income line, investment income, what are we kind of thinking about for Q1? The net non-operating income and investment income line items on the income statement, what are we expecting those to be in Q1? This part is actually quite difficult to forecast. But fortunately, if you look at TSM's history, this line number is quite more. Okay. I want to make some comment on tax rate. In 2006, we estimate the tax rate will be within 5% of that we offer net income before tax. That configures the tax expense minus the tax credit. Okay. And then last one, can you give us at least for Q4 what wafer shipments were in Q4, or are we no longer doing that either? So we should just back into it, just with the utilization, I know your utilization rate obviously your actual wafer shipments. Is there a reason for this? Is it just you don't want to be this transparent anymore? I'm just trying to wonder why you're not doing wafer shipments anymore in Q4, because we all…. It's not we don't want to be transparent in the U.S. We have changed our guidance by directly giving you the top line, the revenue, the gross margin, and operating margin. So for you to figure out the profitability is actually much easier. Let's conclude today's conference. Thank you very much. We're going to have a lunar new year and we should all have a very good year of 2006. Bye-bye. Ladies and gentlemen, we thank you for your participation in this conference. This concludes the presentation and you may now disconnect. Have a great day.

EarningCall_233813

Here’s the entire text of the Q&A from Agere Systems’ (ticker: AGR) Q4 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. Thank you. Good morning. Welcome on board, Rick. Just Rick, you just told us that your target is to achieve $165 million in operating expenses. It looks like in the past the company communicated that your operating margin target is about 15%. So if I put in the numbers, you are clearly assuming growth in revenues in 2006. I don't know if me and the rest of the Street, based on what you delivered today, I believe that the company will grow in 2006. I mean what are you guys modeling internally for 2006, and also where do you think the growth is going to come from in 2006? Well, thank you for the welcome. I think it's premature to talk about 2006 relative to growth. We clearly have said the objective is associated with operating expenses, which obviously means that we will have to be very focused in our decisions about where we're spending that money based on the level that we just ran as you make those adjustments in the bonus accrual. But as far as expectations for 2006, we're not prepared to talk about the specifics of that. Okay. Fair enough. But just again, you've been with the Board for 2 years and I'm sure you know the company fairly well. And I'm also guessing you did your due diligence. As you look into different divisions, my concern is that you have storage business which is probably going to decline next year, and where you are investing in 3G, wireless and also in small drives, that's what's probably is going to drive growth if there is growth in Agere and also in Ethernet. And I am not sure how much cost-cutting we can do in, in those divisions. So, I'm assuming that the other divisions are fairly lean. Could you give us some idea? You told us what the gross margins are for different businesses. Could you give us an idea which businesses are making money today, and where do you see the opportunities to cut costs? Srini, its Peter Kelly. You know that we don't actually give any profit level will allow Agere in the segments of telecom and everything else. And in terms of growth for 2006, right now, we are not prepared to give guidance for the full year. But we have said and I think I've covered in part of my speech. We do have significant parts of the storage business that are growing, right now. Mobility is growing, right now. And we have parts of telecom. So I could understand how you could model these things different ways, but we certainly think we have parts of our business that are beginning to show some real strength. And it comes from the investments we have made in the last few years. Yes. If I could just add to that, I think, that we're excited about the opportunities we see, especially in the 3G space. I think that our technology position in our product platform is really what we're counting on there, and we are excited about the opportunities that are there. And in the storage business, we have made significant progress. And as we look at a ramp-up in preamp, that business, it represents an opportunity for us. So I don't think we can necessarily draw the conclusions that are relative to our overall storage business. Okay. And then just to moving on to the share buyback, you are still paying about 6 million or 7 million in, then interest expenses looks like, Peter what's behind buying shares as opposed to retiring some of the convertible debts on the balance sheet? Well, I think, there is two things. You're right, the interest expense, fully round about now is completely offset by interest-type income. But we do believe, our stock is significantly in the value, and the best use of the shareholders' funds, right now, is to buyback the stock. Okay. And one last question. You talked about the OpEx being lower because of the bonuses and it looks like it's going to increase again. So could you give us some idea of what's changing in the Q4? I mean, are you going back to your old pay scales or is it - why is this a one quarter event as opposed to -? I think there is are a couple of thing. Obviously, the way we accrue our bonus is based on, I guess, the same way all other companies do, which is what's your full-year target and how do you achieve against that target on a quarterly basis. And we were doing reasonably well, up until this quarter, and this past quarter we clearly missed our targets. And although, there was an expense level in the fourth quarter, it was significantly reduced over any previous quarters. Now, as we go into 2006, we are assuming that we are going to deliver our programs. So, there is a higher level of bonus in this accrual in the first quarter of 2006 versus the fourth quarter of 2005. On the other hand, I would like to say that we have versus what we said previously, I have lowered the expense level that effectively we have got to do to model, both in the quarter and now, and in the target of $165 million by the fourth quarter. So I think we are making some progress. And obviously with Rick in the coming weeks, we will continue to look at where our investments are best spent. I guess I have a question for you Rick, given all the caveats that’s you just started, and haven't really dug in, but have been on the board, I guess could you comment is there a mandate that you think you have and what it might be from the board in terms of what is really your charge at this point for the company, you believe? I think the mandate from the board is very clear. We are very focused on shareholder value. I think that we are going to do what's required to drive the growth that is going to spur the shareholder value. I think the company has done a very good job having us establish the correct capital structure It's done a significant job in the cost reductions and restructuring that's required to improve the profitability and actually drive us to a positive earnings. And so, now I think the board has given a clear mandate that we are going to focus on the growth associated with this business, and how we deliver on shareholder value. And I guess that makes sense. Related to that, do you believe that your mandate in that sense to consider further restructurings, more significant changes or is it generally the belief that you have executed on this plan in over the past 12 plus months and now is the time to go drive the top line? Clearly, the focus is driving the top line. When you look at the cost reductions the company has taken in restructuring the fab-wide process, I think we've taken significant steps to put ourselves in the correct cost structure moving forward. I think the key focus for us is how we try the top line, and how we drive the growth of that in a profitable fashion. So we will continue to focus on expenses, and really focus on allocation of resources and expenses. But the focus will be in conjunction with how we drive a stronger top line growth. Okay. And a question or a couple for Peter, if I could. First, I may have missed it, but in terms of the Q1 outlook, did you describe what you thought the storage outlook looks like? First I'll go with the housekeeping question. Can you tell us what the IP revenue was in the quarter $0.05 a segment like you have given in the past? Yes, I posted it on the web. If you got the time do that. We did put it on the web. We just thought it was kind of easier for you guys to see it there. I can track it down then. Question on the mobility guidance in the Q4, you mentioned that demand for EDGE is not quite a strong. Is there further inventory reduction assumed in your guidance or, is it just kind of a demand thing that is driving that weakness? It is a mixed thing, really. The things what happened is in terms of our end customers, they probably over ordered on Edge in Q4 sorry our fiscal Q4. And under ordered on GPRS. And what we have seen is a kind of fairly significant switch, so they have reduced EDGE, and are buying a lot more GPRS in this quarter. So, I think it is just how they are managing their inventories really. Okay. And I have a question on the 4 Gigabit Fiber Channel business. If I look over at QLogic's cost of goods is about $35 billion on a quarterly basis. Clearly not all of that is HBAs and that is chips, but can I assume that that is kind of the total revenue opportunity that you guys go after? And then, how long does it take to get to kind of a full run rate with them? Hi. This is Sujal. That yes, we are entering with them at the 4 gigabit node. And typically if you look at the previous cycles, that the switchover happens between 12 to 18 months. So fundamentally what you will see is the 2 gigs moving to 4 gigs. So as they introduced the product in ramp that the majority of the volume will be 4 gig Fiber Channel over this video Okay. Great. And then one question on the telecom business, recognizing that the wireless infrastructure business was down this quarter, how did the other pieces of business do, and what does it look like for the December quarter? It was really a wireless infrastructure business that was down, so the rest of the businesses looked okay. As we go into the first quarter, we are not we couldn't say we'll be seeing any strength in 32:40 wireless infrastructure, but the decline we are seeing is really around some Legacy products. Okay. Great. And one final one on the restructuring. Is exiting any businesses on the table or, is it more tightening up and working on execution at this point? Yes, I think it's totally premature to make any specific comments. I think the clear position that we have is we are going to focus on what drives growth and how we allocate our resources. So I think it's premature to make significant comments. Allen, the numbers on the IP for the quarter ending September, storage was 9, Mobility was 6, G&N was 9, Telecom was 7. First off, best of luck Rick with your new position. Question I guess Peter, in the quarter, the expectation was that as Orlando would shut down you would have some inefficiencies and that would hit gross margins, but gross margins did pretty well. Can you just talk through what happened there and whether another was an impact from Orlando in the quarter? Yes, actually there was an impact, Mark, and we kind of estimate that if you exclude that impact, our margins were probably close to between 53.5% and 54%. The reality is the fourth quarter was very strong for a number of reasons, one of them was we did much better in Orlando than we expected, but we had some NRE in the fourth quarter, which helped us from a mix perspective. And certainly, the IP mix was a little bit better than expected. So, I think if you look at our gross margins for that period, so for the fourth quarter, and so I guess the question immediately comes why are you guiding to 48? I would say the mix of NRE was quite strong. It was stronger than we expected. We have the bonus accruals, which probably impact us about half a point. There are some mixes as we go into the Q1, on other products, which will take out about a percent. It really depends on what you assume on our revenue guidance between the 390 and 410 on which end of the 48% and 50% you get to. But yes, Q4 was a really, really good growth on margins. We are very pleased with the progress we've made there, and it gives us lot of confidence for the future. Fair. I guess I'm just surprised a little bit as you become a fabless company. I know you obviously have different margins based on mix, but it would seem like 200 basis points of variability as you effectively become much more of a variable cost business model is fairly meaningful. And I just wonder if that makes sense, and going forward if we'll see more predictability in the gross margin as the business model cruelly changes? I think it will be fairly more predictable than it was in the past. But the other side of it, Mark I still do have some fixed costs and leverage in the company to the extent that I do have the assembly and test sites, so the depreciation, and the if you like the engineering and people costs associated with that. And then we also have the costs of product engineering, quality and various other things that we include in our manufacturing costs. So, there is some leverage in our numbers. And depending on the revenue, I would expect a number of 50% plus or minus some things. And the issue for us right now is that at what level is the correct model for 50% given our revenue points. I think the only thing I would add to that Mark is that it's also somewhat dependent on the mix of the businesses in any individual quarter, and how that gets distributed obviously. Yes. Great. Thanks a lot. Just one last question on bonuses, you mentioned what the decline was in the Q4, but can you give us the total bonuses were in the quarter? It was not as high as we would like or expect based on the ability to drive some top line revenue growth. Thank you. The next question comes from Charlie Glavin of Needham & Company. Your line is open. You may ask your question. A couple of housekeeping, and kind of follow-up to Mark, maybe next quantifying the actual NRE, but you did mention you do as far as kind of the impact of the bonus in the mix. What was the impact of the NRE to gross margin? Like you say on mix in general, I don't want to get too specific there. You can easily assume three points on NREs and product mix, whether it'd be telecom versus IP versus our other products. Thanks. The tax rate, if I read it right, it looks like the taxes are up next quarter. Is that going to be ongoing that we're going to see it closer to the 35% range? Well, the thing with our taxes really is we have, very significant NOLs. So we're really just talking about interest in the US on some of our provisions and the foreign taxes which are not largely but partly withholding taxes. So we assume about $7 million a quarter. And I think that's about as good an assumption that you can make right now. Okay. So for fiscal 2006 we should assume that is going to be much higher than sort of the 20% previous rate? I guess, I'd have to go back and look at it, but I didn't think it was that significantly different from 2006. I'll go and check that. Yes. Yes. That was the, we had an adjustment. Let me just get the right notes on this. Yes. It's really, it's about, you can see, I think just about a $100 billion or so. We take through the equity our change in our pension liability, and it was really around the 50 basis decrease in the interest rate from 6 to 5.5%. Moving on to the actual core business, in terms of the storage in the outlook on that for 2006, as far as the potential of having storage being flat or even some growth, can you give more clarity, right now, in terms of where you are expecting that? You had one of the customers out with the first 160 but obviously, that's going to be offset by Maxtor. And while the guys at Maxtor are saying they are not going to go single storage, but rather dual storage. Could you give a little bit more clarity, is the growth from storage going to come from one of those 5 small point factors kicking in? It is delays within that 160? Or is it actually a pull in S60, I know you guys haven't announced it, but let's just say new design wins coming into '06? No. We think our revenue growth for 2006 is pretty broadly based actually. So, I mean, I can't get into the details of specific customers. But in terms of it is it going to be more within small point factors compensating for the fluid changes within 160 or, is this going to be more of the traditional customers' growth out of it, even assuming that Maxtor starts to kick in here, which looks like it's the case? No. I have just said, I think what I said in the call what that I really think we are showing traction now with a broad base of customers. And our strength is not based on the performance of one single organization. I'm not I really do not want to go into any more detail than that. I think it's important for us as a company to actually show you what we've done rather than get into significant promises for the future. Okay. Last question, Rick, I know you mentioned that its premature to talk about areas of restructuring, but as a board member the last couple of years and taking a look at the OpEx coming down, is Agere open to taking a look at certain lines of business that may not be a strategy and looking to potentially sell or spin those off? I think it's premature to comment on any of that. I think that clearly, the charter is to focus on top line growth, so that we can deliver shareholder value and focusing our resources associated with that. So I wouldn't say that anything is off the table, but I would say it's premature to comment on any of that. I understand Rick. But in terms of actually taking a look at the synergy and looking at that focus issue, your old, alma mata TI has been rumored to be spinning off parts of its sensor business because it may not be core to their core markets strategic market. In a similar fashion, if there were market segments that Agere had had previous success that may not be as core going forward, again from a management and board perspective, would Agere be looking to potentially for shareholder value be willing to spin or sell those off? So it's premature as I said to comment on any of that. But I can tell that we're very focused on how we drive that shareholder value. So nothing is off limits, but it's premature to comment on any of the specifics of that. Thank you. Couple of questions. Rick, you're not necessarily new to company, although you may have not focused on all of the details. But I have the opportunity of following the company in the last since it's public. And it's actually I think it under performed the semiconductor business every single year. In fact, it has actually not even grown I think in a single year in the last 5 years. Can you talk a little bit about what you think has gone wrong with the performance of the company? Why is it losing share? It seems like a lot of key markets and what you can do to fix that? I have a follow-up please. I think, clearly, the company has not performed in the top line, I think the company has gone through a significant transition as you say, since you have followed it, since the IPO, relative to establishing the correct capital structure. Restructuring the business to ensure that we get to breakeven level, and I think the team has done an excellent job in positioning the company to be in position and report on that front. I think if you look at our relationships with customers, it's extremely strong and very positive. And so, the real challenge for us is to focus on those customer relationships and the strong capabilities that we have, the strong product capability that we have and leverage that, so that we can drive the top line growth. And that's what the charter is. That's what the challenge is from the board, is we have to clearly be focused on that, and we are going to ensure that we're doing everything possible to be in a position to drive that to ensure that we're enhancing the shareholder value. One follow-up regarding your plans about using your cash, there again it seems like historically, you haven't done a great job in generating cash, but you're saying that you want to buyback your stock because this stock is undervalued. Is there something that we're missing in terms of whether you want to improve your capital structure by reducing your debt? Because in the next 4 years generating another 300 million so you don't actually have to do transactions, at least the history of the company doesn't suggest that. So, could you discuss sort of what the reasons for a decision one way or the other? Are you open to that in general and don't want to give a clue to the marketplace? I think, first of all, I think we have generated a lot of cash over the last few years. If you remember, we exited Lucent with $2.5 billion of short-term debt. We continue to have very strong EBITDA. We have confidence in our cash flow as we go forward, and that's based upon our history, which is, I think, is strong, not weak on cash. And we think at the moment our stock price is undervalued and this is the best use of shareholder funds well the cash rather, that we can see right now. Hi, thanks. Welcome, Peter as well as Rick. Just in terms of first can you outline your depreciation and CapEx outlook for fiscal '06? Well, in terms of first quarter, we're seeing depreciation of about $29 million, which is down from the numbers you would have seen historically, because of the exits from Orlando. In terms of capital, I mentioned we are going to spend about 40 million to 45 million. Again, our capital expenditures will probably be in the range of probably in the similar range as to what we have seen in the past. No. You have to look the thing is you would have to go back and look at the quarterly CapEx spend. So, no, I wouldn't assume depreciation is going to increase as we go forward. Okay. And then, it was mentioned that part of the restructuring charge that you will be taking in the Q1 will be to further reduce expenses going forward. Can you elaborate on that on when we might see the benefits of that? I definitely don't want to elaborate on it. But we did say that we're targeting $165 million expense level in the fourth quarter of 2006. No, well, I definitely hope it's not because of the reductions in bonuses, personally. But, again, I think at this stage, it's kind of premature to go into what the specific details are around doing that. And then, can we talk about the storage business a little bit? You did very well on the preamp side. I think you said it grew 50% sequentially? And can you say what percent of your storage revenues that now represent, and what have been the drivers of that? No, we don't specifically go into what the percentages of the storage business are. I think the driver of preamps is doing well. We have a whole new set of silicon germanium products, which are really very good products, both got fantastic traction in the marketplace. We hear great things about them, it's a great product. Thanks guys, and welcome, Rick. Just a quick question on the mobility side of things. If I do the math right, it looks like I get to a number of roughly $73 million for the quarter. That's for the December quarter, that's the lowest mobility revenue in about 3 years. It seems to me that mix and/or the inventory adjustment is that had to be a really big impact for just to be the mix side of things. Is there any sort of share shifting going on, where if they are back to shifting or shipping more GPRS, one of your competitors is gaining more of that share than you? Well, I think if you go back over the last 3 years, you really have to take out the first of all, the NEC 3G ASIC, which is not a standard product. And we all know the issues around that particular program. And also, in our mobility business you have the Wi-Fi and digital voice products, which really don't contribute all that much to the revenue anymore. So, I think that the move from Q4 to Q1 certainly for our main customer, we absolutely don't interpret that as a share shift. In fact, it's from a volume perspective. And I guess it just comes back to the mix discussion before. We're really seeing that kind of similar levels of volume. It's a kind of just a tilt and shift we think between EDGE and GPRS. Certainly in other parts, we're, as I mentioned, now, we are beginning to see good performance as well from some of our other customers. Well, if go to look at it's not that easy to, it's not that simple a calculation. But, yes, I did say in the actual transcript that we expect volume to be around roughly the same. Okay. Moving on a little bit to the cost structure, not to hit the same question too many times that others have hit, but the 165 target down from 175 with the restructuring seems to make sense, but the one thing I'm having a little bit of trouble with is if I remember right, the 165 number was roughly in line with what the long-term target was before, but the revenue progress has been a little bit disappointing. So, on roughly lower revenues, why would 165 still be the right number? What source I thought that John, when he spoke I am talking about John Gamble, when we talked previously, he talked about a much higher number than 165. I thought John Gamble had talked about 180 actually. Okay. And the last question, again, a little bit of a math one here. If I just take the midpoint of your guidance and then the below the line expenditure guidance that you gave, and I get about 14 million in revenue, excuse me, in net income. That gives me about $0.08. Why the range $0.03 or $0.09, if the midpoint gets me so high? Is it just being conservative or, is there something in the math that I'm missing that could bring you to this $0.03 level? The guidance you gave for the fiscal first quarter, the December quarter, you just take the midpoint across the board, midpoint of revenues, midpoint of gross margins then everything else you guided to on OpEx, net interest expense, etcetera? I guess, I don't get quite to the same number. But it's about roughly one-third on revenue, one-third on safe or and one-third on mix and NRE. Hi. A couple of quick questions. One is can you tell us what the pension obligations could be for the next 2 years? And the second question is, on this call you have mentioned a couple of times that you think the stock is undervalued. Can you give us what kind of metrics are you using, and what things you are looking at to determine why the stock is undervalued? Okay. Well, our pensions are fully funded under our result. And in terms of stock evaluations, I probably use the kind of same, sort of, methods that you might do, but other than that, I can't really go into any detail. I think if you look at the product portfolio we have and the opportunities that we see for the company, and the cost structure that we put in place, we believe that the opportunity is there such that, that really confirms the under evaluation. I don't know that you can draw correct correlation from that. But, I think clearly as you compare us to our peer companies, with the inherent technologies, the know how, the customer relationships, the people we have, I think we believe strongly that the stock is undervalued. So you know, when I look at I mean maybe your obviously from an investment perspective as being a disappointment. But this change is excellent. I mean, I think there is new management. The opportunity at Agere is great again, both the technology that you posses from the end market that you serve. Rick, can you talk a little about given on the board, why what drew you to this opportunity? Can you talk about what are your motivations are? My motivations are the significant opportunity that faces the company. You know, when you look at my background and experience it's pretty diversified, but a longtime base at Texas Instruments, then specifically in the Disk Drive Business at Quantum Corporation, and most recently, a couple of years focused on emerging technology with a venture-capital partnership, and the growth companies that we were able to nurture and focus on. When I look at the combination of the emerging technologies and how that plays to the wealth of technology that's positioned at Agere, and the cost structure that we've been able to establish and combining that with the strong customer relationships we have, this is just too significant of an opportunity to try to see what we can do to really maximize the shareholder value and create value. That's really what makes it such an exciting opportunity for me. I think it's certainly very significant, and one that we believe is a very bright. And it's going to require a lot of hard work. It is going to require a lot of focus relative to our strategies. A lot of focus relative to our investments. But the combination of the people, the customers and our technology, and how we deploy that to drive the growth that we know is here, is the key for us. Well, we agree. And we welcome the new management change here, and we look forward to working with you. Thanks a lot. Thank you. The next question is from Jeremy Bunting with Thomas Weisel. Your line is open. You may ask your question. Thank you very much. Could you expand on your opportunities in the UMTS space, particularly traction with new customers, and what you believe your competitive positioning in that sector is? And thirdly, if you partner with any specific transceiver players, because I know that you don't have that particular product? Thank you. Jeremy, this is Sujal. So we partner with multiple folks on the radio side, but we don't disclose necessarily who we are working with on a particular platform. So, I think in the case of our wedge standard products, I mean, we've made a lot progress we've talked about engagements with Samsung, as well as PC cards with Sony Ericsson. And we also talked in this call about a new engagement with an ODM who supplies to a Tier-1 OEM. So, I think everything continues to progress very well with that product. And we mentioned we are going through IOT testing, we are passing calls. So, the progress is quite good. Well, I think as you know, I mean, it's a combination of base band as well as protocol stack. So, I think one of the things that we offer is that this protocol stack software is built up over generation, and generation of barrier technology. So we have a protocol stack that is working in multiple countries, over multiple networks and it's just proving in the case of our key customers to be a key differentiator. So, I think Samsung is a great proof point of the technology and products we offer in mobility. And the interest that we are seeing from new customers is encouraging as well. Yes. The final question will be from Suji DeSilva of Fulcrum. Your line is open. You may ask your question. Actually, his lines just disconnected. Yes. Hi. Good morning, guys. Was there a search conducted by the board? Rick, if it was, were there any other external candidates look for this position? Thanks. I don't know that I can talk about the specifics in detail. I think that the board felt like that we have a significant opportunity. We needed to mobilize relative to that. I think that searches for semiconductor CEO companies over the last few years have proven to be fairly prolonged, and we felt like that was at a critical juncture of the company where we needed to take immediate action and move forward. So, there was not an external search done. There was a lot of discussion relative to my background and experience and the vision and the opportunities that I perceived here. And the board is excited about the ability to try to mobilize that and drive towards that. The charter is clear and the focus will be on how we achieve that. But, clearly, is focused on top line growth with no higher priority than driving increased shareholder value. And Rick just to reassure investors, what is your commitment in terms of any targets, timing? And how should we be thinking about it, either in terms of timing or targets? Thank you. It's premature to comment on any specifics. What I talked about in the call is that we will come back in the next earnings call with an update associated with that, and we'll clearly be much more specific at that time. Thank you, Ambrish. Okay. If there are no more questions, I would like to thank all of you for joining us this morning. If you have additional questions, please call investor relations at Agere Systems. Thank you and have a nice day. Ladies and gentlemen, this conference will be available for replay starting today at 10.00 am, and running through midnight on October 31st. You may access the replay by dialing 1866-419-5478. International participants may dial 203-369-0773. The call is also available via a webcast replay at http://www.agere.com/webcast. That does conclude your conference for today. Thank you for your participation. You may now disconnect. 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_233814

Here’s the entire text of the prepared remarks from AsiaInfo Holdings’ (ticker: ASIA) 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. I will now turn the conference over to Ms. Eileen Chu, Director of Investor Relations. Please go ahead, Ms. Chu. [Eileen Chu, Investor Relations] Hello everyone and welcome to AsiaInfo's 2005 third quarter conference call. Today Steve Zhang, President and CEO of AsiaInfo, will review some of our Company's business highlights for the most recent quarter and Ying Han, our Chief Financial Officer, will provide greater details on our financial results and provide guidance for the upcoming quarter. Mr. Zhang will then provide a few closing remarks and open the call to questions. Before we continue, allow me to review our Safe Harbor Statement. During this conference call representatives of the Company may make forward-looking statements in an effort to assist you in understanding the Company and its results. Please refer to AsiaInfo's report filed with the SEC for discussion of important factors that could affect future results. Also, please take note that all figures mentioned during this conference call are in U.S. dollars. Hello everyone and thank you for joining us. I am pleased to report that AsiaInfo's net revenues and earnings per share for the third quarter were in line with our previously stated guidance. During the quarter we continued to execute our strategy of focusing on our high growth, high margin telecom software and the security products in the services business. We have made important progress in these core businesses with 14% year-over-year growth in our Telecom solution and 50% year-over-year growth in the security business and we have every reason to believe that with our leading offerings and the brand recognition AsiaInfo will continue to outperform in this area. Turning to our core telecom business, we saw strong performance over the quarter in terms of both revenue generation and orders booked. We signed several key contracts with China Mobile, including a significant contract with Guangxi Mobile to upgrade and optimize their BOSS system, which is the largest BOSS system in China, including enhancing its data support and backup ability. We also signed a contract with Shanghai Mobile to construct a disaster recovery backup system in support of their existing BOSS system. This will ensure that the carrier can protect its core data, maintain operation continuity and provide value added services to its customers without interruption. As a long-term strategic partner of Shanghai Mobile AsiaInfo is the largest system integrator and telecom solution provider for the carriers BOSS network. This contract list further demonstrates the benefits that AsiaInfo's operation support system technology brings to telecom carriers and the enterprises and it further enhances our position as one of China's leading telecom software product and IT service providers. Looking to the future, the sales capital for Telecom Software Solutions is mainly the dealing and the Customer Care Solutions is encouraging. We are especially excited by the increasing demand from our current telecom customers to implement additional services and the new functions to their existing BOSS systems as a means of maximizing their efficiency and improving customer services. We also saw significant progress in our security product in the services sector, including a contract with Beijing Mobile to carry out a network security and the vulnerability assessment. As I mentioned earlier, AsiaInfo's strategic focus is squarely on growing our high margin core telecom software and services and IT security business. These lines are highly profitable in drawing leading market share and strong competitive advantages and we believe that with our-- and we believe that there are cross marketing opportunities for selling security solutions into our telecom customer base. In line with this strategic focus, we have recently announced the sale of our Human Resources and Business Intelligence software business to Hinge Software for RMB 15 million. That's approximately in U.S., 1.85 U.S. million. Our earnings release contains further details on this transaction. We are confident that this sale will further our strategy by allowing AsiaInfo to focus on expanding market share in our core business. Of course, we will keep you up to date on our progress as we continue to execute against this strategy. Let me now turn the call over to Ying Han, who will review this quarter's financial highlights. [Ying Han, EVP and CFO] Thank you, Steve. Good morning. Rather than repeating all of the numbers in our Press Release I will provide some explanation of key results for the quarter. I will also discuss guidance for the quarter as well as for the 2005 fiscal year. Total revenues net of third party hardware costs for the quarter were in line with guidance at $22 million, an increase of 53% year-over-year and a 7% decrease sequentially. In this quarter, both our software products and solutions and our service revenues showed substantially year-over-year growth, but decreased sequentially due to lower revenue generated during the quarter by our recent diversified business assets. In all, AsiaInfo contributed 26% to total net revenue during the quarter, slightly below previously provided guidance due to the ongoing restructuring. As Steve had mentioned, along with our core telecom gains, in all AsiaInfo's core accretive gain has been experiencing highly healthy growth, which should translate into a strong 2006 for Lenovo-AsiaInfo. In line with our strategy of increasing higher margin software and service revenues gross margins rose for the fourth consecutive quarter reaching 43%, compared to 42% for the year ago and 41% last quarter. We are very pleased with our continued success in increasing profitability and we expect this trend to continue as we focus on growing our high margin businesses. Total operating expenses for the quarter showed a sequential increase as sales and marketing expenses increased by 15%, reflecting increased sales and marketing efforts in the security products and service business. G&A expenses decreased 18% from last quarter as a result of a decrease in the provision for bad debts due to increased collection of bad debts during the quarter. During the third quarter Lenovo-AsiaInfo recorded an operating loss of $2.1 million before overhead allocation and after the amortization of intangible assets. The loss is largely due to the revenue decrease from the business restructuring exercise carried out during this quarter. Moving to our balance sheet, net operating cash flow for the quarter was $6.3 million due to increased collection of accounts receivable. Two long outstanding debts, which have been fully provided for in accordance with Company guidance, were collected in the third quarter. Our total cash position, including cash and cash equivalents, restricted cash and short-term investments increased from $142 million to $148 million, primarily as a result of the increase in operating cash flow over the quarter. Enhanced collections over the period resulted in a 12% decrease from last quarter in accounts receivable and DSOs for the third quarter decreased by 2 days from last quarter to 103 days. And the current liabilities decreased to $17 million due to $27 million paid to Lenovo as the final installment of our acquisition consideration. Assets and liabilities related to human resources and business intelligence assets has been sold in the fourth quarter, has been reclassified separately in this quarter. High restart was down U.S. dollar $22 million in this quarter as we completed the issuance of shares to Lenovo causing shareholder aggregate to increase by the same amount. I will now read you AsiaInfo's financial guidance for the fourth quarter of 2005. Please note that the following outlook statements are based on our current expectations. These statements are forward-looking and the actual results may differ materially. AsiaInfo expects fourth quarter net revenue to be U.S. dollar $18 million to $20 million, equivalent to a year-over-year decrease of 13% to 22% and a quarterly decrease of 9% to 18%. Excluding one-time impairment charges and associated diversified costs relating to the disposal of non-core businesses of U.S. dollars, $18 million to $23 million, earnings per basic share for the quarter is expected to be $0.00 to $0.01. On a GAAP basis loss per basic share for the quarter is expected to be U.S. dollar, $0.38 to $0.49. For the 2005 fiscal year we expect net revenue to be U.S. dollars $86 million to $88 million. Earnings per basic share is expected to be U.S. Dollar $0.06 to $0.07, excluding the above mentioned one-time impairment charges and the associated diversified costs. On the U.S. GAAP basis, loss per basic share is expected to be $0.33 to $0.46. Thank you, Ying. Going into the last quarter of the year I'm confident that AsiaInfo has regained its strategic focus and is poised for healthy growth in year 2006. In the telecom software and services space while we continue to expand our traditional billing and customer care solutions, that's the area to where we enjoyed clear competitive advantages and leading market share. We'll also be rolling out exciting new initiatives that leverage our core competencies. In the months ahead we'll be keeping you updated on these new initiatives, as well as the progress we are making here in our current key markets. 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_233815

Ladies and Gentlemen, thank you for holding and welcome to the Millennium Pharmaceuticals Conference Call. At this time all participants are in a listen-only mode. There will be a Question and Answer session to follow. Please be advised that this call is being recorded at the company’s request. At this time, I would like to introduce your host for today’s call, Mr. Kyle Kuvalanka, Director, Investor and Corporate Communications at Millennium Pharmaceuticals. Please go ahead sir. Good morning everyone and welcome to Millennium’s Conference call to discuss the financial results for 2005. With me today are Dr. Deborah Dunsire, our President and Chief Executive Officer; Marsha Fanucci, Chief Financial Officer and Senior Vice-President of Corporate Strategy; Dr. Robert Tepper, President of Research and Development; Dr. Nancy Simonian, Senior Vice President of Clinical Research and Regulatory and Medical Affairs; Lisa Adler, Vice-President of Global Corporate Affairs. Our agenda for this morning is as follows: Marsha will open with the highlights of our financial results for the year, Bob will provide an update on research and development activities, Deborah will then ramp up our prepared comments. We will then take your questions. Before we begin, let me remind you we will be making forward-looking statement, when we discuss our growth signs, products and cost effects, a point of reference is how we as a company think, expect or believe the future will look based on information as we know it today. No one can predict the future, and there are risks that could cause the company’s actual results could differ materially from these statements. You can review a list and description of these risks in the reports we filed with the SEC. During this call we will be referring to non-GAAP net loss, non-GAAP net income, and non-GAAP profitability. These financial measures are not prepared in accordance with Generally Accepted Accounting Principles. Description of the differences between these non-GAAP financial measures and the most directly comparable GAAP measures is included in the press release we issued this morning. A discussion of why we believe these measures are useful for investors and of the additional purposes for which management uses these measures is included in the Form 8-K we furnished to the SEC this morning. The press release and the Form 8-K are available on the Investor section on our website. Let me now turn the call over the Marsha. Thank you, Kyle and good morning everyone. I am happy to report today that Millennium achieved its annual financial guidance for the third consecutive year while continuing to develop a solid foundation for profitable growth long-term. Our non-GAAP net loss narrowed significantly to $87 million in 2005 from a $181 million in 2004. Total revenues were up 25% for the year and R&D and SG&A operating expenses were 13% lower as planned. Let me provide some perspective on these results starting with VELCADE™. VELCADE™ is the market leader in the relapsed multiple myeloma treatment setting. US net product sales were $192 million, an increase of 34% over 2004. Based on our quarterly survey of 75 US based oncologist who treat significant numbers of multiple myeloma patients, VELCADE™ growth in 2005 was primarily attributed to an increase in end user demand in the second line treatment setting, corresponding with full approval of the drug in March and the expanded label. Annual growth was also the result of increased end user demand in the frontline setting even though Millennium only promotes VELCADE™ in it’s approved indication. We are confident in the growth prospect for VELCADE going forward. 2006 US net products sales are estimated to be between $225 million and $250 million, a 17% to 30% increase over 2005 result. We expect this growth to come from increasing the average length of therapy used by patients as indicated in our label and from treating more patients with VELCADE™ as a result of our new marketing messages and the expansion of our sales force. Our sales force is expected once fully trained and deployed to approximately double the number of daily calls to physicians. We expect to see the impact of these new programs increase over the course of 2006, with the greatest effect in the second half of the year. Let me now turn to revenues received from our collaborators. For the first 8 months of 2005 the company reported a co-promotion revenue of a $123.5 million associated with the original collaboration agreement between Millennium and Schering-Plough for INTERGRILIN®. As you will recall effective September 1st 2005 millennium modified its relationship with Schering-Plough from the co-promotion arrangement to a royalty-based agreement. As a result Millennium stopped reporting co-promotion revenue and began reporting royalties in a separate line item. Royalties for the last four months of 2005 were approximately $38 million and primarily included royalties from Schering-Plough for product sales of INTERGRILIN® and from Ortho Biotech for sales of VELCADE™ outside the US. As a reminder, we expect to receive minimum loyalty of $85 million from Schering-Plough for INTERGRILIN® in both 2006 and 2007. These payments increased the near-term certainty a revenue to Millennium associated with the product, while still allowing us to participate in any potential upside. Recognition of the royalties from this relationship will be somewhat complicated as it will not be straight lined throughout the year. Royalties will be recognized as earned based on the performance of the product and then the future quarterly revenues will be recalculated based on the unearned balance of the $85 million. The royalties received from Ortho Biotech will be recognized as earned based on the performance of the product. Turning to our strategic alliance revenue, this revenue increased to $204.5 million in 2005 from $99 million in 2004. Strategic alliance revenue in 2005 included the $71 million one-time sale of INTERGRILIN® inventory to Schering-Plough as well as reimbursement and payments for the achievement of milestones from our collaborators. In 2006, we anticipate including in this line approximately $20 million to $25 million in milestone payments for VELCADE™. We’ll do our best to alert you of any material milestone payments in a timely manner. Regarding our operating expenses, research and development expenses in 2005 decreased to $342 million from $403 million in 2004 primarily as a result of cost reductions associated with the company’s strategy refinement and restructuring efforts. Selling, general and administrative expenses in 2005 decreased to $181 million from the $197 million from 2004 primarily as a result of the cost savings associated with the restructured relationship with Schering-Plough for INTERGRILIN®. We will continue to see reductions in our operating expenses. Full year 2006 operating expenses are expected to be approximately $425 million roughly 30% lower than 2004 results and 19% lower than 2005. Our 2005 GAAP net loss including amortization and intangibles and restructuring narrowed 21% to $198 million from $252 million in 2004. Turning to the balance sheet, we ended 2005 with $646 million in cash, cash equivalents and marketable securities, and $105.5 million outstanding principal amount of comparable debt of which approximately $6 million is classified as short-term. In our release this morning, we reiterated the guidance we provided earlier this year. For the sake of time, I am not going to review the line items with you; however, I do want to provide some prospective on the expected non-GAAP quarterly results for 2006. During this transition year to non-GAAP profitability, we do not expect to see steady quarterly growth and our achievement of non-GAAP net income. Instead quarterly results will fluctuate due to variability in product sales expenses and strategic alliance revenue including the achievement of milestones. So, for example if all possible milestones are achieved in the first quarter, we may reach non-GAAP net income for the first quarter. As Millennium grows as an operating company, we continue to build strength in our financial management team. I am happy to announce the appointment of Mark Kost as Vice President of Finance reporting to me. Mark brings with him over 20 years of experience in both finance and accounting, most recently serving as Vice President at The Gillette Company. Mark will start at the company in early February and will hold responsibility for both financial planning and accounting activity. With that I will turn the call over to Bob. Thanks Marsha. Today I want to update you on VELCADE™ clinical data as well as review some pipeline announcements. Let me start with VELCADE™. As many of you know we had a very exciting cache in December with 117 VELCADE™ abstracts accepted further demonstrating significant interest in the product from the hematology community. VELCADE™ as a single agent demonstrated a median 30-month survival in relapsed multiple myeloma patients. Which has a 6-month survival advantage over dexamethasone. This result was achieved even after 2/3rd of the patient in the dexamethasone arm switched to VELCADE™ in our phase III Apex trial. Promising data were also presented in the multiple myeloma frontline setting, demonstrating some of the highest overall and complete response rates seen in the treatment of this disease, when VELCADE™ is added to standard therapy. One trial is particularly important to highlight. Data from the phase I/II study of VELCADE™ with melphalan and prednisone showed transplant like responses in patient 65-years old and older, with an overall response rate of 86% and a complete response rate of 30%. Very importantly this triplet achieved a deep molecular remission in 50% of the patients who did receive a complete response. Thus showing we are potentially leading the way one day to the cure of this disease. These are spectacular results compared to melphalan and prednisone without VELCADE™, which had demonstrated a response rate of only 50% and a complete response rate of only 2%. We also saw exciting data with VELCADE™ in non-Hodgkin’s lymphoma. Interim results of the phase II trials of the combination of VELCADE™ plus rituximab in two dosing regiments in the follicular relapsed and refractory setting showed response rates over 50% in both arms. In the arm with the convenient once-weekly VELCADE® regimen, matched with the once-weekly rituximab regimen, we were pleased to see improved efficacy as well as improved safety. These are very strong results in the treatment of follicular lymphoma patients, while we know the response rate of rituximab in the rituximab naïve patients in the relapse setting, there are no clearly established results outlining the use of this drug as retreatment therapy in patients who had previously received it in combination with Chemotherapy. The results from our trial exceeded the threshold the established internally and also by our advisory board giving us the confidence that the VELCADE™ and rituximab combination should be tested in a phase III randomized trial. This trial is expected to start in the second half of this year. The most common adverse-events seen with VELCADE™ in these trials just discussed where gastrointestinal events, hematologic events, fatigue and peripheral neuropathy. Now let me turn to our pipeline. Millennium continues to advance the pipeline of the seven clinical and three pre-clinical molecules in oncology and inflammation, including two high priority molecules, which have shown meaningful clinical activity with manageable safety profile. These molecules are first MLN02, our antibody to alpha 4 beta 7, where we have shown clinical efficacy in ulcerative colitis and secondly MLN518, an oral small molecule inhibiter of type III receptor tyrosine kinases in AML, acute myelogenous leukemia and along with CTEP being studied in other indications. As part of the company’s ongoing portfolio management process, Millennium has also decided not to continue the development of two other molecules: 2704 and 1202 for one of it’s indications, rheumatoid arthritis. The 2704 which is a novel anti-PSMA antibody conjugated to the DM1 toxin, the company does not believe that its sufficient therapeutic window is achievable. As you will recall, we have seen encouraging data with this drug 2704 in terms of PSA declines and tumor reductions as indicated by the resist criteria. However, we have also seen peripheral neuropathy which we believe is the result of the three toxin. We are currently evaluating whether to continue development of the antibody with other toxins including other maytansinoid. The strategy with 12O2, our CCR2 an antibody has been to explore this molecule in several indications in parallel including rheumatoid arthritis, multiple sclerosis, atherosclerosis and scleroderma. The goal of this strategy has been to select the best indications for moving forward into pivotal trials. While the company has seen biological activity through biomarkers, Millennium does not believe that the data in rheumatoid arthritis from the phase IIa proof-of-concept trial warrants moving forward at this time. However, Milllennium will continue to explore 1201 in other phase IIa studies including multiple sclerosis, atherosclerosis and scleroderma. With our earlier pipeline we had several important advances in the fourth quarter of 2005, which are outlined in our press release this morning. I want to emphasize that, we advanced our fourth Millennium discovered molecule to the development pipeline within the last two years. This is an exciting accomplishment particularly given that we have been focused on our internal pipelines for only the past 5 years. Now I will turn the call over to Deborah for closing remarks. Thank you Rob. Millennium emerged from 2005 stronger and more prominent poised to achieve our goal of becoming a company that continually delivers new medicines in areas of high of unmet medical need. Our actions in 2005 were taken to solidify the foundation of building Millennium for the future, profitability is just one marker in the Millennium lifecycle. 2006 will come up with its challenges however, we are confident in our ability to achieve our goals. We will need to make careful investment decision to find the right balance of investing in the drivers of short-term topline growth, with investments in areas that will ensure a long-term value creation. Entering the year we believe that the company is focused on the right priority and is executing with fiscal discipline. In 2006, we will face new competition for VELCADE™, while we strongly believe in the product and that that is room in the market for new agents, there maybe a period of disruption in the marketplace. Our goal is to continue pushing forward to raise the standard of care in order to provide those better outcomes for patients. VELCADE™ is an important differentiated drug and we are confident in its growth prospect. Data presented the GR X (ph) continue to confirm the characteristics of VELCADE™ that has offered significant building blocks of growth. It’s significant survival advantage combined ability as we see from numerous clinical trials, a well characterized safety profile as evidenced by it’s use in more than 30,000 patients worldwide, and its benefit to a broad range of patients. Including those patients with renal impairments, common and multiple myeloma to meet the charge on setting a new sophisticated vision for the commercial organization, I am pleased to announce the appointment of our new executive Vice President of Commercial Dr. Christophe Bianchi. Christophe comes to Millennium with more than 17 years of pharmaceutical marketing experience, and with most recently Vice President and Business Unit Head of Oncology at Sanofi-Aventis in the USA, one of the largest oncology franchises in this country. It was driven by success of Taxotere® and Eloxatin® as well as other important cancer therapeutics. Previously Christophe was with Sanofi-Aventis pharmaceuticals and prior to that with Rhone-Poulenc Rorer. In Rorer, Christophe was responsible for the successful pre-marketing and launch activities for several cancer drug, and met the commercial efforts for the market-leading anti-coagulant LOVENOX®. Christophe will work closely at growing VELCADE™ with Grant Bogle who was recently promoted to Senior Vice President of sales and marketing. We will make sure that you have the opportunity to meet the two events coming month. As we get through our first year of non-GAAP profitability and continue to position the company for long-term growth, Millennium is focused on three key strategic drivers of the business with clear goals against each. For our first strategic driver VELCADE™, we expect to continue to grow the use of this important therapy in multiple myeloma patients, with the supporting publications the company will be investing in the myeloma on frontline setting while we continue driving forward our registration trial. We also expect to file a supplemental NDA in the mental cell sale non-Hodgkin’s lymphoma relapsed setting. And finally in the area of relapsed follicular and marginal zone lymphomas, our goal in 2006 is to initiate the phase III trial. Moving on trial second strategic driver our pipeline, our goal to share or to continue accelerate in our highest priority programs 02 and 518, progressively two molecules to critical decision points in order to advance the pipeline and focus our resources on the key program, and to advance two new molecular entities from our discovery organization to development candidate status to fuel the pipeline for the long-term. Turning to strategic business relationship, we have a strong internal team, led by Anna Protopapas who recently joined the executive team, working on several front with the goal of supporting the long-term growth of the company. The collaboration is not necessary for us to achieve non-GAAP profitability in 2006. But, the right ones could add significantly to our growth profile in 2007 and beyond. Millennium evolved into a stronger and more focused company in 2005. One that achieved its financial goals for the third consecutive year. We have grown VELCADE™ significantly since its launch in 2003 and we will continue to do so into the future. In 2006, we expect to reduce operating expense to approximately 30% compared to 2004 and 19% compared to 2005 results, producing an effective lean organization going into 2006 and beyond. We are focused on the right strategic drivers, VELCADE™, the pipeline and our strategic business relationship. And we will continue to improve execution with the goal bringing Millennium to profitability, growth and sustainability. In addition to that we have plenty of time for your questions. It was great getting to know many of you over the past six months, it is an exciting evolutionary time for the company and we look forward to working with all of you throughout the year. Thanks and I will turn the call back to Kyle. Hi, thanks for taking my question, I actually got in the call late so I apologize if you have already answered it, but back in the Analyst Day in November, you indicated that around 25% of physicians are using VELCADE™ for the recommended eight cycles, given your recent marketing efforts, could you provide an update on that number? We haven’t done any further research and to see where we are, but we will be doing that through the year as we go forward, but that is one of the most significant areas of growth for VELCADE™, as we have go into 2006. Actually just to expand the math even further our Apex trial had demonstrated the significance of that for patients and maybe Nancy, you can comment on that. Yes. So this is the data that we presented ASH on the APEX data and in that trial, individuals that responded to the drug received a median of 10 cycles and that in, over 20% of patients the best response occurred after Cycle 8. So, I think, it's pretty clear that the standard regimen use, in which we saw the survival advantage, individual’s received 8 cycles and that’s very important message that we need to get out there. Good Morning. It’s actually Mark Ingles for David Witzke. A couple of questions on your 2006 guidance. First, with respect to the VELCADE™ sales guidance, 17% to 30% increase over last year, just wondering if you could give any additional details on your expectations or competitions specifically from Revlimid® in terms of timings what is the magnitude of that, new player to the myeloma market? Thanks Mark. I think that Revlimid® coming into the market is a good thing for myeloma patients. We need extra drugs, it is not a disease that’s cured, and in the true traditional of oncology, we see new agents coming in being combined. What’s very interesting is, we’ve seen VELCADE™ combinability with all the agents its been used with in myeloma adding to the efficacy, and being able to be safely delivered. We had that tremendous data at ASH at San Miguel showing VELCADE™ addition to the melphalan and prednisone regimen and we also have data coming up from VELCADE™ with a new agent including with Revlimid®. So, I think that, while 2006 maybe turbulent than you see that in the guidance range, that we have given you, we believe that VELCADE™ has strong growth prospects into the future and that ultimately the combination of active agents could change the phase of myeloma, and Nancy, would like to start in terms of adding commentary? Yeah, I think, as Deborah said, we have that strong single agent activity with VELCADE™ and it's so combinable with other agents including with Revlimid® and as you know the data we presented at ASH last year demonstrating very encouraging activity both response data’s reliability with VELCADE™ and Revlimid®. We are very encouraged about that combination and that in the future, our positions as they always have will combine active drugs together and that really is the way the future and the growth of these products. Okay, thank you and then just very quickly if I might, with regards to the R&D SG&A expense strategy. Does that include within it the stock option expense $40 million to $50 million, or is that separate? That guidance is prior to the option expense which we’ve provided as a separate line item in the guidance and we are estimating between about $40 million and $50 million in total for the stock-based compensation estimate but we have not provided a breakout of that line item yet. Good morning, thanks for taking my question. My question is actually is on the use of VELCADE™ in combination with rituxin in lymphoma, it does seem like there is some buzz building in the physician community about VELCADE™‘s use. Could you tell us, what you are currently seeing, how much VELCADE™ is actually being used in the treatment of lymphoma? Lets have Nancy start off with what we are seeing in terms of the clinical trial and Rob may follow up and then Deborah can respond with what we are seeing in the marketplace? Yeah, it's great to hear that you are hearing the buzz because we are actually hearing the same thing, a lot of really exciting news coming out in terms of VELCADE™ and Lymphoma, both in mantle-cell lymphoma as well as in follicular lymphoma. We are hearing the same thing, Nadeau, we have very encouraging data on our VELCADE™ rituximab combination study that was presented at ASH last year, I mean, interestingly looking that once weekly VELCADE™ in combination with rituximab looked very well tolerated and showed very impressive overall the response rate of greater than 50%. So, we are very encouraged with, met with lots of outside investigators in terms of these data and I think they are encouraged in moving forward in pursuing both development and follicular as well as a mantle-cell. Yeah and I just want to do add to that comment in terms of earlier studies that we continued to get data on for investigators about, again the combinability of VELCADE™ in the lymphoma setting as well, as many of you are familiar with the CHOP regimen, not that different from melphalan and prednisone that we just spoke about in terms of classes of drugs. So we are finding that physicians are interested in studying the addition of VELCADE™ to the active agents not only in myeloma but also in lymphoma. So we feel that there is going to be some very important information coming over the next year or two on the use potentially in earlier settings again mostly through investigators at this time while we focus on our phase III VELCADE™ rituximab study. And to address the marketplace, we are starting to see some use in lymphoma reflected in the awareness at Trial and Usage study that we do, but of course are directional, it’s definitely a very small proposition versus the myeloma usage, which is by far the majority and it's fair, it’s growing and of course we do have compendia listing for mantle-cell lymphoma and are reimbursed for that and as you know we will be submitting a supplemental NDA for mantle-cell lymphoma. While that’s a smaller portion of the lymphoma patients, it is a very aggressive disease and really does not have any adequate therapy. So, we are very excited about VELCADE™ activity in that population and of course, then will be building on that, in a much larger relapsed follicular setting as Rob said. Yeah there is, the usage has been mainly for mantle-cell, there is some utilization in follicular and in certain states, we are getting the reimbursement. Of course, in any unapproved indications where its hard to work for the physician because they have to make representation for the necessity for the patient but in certain cases where the physician have done that, they have been reimbursed. Yeah, maybe it’s little bit too early but can you talk about the impact, are you seeing impact at all from Revlimid® right now or is that your projections? I think it’s very early Rachel, remember Revlimid®’s approved for myelodysplastic syndrome, there’s a very significant program that patients have to go through and I think it's very early to tell, thus far. Okay and then the survey results that you typically give, are you prepared to give them by setting for VELCADE™ in terms of penetration? Rachel, we haven’t updated since the last call, I think we are still saying that we are around 9%, 10% in the frontline setting, 40% to 45% in the second line setting and 40% to 50% in the third line setting. What was interesting about that Rachel, but I am interested to comment on it, is when we do look at the data there are significant number of patients still receiving older therapy that those deliberate to vital advantage that VELCADE™ does, that’s one of the things that excites us about the growth opportunity for VELCADE™ as we go forward. So, we are really looking to make sure myeloma patients get appropriate therapy that can deliver a survival advantage. And just kind of following up on that, can you talk, I guess more generally as what do you see as peak sales for VELCADE™ and multiple myeloma, if we take a step back and kind of look at where the penetration is right now in second and third line and think about the markets as frontline maybe being twice out or maybe equivalent to those combined opportunities. Should we think about peak sales going from current levels of around $200 million to $400 million, and then anything beyond that driving sales higher, how do you think about it internally? I think, we haven’t communicated that in specific breakdown Rachel, but what we did communicate back at J.P. Morgan is that, we do see a significant growth for VELCADE™ in the myeloma setting and lymphoma and then potentially some of encouraging lung cancer data, what we’ve said to you there was that worldwide sales for this product will go over $1 billion. Okay and then one quick financial question just, Marsha based on your comments about the milestones, should we read into that that you are expecting to achieve that $20 billion to $25 billion in the first quarter? It wasn’t that really precise, in the delay which Rachel, we felt, well what we are saying is that if you look at Q1 and you look at how the milestones and other strategic alliance payments going forward, that you could see profitability in Q1. But we haven’t commented on the timing of the full $20 million to $25 million in VELCADE™ milestone. And can you provide any color on what those milestones relate to you or are they specifically sales milestones or development really? As we have outlined in the past, the milestones are a combination of sales clinical regulatory milestones around that product. But we haven’t done more specific to define which of those these are coming from. But as we do get close we certainly will keep you apprised of those. Hi actually this is Chris Metropolis. I had a couple of questions. First, regarding the clinic, I was, you mentioned that couple of weeks ago that we see data from our frontline myeloma study in the second half of ’06. Just wondering out of the three ongoing which study that might be? And so, we are not going to state specifically which trial that we’re going to present data from. But as we know, we have three frontline trials ongoing and one we should have data by the end of the year, the interim data by the end of the year. Okay, great. And regarding the sharing relationships, can you tell how after, in 2008 that relationship changes and when the $85 million is guaranteed? After that timeframe the agreement just changes to a royalty-based agreement and also would include any of the COGX reimbursement for supply, if we were so continuing to supply the product at that point of time. Okay and regarding the stock options expensing, I know, you said, you haven’t broken it down. Well can you add any color on, how we should expect $40 million to $50 million to be distributed between various line items? We haven’t got into that level of granularity but I think, if you look back over our distribution of employees overtime that can give you some rough idea of where things would fallout since those just follow the people so. That’s about the best advice I can give you at the moment. Sure. And then regarding R&D if we kind look at the run rates from the first quarter and extrapolate that over ‘06, it might be difficult to achieve the R&D and SG&A guidance. Do you anticipate R&D trailing off from the level that it’s at now over the course of next year? Well, in 2005 you have not yet seen the full impact of the restructuring run rate because a number of the programs were being phased out through the end of the year and so I think that when you look at the Q1 run rate for R&D and SG&A that that will give you a better platform to look through the rest of the year. We do see quarter-to-quarter variations in our expenses and Q4 has historically been our heaviest quarter of expenses just because we have a lot of events and contracts that tend to fall into that period. Okay. And then finally regarding the strategic alliance line, can you give any color on how the miles that going forward would you say with the variability that you discussed and related to the Q1 payments, any particular quarter we should look at it as kind of an average quarter for that line? I think that you know we’ll have to give you a little bit more counsel as we can get closer to some of those milestones because the predictability of those milestones is not such that I could give you the quarter-to-quarter guidance right now and I think that’s part of the reason that we want you to just pay special attention to those and think about when they do occur that those are non-recurring events and so I’ll try and give you as much guidance as I can as close to the event as possible. Good morning, thanks for taking my questions. The first was, can you give us a sense for some of the data points that we can look forward to perhaps in the first half of ‘06 and even second half if you can provide them, especially on the clinical trials? Okay, so I think what we had said is that we are going to start a clinical trial with VELCADE™ with Alimta in the first half of 2006 and we are going to be initiating follicular VELCADE™ study in the second half of the pivotal trial. And data presentations to expect would be the final phase II data from the mantle-cell program in the first half of ’06, also the final data from the follicular VELCADE™ phase II study as well as Mark will be presenting our frontline data with VELCADE’s Gem/Carbo in the frontline multiple myeloma setting. And then as we told you before we’ll be filing the sNDA for mantle-cell in the second half of this year. So with MLN02, as we said before we are currently working on scaling up a commercial cell line and will be plan to be back in the clinic in early 2007. As you know the data that we have with that molecule it’s already demonstrated in phase IIb study with ulcerative colitis to induce clinical remission specifically significantly greater than placebo. But we have reached to some concept there with a very robust phase II study and now really it’s getting back in the clinic with the new cell line and material and then moving aggressively into pivotal studies there. With 518 as you know we’ve already demonstrated a clinical activity with that molecule in the relapse AML study as a single agent and based on the very encouraging data there we’d now move into frontline studying in combination with induction chemotherapy and we have initiated a trial which is ongoing now with the 518 molecule and chemotherapy and based on the results of that study, in other words, we’re looking at plans to sort of accelerate into pivotal trial studies so we haven’t announced when exactly that would happen. Great. And if also can I ask the question regarding VELCADE™ utilization. Given the promising data you have now seen in the frontline non-stem cell transplantations, would you expect that area of utilization to be more exploited by VELCADE™ use or you expect to sort of an equal spread of use as you look at your projections going forward in the frontline setting across those two populations, that’s the non-stem cell transplantation versus stem cell transplantations? You know I think the first thing to say about that is any data, to think a physician chose to use it in that settings but I will tell you that we do not promote in the settings for we don’t have approval. And so you won’t expect a huge pickup and that you will once we get a sales force and approval, and together. So I’m going to ask Nancy to comment on the non-stem cell transplantation versus stem cell transplantations. So, as you probably know in the frontline setting in multiple myeloma, the majority of individual actually don’t get a transplant and that’s because of they tend to be elderly and have other sort of risk factors that don’t make them eligible. So people in the past have not been able to get the most aggressive potentially curative or they will have potentially survival advantage. I think what’s really exciting here is that without a transplant we’re actually, with conventional chemotherapy seeing transplant like results. And then that opens up the whole possibility that the majority of patients they are out there now that are getting less intensive therapy that could actually result in survival benefit could get that with VELCADE™. I think that’s a really exciting piece of a story here is the transplant like results with chemotherapy with VELCADE™. A quick to remind you, because in the phase II studies we’ve done we’ve seen the combinability of VELCADE™ not only with melphalan and prednisone for patients who won’t go onto transplant, but also with other combinations where VELCADE™ has yielded similar marked increases in overall response rate and complete response rate for patients who might go onto transplant. We’re studying in our three registration enabling phase III trials both setting, that is patients who may go onto transplant, or transplant eligible, and also patients who would not be eligible for transplant. So we feel that there maybe a VELCADE™ alternative in the frontline setting for all patients which is a very exciting data coming from our phase II studies. Great. So this is the end of our conference call today. We just want to thank everybody for joining and we look forward to seeing everybody throughout the next quarter. Thanks a lot. Ladies and gentlemen that does conclude our conference call for today. We thank you for participating and have a great day.

EarningCall_233816

Here’s the entire text of the Q&A from 51Job’s (ticker: JOBS) 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. Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the “*” key followed by the digit “1” on your touchtone telephone. If you’re using a speaker phone, please make sure your mute function is turned off, to allow your signals to reach our equipment. Once again, that is “*” “1” to ask a question. And we’ll take our first question from Safa Rashtchy with Piper Jaffray. Good morning, Rick, Kathleen. Good quarter. Congratulations. A couple of questions. First, it appears that I believe for the second quarter, at least, your online advertising is doing very well, a well ahead of the print advertising. I know you commented on the call briefly about it, but could you elaborate on that? Are we seeing a trend here of more accelerated shift to online or are these just seasonal effects? And I have a quick follow-up. Based on our observations this year, I would say that in the last two quarters, certainly the online growth has been much stronger than the print growth. But typically, we do expect that that is the pattern, because usually the biggest jump in our print revenue usually comes in the first quarter. But I would say that, similar to what we said last quarter, we did see that there is a very strong uptake of online customers and that continued to be the case this year. So, yes, I would say that so far, we’ve seen in the first three quarters that online has been actually quite strong. Okay. Could you talk a little bit about your guidance for Q4 and what kind of expense levels are you assuming that you will have; anything unusual or higher levels than what we have seen already in Q3 that you are contemplating in your guidance for Q4? I think in looking at Q4, we mentioned that we will be actually preparing ourselves for the peak season for the first quarter next year, and I think that relates to probably investing in sort of bandwidth and operations for the online business, looking at some of the operations overall to see if there are any sort of personnel needs as well for that. But aside from those considerations, I’d say that on a more general basis, I expect that there should not be very significant cost increases versus Q3 of this year. One final question, if I may. You mentioned that obviously you’re giving guidance based on your understanding of the market right now, with the broader understanding that the market as a whole has slowed down. Are you giving any special allowance for what happened last year, the particular slowdown in the last two weeks, are you assuming any significant slowdown in the latter part of the quarter or are you assuming more of a linear growth this quarter? I think, in looking at, sort of, our forecast for Q4, we have been cautious in terms of looking at the last two weeks of December in terms of our budgeting. Hi, and I have two questions. First question is maybe you can elaborate a little more on the current status for sales and marketing and also your business in first-tier versus second-tier cities. Particularly I’m interested in your expansion status and plans in the new city? And then I have another question. Well, I think for this year, we’ve gone into extended operations into three cities so far this year. And that has basically been the pattern of where we’ve been. I’m sorry; I should say its four cities including Zhengzhou in September. But I don’t see that there is a meaningful difference in terms of what we are doing in terms of sales and marketing in the larger cities versus the smaller cities. But, the impact that we have seen is that with some of the smaller cities that we’ve entered, the pricing has had an impact in terms of looking at the average revenue per page, and that has been sort of, in decline in the last few quarters, relatively speaking. But, that’s a trend that we have continued to been up front and have been actually sharing that with analysts and the public as a trend that we expect. And, can you also comment on the competition, especially like ChinaHR, which give us, sell us the (ph) revenue modest like doubled the year-over-year during the first half? And, can you also comment on what you see about the change in the competitive landscape and what is your particular strength going forward? Thank you, Richard. We did learn from Monster’s earning call that ChinaHR had year-on-year growth in the vicinity of 100%. But, as you would expect from a private company, there were no more details on whether that growth was on overall revenues or just the online revenues, and what kind of accounting standard they use. For the online segment, from our internal monitoring of competitor job postings, we don’t know the pricing situation, but we do know how many job postings they have. If you look at our internal monitoring of the competitor job posting data, our competitive position remained stable so far this year. We did observe that there is market share shifting from other smaller competitors to ChinaHR since the beginning of this year. In addition, we also noted from Monster’s financials that ChinaHR seems to have lost RMB13 million in Quarter 3 that was three times their losses in Quarter 1 and almost double their losses in Quarter 2. We learned from previous Monster’s discussion that ChinaHR had US$7 million revenue last year and were border-line profitable last year. So, these losses were pretty significant, given the small revenue base and the market share shift from smaller competitors came at a pretty high cost. In terms of our competitive strength, I think we had a comment in the earlier discussion that we got venture funding in year 2000. And when we got venture funding in early year 2000, we were the market follower. And in the past five years, we have executed a successful, executed our business plan and stick to our strategy, and we are now very significantly bigger than our competitors. And we turned profitable in year 2002 and we have continued to improve and increase our profitability the past two years. So, we actually think that, we don’t think that the market of the competitive landscape or competitive strategy has really changed compared to five years ago, and we are going to continue to stick to the strategy that we’ve been using and continue to execute and deliver result like what we have been doing in the past five years. My last question, regarding your margin, clearly, we see margin recovery for this quarter. Should we expect this standard to persist or we may see further fluctuation going forward? Well, I think with margins, I think Quarter 3 last year, our gross margin has returned to a level that was higher than Quarter 3 last year. But, if you note that operating margins and net margins, they were still below what we achieved in Quarter 3 last year, so, we certainly believe that we need to continue to improve our profitability and our margin levels. We do believe that in the longer term, we can achieve 30% plus operating margins for the print business and 40% plus operating margin for the online business. So, we are certainly not there yet and we are certainly working on continuing to improve our margins going forward. Hi. Congratulations on a good quarter. I have basically two questions. First question is in regard to your first and second-tier cities revenue breakdown. I know that you normally don’t provide that; I’m not sure if that is available. If that is unavailable, I can understand that. My second question is in regard to your CapEx spending schedule for your new facility in terms of, how you plan to spend the RMB118 million that you plan to incur? Thank you. Kit, let me, well, I guess the first question; we do not provide that breakdown, so I won’t go into detail to answer that question. But, let me quickly go to your second question, which relates to the CapEx related to the new office complex we mentioned. The RMB114 million that we spoke about is actually the purchase price, the consideration for the complex itself. We expect that in addition to that, we will be incurring additional expenses from the renovations, moving, etc. So there will be additional expenses on top of that. This letter intent was just actually signed a couple of days ago, really, in late October. And so we’re actually going through the details of going through the CapEx planning related to that specifically. We will be able to share a more probably detailed update with everybody in the next call, I expect. And, once again, if you would like to ask a question today, please press “*” “1” at this time. We’ll now hear from Albert Lee with Maxim Group. Hi. Most of my questions have been answered, but just studying from your comments regarding competition in ChinaHR, do you continue to believe strongly that your pervasive presence in the traditional print business keeps you at a competitive advantage versus the more pure-play online players? Yeah, definitely, because this is actually a B2B business, substantially all of our revenues are generated from HR customers; they are not generated from job seekers. In China, we do believe that you need a sales team to talk to customers in order to close a sale, as well as provide after-sale services to the customer. So, feeding up by our, feeding a sales team is very important. In some of the, larger cities, you would expect that internet penetration is probably higher, but if you go to the second-tier or third-tier cities, internet penetration is still at an early stage. So, by combining print and online services to customers, we are able to generate more revenue per account and in turn supporting a larger and higher quality sales team. And, I think that has been our core strategy, because the customer could use online for certain positions, they could go back to print for other positions. And the ability to provide a full range services to customers is very, very important, not only from a total solution service provider point of view, but also from the economics of supporting a large and high-quality sales team. Okay. So, you’ve definitely seen your customers within the traditional print business, for instance, crossing over to become customers of your online business? That is a true statement, right? Albert, I think in earlier calls we’ve also said that today, probably only about 30% of our customers that are offline as actually opposed to online. There is actually a much larger base of print customers out there for us, and we continue to believe that it is very important to serve them in both the print and then convert them to the online segment, rather than just focus on the online, which we believe is actually a smaller population, based on our experience. Got you. Now the increase in the print segment, I guess, is attributable to entrants in new cities, albeit at a lower price per page. Now is it still generally correct to assume going forward that gross margins are not really negatively impacted by this, as I think you alluded to was the case in the prior periods as well. Can you kind of, help us rationalize that, how exactly is the case? Well, I think it’s simply a case of the pricing is not the only consideration; it’s really the market structure, if you will, of each city that we get into. If we’re getting into a city with lower prices but with higher margins, still overall, it does not negatively impact our margins, but it does pull down our average revenue per page. So, that is really sort of the underlying economics. I’m not sure that there is anything new or different in terms of what we are doing. I think in terms of, if you look across the 20 odd cities that we are in, I mean, we do have a mix of cities in terms of the type of partners that we’ve selected. We have not made any changes in the last quarter, so there has been no change in terms of the structure. William, I think here, the key point above that shift is really margin driven. I think the world is not exactly kind of, black and white. I think there are situations that we are working with a higher circulation newspaper contractor, if they still give us a decent gross margin, we will be happy to stay with them. But, if in situations where we’d believe we can improve our gross margin, by moving to a smaller circulation paper and still generating the same or better results for customers, we will do that, and we’re going to do it in a gradual fashion. So, I think, to us, the strategy is not really shifting everything to smaller circulation names paper but continue to improve our gross margin and achieve profitability that we targeted for. I guess that is my question. Have you seen any shift in the larger guys willing to give up more margins? I think, it is a negotiation that happens from time to time. I think every quarter we probably have a few contracts up for renewal and discussion, and I think it depends on the situation. I think there are times that we want to make a proactive change; there are times that our partner offers a more attractive deal and we might stick around. I think it depends on the competition in the newspaper paper market too. The way we work is we know that gross margin is a key determining factor in terms of who to work with and what approach we take in that city. We have not seen a trend that all the newspapers are now coming to us and say they want to increase the price, they went to charge us. We have not seen that. Yeah, I think the college recruitment market is interesting. I know there is a lot of interest in the college recruiting market because there are so many graduates coming out from college every year. But if you look at revenues, we have not seen a lot of revenue opportunity from the college market in the past. The reason is, as I said earlier, that our revenues are coming from customers from HR departments. The challenge in China today is there are too many college graduates and there are not enough positions for them. So, unemployment for college graduates is becoming a social problem; it is a very high priority in the agenda of the Chinese government. So, to ask a customer to pay a lot of money to recruit college graduates, it’s just not a very attractive opportunity. Most customers are either not hiring a lot of college graduates or they are flooded with resumes already. So, we do not have a strategy to attack the college recruitment market in any major way. But, we would continue to look at that market and if we see any interesting opportunities, we will try to capture it. And as a final reminder, if you would like to ask a question, please press “*” “1” at this time. We’ll now move on to Patrick Lin with Primarius Capital. Well, hi everyone. Nice job on the quarter. I was wondering in terms of guidance, I know you gave the preliminary guidance for Q4. But, was that giving guidance (indiscernible) calendar ‘06? Can you discuss what kind of visibility do you have going into ‘06 in terms of revenue and EPS earnings growth? Well, as I said, we’re actually, as you said actually, we are not really going to get into 2006 at this point in time. But, I’d say that, when we look at the different product segments, if you will, in our business, we continue to believe that in the online business, this is where we have the higher amount of visibility, because we have customers locked into longer-term contracts. But, some of the other segments will have a shorter lead time in terms of then probably less visibility. But, it is no different on this quarter up to the next quarter. So, I think, we will continue to update everyone on our progress and our views as time comes. So, if you had to compare with 12 months ago, when we were at the end of giving out the Q3 numbers, you guys were in the US talking about ‘05. What does the visibility look like right now compared to a year ago? I think we’ve said consistently every time that the important indicator for us will be after Chinese New Year. So, that to us is going to be the best indicator for 2006. So, it’s probably too early to tell right now. Yeah, I have one question with Rick. When you say your customers said the environment is more, the amount is more moderate. Is that compared to last quarter or is comparing to last year when they say it is more moderate? Right. And also, in terms of last year’s week and last two weeks, what your customer or potential customers say regarding their budget for the rest of Q4? We have not, we are still in November now, and we are still trying to close orders every week. So, I think we try to serve our customers’ demand, the recruitment demand they have. And I think, as we talked about this before, our customers came to us probably two to three weeks before they need to place a recruitment advertisement. So, basically, we are still working very hard to serve customer demand for advertisements that are to be placed in latter part of November and early December. So, we have not got to the stage to us or to feel what the demand will be for the latter part of December. I’m sorry. We actually do not give breakouts by cities. So, we will not be able to do that for you. Or, maybe this way. For the print revenue, you have a sequential increase. Maybe can you give us some idea how much of that increase is due to the new office, how much is from the same city increase? Again, I think we’ve shared all information out there on an aggregate basis and will continue to do so, actually, on that front. And it appears there are no further questions at this time. Mr. Yan, I’d like to turn the conference back over to you for any additional or closing remarks. Thank you. We appreciate you joining us today and we look forward to updating you on our achievements next quarter. Again, thank you for your interest and continued support of 51job. 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EarningCall_233817

Good morning. My name is Judy and I will be your conference facilitator to day. At this time, I would like to welcome everyone to the BellSouth First Quarter 2006 Earnings 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 period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. As a reminder, ladies and gentlemen, this call is being recorded today, Thursday, April 20, 2006. Should anyone need assistance at any time during the conference, please press star, and then zero, and an operator will assist you. Thank you. Thank you, Judy. Good morning. Thank you for joining our 2006 first quarter earnings conference call. During this call, we will refer to a slide presentation. The presentation, earnings press release, investor news and our financial statements are posted on our investor website at BellSouth.com. Before we get started, let me point out that some of our remarks today may contain forward-looking statements. Actual results could differ materially from those projected statements. For discussion of factors that could cause actual results to differ, I refer you to our various reports on file with the Securities and Exchange Commission. I will begin our discussion by covering BellSouth’s consolidated financial results. Pat Shannon, Chief Financial Officer for BellSouth, will cover the quarter’s highlights in our business unit results. The supplements of reporting of BellSouth consolidated financial information under GAAP, the company presents certain non-GAAP financial measures, including normalized operating results, and operating free cash flow. Normalized results from continuing operations include BellSouth’s 40% proportionate share of Cingular’s revenues and expenses, which are recognized as equity earnings for purposes of GAAP reporting. Normalized results also exclude the impact of significant non-operational or non-recurring items. I’ll review the normalizing items for the first quarter. A complete list of normalizing items, as well as a full reconciliation of normalized results to GAAP reporting, is included in the quarterly financial statements, which are also available on our investor website. Slide 5 shows consolidated GAAP results from continuing operations for the first quarter of 2006. Revenue was $5.2 billion, up 1.6% compared to the same quarter of the previous year. Operating margin was 24.1% for the quarter. Year over year reported operating margin comparisons reflect the financial impacts associated with ongoing repair and restoration costs for hurricanes that hit our region in 2005. Normalized results for the first quarter are on slide 6. Normalized earnings per share for the quarter was $0.54, a 20% increase compared to the same quarter of the previous year, reflecting stable [ComGroup] results and improved performance of Cingular. First quarter 2006 revenue was $8.7 billion, up 4.5% compared to the same quarter of 2005, as all three BellSouth segment’s grew revenue. Operating margin for the first quarter was 21.9%, a significant year over year improvement for Cingular, offset slight decline in wireline margin. Wireline margin’s were impacted by $85 million in storm repair expenses from Hurricane Wilma. Consistent with fourth quarter treatment, these expenses are not normalized from our operating results. On slide 7, you can see the detail of normalizing items. Adjustments to reported earnings per share from continuing operations include costs associated with Hurricane Katrina, wireless merger integration costs, and intangible amortization. For the first quarter of 2006, pre-tax costs associated with Hurricane Katrina were $94 million, primarily for wireline network restoration expense, which is net of $20 million in insurance recoveries during the quarter. Since the third quarter of 2005, BellSouth has incurred approximately $730 million for Katrina related network restoration expense and capital. We expect a portion of the costs associated with Hurricane Katrina recovery effort to be covered by insurance. While the exact amount has not been determined, our current estimate of the total amount of covered losses that will be covered by insurance net of our deductible, is approximately $250 million. The actual recovery will vary depending on the outcome of insurance loss adjustment efforts. Thank you, Nancy, and good morning. Clearly our most noteworthy highlight for the quarter is that on March 5th, BellSouth and AT&T announced an agreement to merge the two companies, a combination that will create a more effective and efficient provider of wireless and broadband products and services. BellSouth first quarter’s earning results were strong, with revenue, margins and income reflecting solid growth for the first quarter of 2006. The communications group, Cingular, and advertising and publishing all continued to grow revenue, as demand remained strong in all three segments. The communications group added a record 263,000 DSL customers, and continued to drive up total revenue per unit, with further penetration of product packages. Cingular added 1.7 million customers, and now serves over 55 million customers nationwide. Their operating revenues continued strong growth, and their retail revenue per unit is up year over year, and sequentially, driven by strong data revenue growth. Cingular service operating margins before depreciation and amortization improved year over year, and [are sure to] improve again. They are on track with their plan to reach industry leading metrics in 2007. Slide 9 shows the breakdown of our revenue growth by segment. Cingular’s and AT&T’s results were strong, at more than 9% and 3% growth respectively. Following similar trends as in the fourth quarter, the communications group again grew revenue in all retail segments year over year and sequentially. Consumer’s drove more than 2% revenue growth in the first quarter of ’06, driven by higher DSL and long distance revenues. Small business had a record quarter, with revenue growth at 9.4% year over year. Our small business team continues to reacquire and retain customers with competitively priced term agreements while also increasing customer revenue per unit with DSL and long distance bundles. Large business revenue was up slightly as revenue from long distance and emerging data products offset declines in core, voice and data products. Wholesale revenue declined 2.7% year over year. This segment continues to experience the expected revenue erosion due to a lower [UNIP] access line base. The [UNI] market decline was offset by growth in wireless and a stability in the general transport area. Turning to slide 10, the communications group revenue was up 1.3% year over year, and flat sequentially. Operating margin was 23.6% in the first quarter of 2006, down 60 basis points from the first quarter of ’05, and up 170 basis points sequentially. In addition, first quarter operating margins were negatively impacted as the company incurred approximately $85 million in incremental expenses to complete the network repairs associated with the damage caused by Hurricane Wilma, which struck the southern Florida coast in late October ’05. As Nancy pointed out, to be consistent with the way we treated repair efforts, other than those of Katrina, these expenses were not normalized from out operating results, and had the impact of reducing first quarter margins by 180 basis points. On a positive note, the most significant driver of wireline margin improvement, was margin improvement on DSL, both year over year and sequentially. Given the importance of this product for our future, the margin improvement that comes with increased scale and falling churn is a welcome trend. Year over year, network data revenue growth continued to improved, reaching 9% in the first quarter, driven primarily by a 30% growth in DSL revenue. Retail network data without DSL also grew 4% driven by emerging data products, such as Metro Ethernet and Network VPN, and growth in complex long distance services. Total wholesale data revenue was stable. Demand for wholesale services from wireless carriers remains strong, with transport volumes up 14%. General transport revenue was flat, reversing recent downward trends due to strong volumes. These positive trends in wholesale data revenue were offset by a $17 million decline in revenue from the wholesale aggregation of dial-up Internet traffic. Slide 12 shows more specifics on our DSL growth. BellSouth set a new record on DSL net adds in the first quarter of 2006. We added 263,000 net new customers, driven by successful pricing and promotion strategies, and lower term. In January, 2006, we reduced the monthly price of the 3MB product by $5.00 to $37.95, driving both new adds as well as migrations from lower speed products. As a result of strong upward migrations, 80% of the first quarter net adds were to our 3MB or 6MB product. And as a matter of fact, in the past six months, 72% of our net adds were 3MB and higher, and in the past year, 57% were 3MB and higher. At the end of the first quarter, DSL customers totaled more then 3.1 million, up almost 34% from the end of the first quarter of ’05. DSL penetration increased to 16.4% of retail [switch] access lines, and revenue increased 30% year over year and 8% sequentially. DSL ARPU held steady at $42.00, reflecting increased customer migration to higher speeds and higher ARPU DSL plans, and our discipline and targeted approach to the marketplace. Benefits from customer growth and migration to higher speed service, stable revenue per unit and reduced promotional costs, all drove significant improvement in DSL margins during the quarter. Wireless substitution continued to be the main driver of loss in residential lines across both retail and wholesale services. Losses to CABLE and VoIP providers have been at an absolute level of about 50,000 to 75,000 lines per quarter for the past year, and that trend continued in the first quarter of ’06. In the business segment, small business gained an impressive 48,000 lines, the sixth consecutive quarter of line growth. Large business lines declined 28,000 in the quarter after experiencing some stabilization in the second half of 2005, in line with negative seasonal trends that we usually see in the first half of the year. We’re keeping out top line growing to further penetration of DSL and long distance services. Customers continue to combine long distance, DSL, DirecTV, and Cingular services in the BellSouth Answers Bundle. Mass market and complex long distance revenue totaled $464 million in the first quarter, an increase of 14% year over year. In the first quarter another 105,000 added DirecTV to their BellSouth bundle, and at quarter end, 628,000 have included DirecTV services in their BellSouth communications packages. Our package penetration strategy in the mass market continues to increase the value of each customer through deeper penetration of packages. Through targeted pricing and promotions, and upselling existing bundled customers with additional products, consumer revenue per unit reached a high of $62, more than a 6% increase over the same quarter last year. Slide 15 shows that Cingular again improved across all metrics. Service revenue grew nearly 8%, and total revenue increased 9%. Operating margin before depreciation and amortization benefited from merger synergies, revenue growth and lower churn as margins improved 640 basis points compared to the same period last year. Both overall churn and postpaid churn declined to the lowest levels thus far. Total churn of 1.9% and postpaid churn of 1.6%, both improved 30 basis points compared to the first quarter last year. Cingular’s continued strong performance in customer additions and churn improvement can be attributed to improved service quality as the company integrates its networks and focuses on a steady stream of innovative products and services. Clearly better churn results flow through every part of the business -- customer growth, revenue, expense, and most importantly, the overall reputation of the business. Slide 16 illustrates Cingular’s year over year significant earnings growth, and how a more profitable Cingular provides incremental value to BellSouth. These opportunities include the completion of the network integration, completion of the [T-Mobile online], further billing and IT consolidations, further customer service integrations, and a full-year benefit from last year’s distribution rationalization. In the first quarter of ’06, $0.13 of BellSouth’s normalized earnings per share came from Cingular. This compares to $0.04 and normalized earnings per share in the same quarter last year, and over the past four quarters, Cingular has contributed $0.47 to our earnings per share. Slide 17 shows advertising and publishing’s results. First quarter revenue was up 3.1 percent compared to the first quarter last year. This segment continues to show strong growth. A&P has delivered six consecutive quarters of year over year revenue growth, a unique attribute in this industry. Operating margins were 44.7%, down 230 basis points, or the equivalent of about $12 million compared to the same period last year. This decline was partially driven by revenue reductions association with lower billings in the areas affected by Hurricane Katrina. In addition, costs of improving the speed and salability of the yellowpage.com platform, along with higher advertising and online distribution expenses also impacted margins relative to the same period last year. We expect margins to improve somewhat later in the year. Additional key financial metrics are on slide 18. BellSouth’s dividend was $0.29 for the quarter. We generated $551 million in operating free cash flow during the first quarter of 2006. Capital expenditures for the quarter amounted to just under $1.1 billion. Net of the storm impacts, increased levels of capital expenditures were driven by a decision to accelerate 2006 broadband investments, especially infrastructure and system investments towards the first half of the year. Given the level of capital spending in the first quarter, I wanted to provide some further context. Slide 19 reflects capital trends for the last five quarters. Without the storm related capital and the first quarter planned acceleration of broadband investments, ongoing capital [expend] is in line with 2005 quarterly capital expenditures. We expect broadband investment levels to drop over the remainder of the year after we shift our focus from fiber deployment to D-SLAM installation. I’ll conclude on slide 20. For the first quarter, BellSouth has delivered strong financial results, with a focus on shareholder value, and we now have an opportunity to further drive shareholder value, improve innovation for our customers and enhance opportunities for our employees by merging with AT&T. BellSouth operates in the thriving economy of the southeast. It has strong relationships across residential and business segments. We’re replacing local voice revenues with profitable growth in long distance and broadband services across the mass market. Our results this quarter demonstrate the strength of our business and our ability to deliver strong financial results in an ever-changing competitive market. The merger with AT&T is an excellent opportunity to build on all that we have achieved and to move our vision forward to the benefit of our shareholders, our customers, and our employees. Now, I’ll be happy to answer any of your questions. Thanks, good morning, guys. First quarter, you saw a nice little turn in the large business market, and small business continues to accelerate. Could you talk about some of the trends you’re seeing there, and do you think we should continue to expect improving top-line performance in the business market? And secondly, on DSL, could you update us on the plan to rollout the faster 12MB service, and you know, the ARPU continues to remain strong. Just your thoughts on the growth of that business over the next few quarters, that would be great. Sure. As far as the business market, you know, small business has been, I think really with the demise of the UNE P model I think was really the big turnaround there, and even before that, with long distance and DSL coming into the product mix, they had done a great job of reaching out to our customers and putting them in packages and in term contracts, but really with the demise of that UNE P model, I think the retail side has turned around significantly. And they’re taking good share in that market, and that’s then building momentum really over the last six quarters, so I would look to see that continue. On the large business side, really the main thing that’s happened is in the terms of pricing pressure on core voice, and if you look back over the last three quarters, we’ve seen virtually no pricing pressure on the core voice side, so even with modest declines in the volumes around core voice and access lines, that has caused a stabilization of that revenue stream. And we’ve also seen some good sales of some of the emerging data products, like I said, around Metro E and Network VPN, so you know, we’ve got two good solid data ports now for the last two quarters around that business. I feel pretty good, a little cautious still, but pretty good about that business. On DSL, DSL’s been a great story, you know, for us. We had good reaction every time we made a pricing move. Some of our pricing moves have not been nearly as aggressive, I guess, as some in the market. We’ve had solid response. We went to an everyday low pricing model late last year and saw some great volumes, and profitable volumes. And then this latest move to just make really a tweak to our 3MB proxy and dropping it down to $37.95, has stimulated some migrations from the lower end of the spectrum, so we really stopped doing what we were doing. I believe it was kind of over-promoting some of the slower speeds at the lower prices. Now we’re pushing people up into the portfolio, so it’s very welcome to see record net ads at higher speeds, higher ARPU’s. And as you can imagine, since the cost for these products are the same across the speed, that really provided a nice margin lift, enough to really float the whole boat. I mean, the entire wireline margins are up because of that important product, and I think that’s a great sign. Churn is coming down. We’ve seen a set improvement in churn over the last four quarters. It’s still higher than our base product, and we’d like to see that come down to sort of the base churn levels. We’ve seen the LD product act that way at scale, coming back down to the base churn levels. We expect over time that we’ll see the same thing on the DSL side. So solid trends across retail. I think that’s what is really driving our margins up, is that our cost structure is so leverageable, on the up and the down. And after experiencing the down side for the last several years, with just some stabilization and minor growth on the retail side, we’ve seen a good pop in the margins, and that’s well-received. Are you able to -- you guys have said in the past that DSL margins were approaching the voice margins. Do you still look at it that way? And is that relationship true? Do you ever see the inverse being the case, where you actually see better margins in DSL as the voice market [itself is under] more pressure? This is all, right now it’s all in. The overall margin from DSL, including some [trial] acquisition costs and the bit, not only on a marginal customer basis, is positive and it caused a very significant lift in the overall wireline margin. As long as you have a significant subscriber acquisition cost, especially with a product, I think it will be tough, even at common churn levels, I think it will be tough to get all the way up to the margin of the local business. But I would certainly see it approaching it over time. Hi, good morning. Just a couple quick questions. Just first, a little bit more on just some of the business trends that you’re seeing. You talked about some of the share gains and pricing, but what about the health of the overall market economy and how that’s playing into the revenue side? And then the second question I had was just a little bit more on what you’re seeing from wireless substitution in your markets. You mentioned the cable voice data point. I’m curious what you’re seeing overall term, and how that relates to what you’re seeing on the Cingular side in your specific region. Thanks. Sure, I think the overall health of the economy is strong. It’s driving some good volumes, especially on the data side of the business, which we saw some good growth, even outside of DSL, in some of the emerging data products on the retail side. The 4% percent growth, that’s a good solid trend compared to what we’ve seen over the last several years. As far as the wireless substitution goes, the absolute amount of wireless substitution was a little bit lower in this quarter than we’ve seen over the last several three quarters, but I think you fall into some seasonality trends. Clearly it is still the main driver of [off-net] line loss that we’ve seen, so again, the absolute number of lines dropped a little bit, but I’m not ready to call it a trend by any stretch of the imagination. And I don’t know the details of Cingular’s southeastern results just off the top of my head. I will tell you that in the past, we’ve looked at. Their southeastern properties tended to grow a bit faster than the overall portfolio, so we’re still by far the net beneficiary of that trend, given our ownership interest in Cingular, and it’s probably more than just the average of Cingular, because I think they do a little bit better in the southeast. Just on that point, my understanding was that you guys were going to be trialing some joint distribution efforts with Cingular, wherein some of those stores you might sell wireline product, DSL or the satellite TV product. Are you far along in that process where there’s some results that you could talk about on how that works from a customer and a productivity standpoint? We’re far enough along in it that we’ve launched it in several of the stores. I do not know the results. We could follow-up with you, but it’s a program that internally we call “Doors and Stores”, and what we’ve done is we’ve put our products in some of the Cingular stores, and selling them through that. We’ve actually put an agent in the store to sell it. And then on the door side, we’re actually doing some door-to-door activity. From an economics standpoint, this increases our distribution channel. It is a little bit more expensive, but it’s all variable because we’re using third parties’ agents to do this. So if they make an incremental sale, they get commissions. If they don’t, then there’s no cost. And we’ve had -- I will say that there were results, last I looked at were positive to the business case, but I don’t know the data right off the top of my head. Good morning. Just kind of quickly on high cap circuits, on the growth there, what you’ve seen and if you can give us a ballpark idea of what the [wholesale] increase is coming from selling to wireless carriers versus wireline carriers. And then, on special access pricing, we’ve seen some other carriers raise pricing recently. Do you have any plans to do that? I think your market can bear that. And then just one last follow-up, and maybe you commented on this and I missed it, but what was the impact of from the AOL agreement you had as far as the DSL adds this quarter? Thanks. Okay, Frank, as far as the volumes go on the wholesale, the point I made on the call comments that wireless transport volumes are around 14%, and the general transport, which is more on the [IXC] side, is actually up slightly. It’s up to a little over 1%, which doesn’t sound like much, but there’s been a relatively continuous decline over the last several years, so a little stabilization on the general side and a solid growth on the wireless side is what is helping, even despite the significant reductions in UNE P revenue, is holding that wholesale side of the equation up. We can’t disclose anything specifically on AOL, but that didn’t start until sort of the mid-quarter. So I don’t know -- again, I don’t know the actual number, but I can’t disclose it even if I did, to know the AOL impact. Most of our special access pricing is under long-term contracts, and you know, we have recently re-upped a lot of those contracts in the market, but I’m not sure that there’s a significant opportunity in the short term to readdress those pricings. Just to delve into the access lines a little bit more, on the UNE P side, you know, it seems to be the big swing in the last quarter. You might’ve addressed this, but do you think you’ll see a little bit more stability there going forward now that you have kind of prices negotiated more on a contractual basis? And then a couple of just other issues on the line side. With the UNE P declining, have you seen much increased [COS] build-out in terms of Cap-Ex, or deploying some new capital? And then lastly, as you’re rolling out these IP products to businesses, how are you classifying access lines or VoIP lines, or have you seen many of them? Let me go back to the UNE P. On the UNE P side, we do have commercial agreements, but those commercial agreements have price increases built into them, and we, in the first quarter, just instituted I think the second round of [pricing] increases. It was $2.00 on the UNE P side. So there will be continued price increases under those agreements, and I would assume continued pressure on that side of the business, on the wholesale side. On the [COS] build-out, I don’t have enough visibility in that to tell you whether they’re spending a lot of capital or not. I just don’t know. I mean, I’m just not as close to it as I need to be. We’ll follow up and see if there’s anything to be found out, but that’s competitive knowledge. I don’t really know. The only thing that we’re selling now and really is VoIP PB access, so it’s not really affecting our overall access line trend. There’s no major impact to that on the access line side. Good morning, thanks a lot. Could we talk about regulation for a second? You stated the merger was on track for a year-end close. Maybe you could just go through the Justice Department, the FCC, and some of the states and where we are and how that’s going versus your original expectations. We had filed with the FCC and we have responses that are due back to them on the 20th of June. Their comments are due on June 5th. There is a 180-day clock that has started with the FCC and that expires on October 17th. We have filed our proxies. We filed with the DOJ. So all the filings are made. We believe that we have to get approval in a lot of our states and…ten. Ten states in total, I’m now being told. And so we made all those filings and we’re working towards the deadline, but we are comfortable that the deal will close sometime before the end of the year. Yeah, I don’t really have a prediction as to whether anything will pass this year or not. I think there’s a lot of activity. We’re right in the middle of that activity, but I don’t really have a personal prediction as to whether anything will pass this year or not. Good morning. It looks like Cingular through AT&T wireless has a pretty large net operating loss carry-forward for tax purposes. Can you discuss the timing of that, the impact and if anything is to impact ’06, is that included in your cash flow guidance? Any impacts on ’06 are included in our cash flow guidance. The NOL should be utilized, you know, we think over the next two to three years. But yeah, the impacts of that are in our results. Yeah, at the end of the year we’ll give new free-cash flow guidance, I assume, for Cingular, and it’ll include next year’s impact, but not anything beyond that. David Janazzo - Merrill Lynch Good morning, thanks. Maybe just a couple of questions. One, on just obviously, the [results] enterprise, pretty good. Could you speak to any kind of specific behavioral changes that you may have noticed as a result of the conclusion of the SBC, AT&T, Verizon and [inaudible] mergers in the quarter, kind of any sense about how they did or didn’t impact the results of the quarter, and how they might or might now impact you going forward? The second question I have is just maybe the mirror image of something we were talking about earlier on wireless and wireline. Could you talk about how successful the selling the Cingular product [inaudible] has been in the bundle? And the last one, if I could, would be on the DSL margin expansion being related to the higher end DSL products. Are you seeing the customers coming into the higher end products, or are you seeing lots of customers coming into the low end products and then migrating up through the value chain? I guess the question being where is the thin inch of the wedge on competition, at the higher end or at the lower end? Thanks a lot. Okay, as far as our enterprise result, I can’t point to any specific activity in the market other than, like I said, the main driver, or sort of the stabilization, is core voice, so it’s not sort of high end data products or anything like that. About half of our large business revenue stream is just core access line driven voice revenue. And what we’ve seen over the last three quarters is a stabilization over the overall ARPU, and that’s what’s kind of held that flat, and then the growth in the emerging data products has then been able to put it into the black. So I don’t really have any specific flavor on any competitor individual, but that’s basically the trend that we’ve been seeing. As far as Cingular in the bundle, we’ve been selling wireless services through our telephone channel in bundles really even since before Cingular was formed. And it is a very sticky product. We get it in the bundle, put it on a common bill. We have seen some significant reductions in churn. The penetration, the bundle penetration around wireless is still at a relatively low number. I don’t even know the number off the top of my head, but it’s not a huge number. It might be like a half-a-million customers, or something like that, that we’ve got bundled through the bundles. Again, it’s not a huge phenomenon, but it is a very sticky product once we get that done. As far as the DSL migration, in the quarter, 30 percent of the gross adds were at the higher end, so we’re still seeing on the gross sales basis, more customers coming in towards the lower end of the product, but the migrations pushed in the quarter, the net adds up to at 80%. The net adds were [inaudible] and up, so again, we’re still seeing again more coming in towards the flagship product of 1.5, less at the 256K level, more because of our own actions of not pressing that as much through the sales channel, but we have this recent phenomenon of seeing strong migration through the products as a good sign. I hope that helps. Hi, Pat. I noticed in the wireline segment that the cost of service was up about $106 million year on year. And I think you said $85 million of that was due to Wilma. What I wanted to get a sense for, what was the other $20 million, and maybe real more importantly, what should be the run rate of the wireline cost of service throughout the year and maybe some of the pushes and pulls that might impact that? Yeah, I mean, you look at that line item, the only cost of service that we have that is just absolutely truly variable is on the LD side, so any sort of LD growth that we see is going to drag along some external costs of goods sold, and that hits that line item. And then the, as you pointed out, the proponents of the rest of the increase was hurricane restoration that didn’t get normalized out of that line. I was hoping to get a little bit more color on the margin expansion in the core group. I think it looks pretty impressive, you know, sequentially and year over year. It’s seems like a lot of it came from DSL. I noticed that most of the lift happened in the SG&A line. Is your subscriber acquisition costs per DSL sub coming down? I’m just wondering if there were any other drivers behind that. And then quickly on your broadband acceleration, I’m just wondering what the implications are for video offering. I think you’ve said in the past that you were waiting to see how the trials come out around mid-year before you make an announcement. But the discussion and the press release around 12 to 24 MBPS seems like you might be getting closer to pushing ahead with video. Thanks. Sure. On the margins, I would say there have been some minor improvements in some of the expenses and some of the promotional advertising and promotional costs around DSL, as we’ve kind of stopped doing some of those promotions and gone to more everyday low pricing. But the biggest driver of the margin expansion is the retail revenue expansion, and I think as I pointed out in the comments, I think it just shows kind of how leverageable the expense, the extremes are in our business. And so you know, we don’t have a lot of variable costs, other than on the LD side, and that’s a very profitable revenue stream. So with just modest growth in revenue, we could see an expansion in margin because it doesn’t drive a lot of revenue -- or a lot of expense with it. On the small business side, there’s 9.4% revenue growth in the taking of access lines share is hugely profitable for us because it doesn’t drag a lot of cost. We already have the network, we already have the services that we can provision, there’s not a lot of incremental costs, the sales channels are in place, so again, it’s very leverageable. And as we get just minor growth, we’re seeing that come through the top line. On DSL, I think it just points to really the scale issue. We now have over 3 million DSL customers. The churn is coming down. The ARPU is stabilizing. We’re reducing some of the costs around the promotions, and now we’re just in that lift on the margin side. On the broadband side, our goal remains the same. Our goal is to have 50% of our homes by the end of ’07 having the capability of 12 to 24 MBPS. There is in place a plan for ’06 that fits into that timeline. And it has a certain budget associated with that activity. What we did in the first quarter is front-end load some of the, what ended being some of the more expensive components of the ’06 plan being fiber deployment. During the first quarter, we have deployed over 50% of what we were going to deploy in ’06, and that was a very expensive endeavor. Later in the year, we will focus more on these plan installations and the [like]. We also had some systems projects that were front-end loaded in the first quarter as per our plan. It will come down in the latter part of the year. So the accelerated [spin] is more of a decision that we made on what activities during the first quarter than acceleration of our goal to get to 50% by the end of ’07. On the implications for video, I think that we continue to look at our position and what we’re going to do on our trials. Given the current situation that face, we’ve recently decided to repurpose the trial that we had. We had a market trial in Copp County. We’re going to repurpose the trial assets to focus on the technical aspects of delivering IPTV over our architecture, instead of the market aspect. So we’re no longer going to have a market trial and we’re going to repurpose that effort and those assets, and we’re going to focus on the technical aspects instead of the market aspects. Pat, if I could follow up quickly, just on the SG&A, the absolute dollar number of SG&A is down both sequentially and year over year, which I guess is a little surprising, given the DSL [gross] that you were seeing. Are gross adds in DSL down? Are you seeing a lift in net adds coming from lower churn? And then I’m just wondering if you could expand a little bit on your comment about the shift from a market trial to a technical trial. What are the implications of that? Are you happy with the market success for the product, and you’re just working out the kinks from a technical side? Or is there something else that we should draw from that? Thanks. I don’t know all the ins and outs of that line item, but there’s no inference. I mean, yeah, the lower churn did help DSL, obviously, but I’m not sure what impact that had on that specific line item. As far as the repurposing of the assets, I think we just, you know, given what’s going on in the business, we just felt like we needed to continue to do the trial. The market results that we might learn from it were less important than the technical aspects. We’re still going to do a trial of it, about 500 homes, but it’s going to be more focused towards the technical aspects of our architecture, because our architecture is slightly different. We’re using bonding where others are not, and we still believe that it makes a lot of sense for us to test the technical aspects of the IPTVO with that architecture, but the absolute market results and whether people wanted to buy the service are probably less important, given today’s environment. Hey, Pat. Just a couple of updates on some of the new initiatives. First, on wireless broadband, maybe you could give us a sense for what the cost per market metrics look like, and also, perhaps some of the early returns as far as consumer interest in those products, or business interest. Secondly, on business voice over IP products, can you give us a sense for where you think, or what you think the impact on margins might be from that as well as an update on some of the dual-mode handsets you guys have been talking about for WiFi GSM phones? And lastly, the talk in Washington on U.S.F. moving to a numbers based system. Your thoughts on the impact of BellSouth. Thanks. You might strike out on a lot of those. Wireless broadband, we’ve done some trials of wireless broadband and rolled it out in a few small places, but it’s not a big enough event for me to know a lot of the details of it. I mean, you could follow-up with Nancy and she could see if she could find out anything for you. As far as the U.S.F., we continue to work through those issues. There’s a lot of work being done on U.S.F. and air carrier compensation, and we have teams working on that, and pushing that in the right direction. We’ll share with you as those issues come to the light what our positions are. On business VoIP, there is some lower margins on some of the IP products, but they still have strong incremental margins associated with them, so we haven’t seen any sort of measure margin impact as people buy IP services. No. You probably should follow up with Cingular on that. I don’t know the details of the dates as to when they’ll be available offhand. The balance of your share repurchase program has been suspended, so the share cap we looked at this quarter should be pretty steady for the year then? Correct, yeah. I mean, for some employee programs, we might repurchase shares to keep it steady, but yeah, it should be steady for the rest of the year. One thing I wanted to follow-up on is the state approvals for the merger. Currently, there are 18 formal approvals at the state level that are required, six of those are in region, and 12 of those are out of region, and those 12 out of region relate to [C-lake] licenses and the like that we have out of the region. So I just want to clarify that. Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will not turn the call back over to management for closing remarks. In closing, we appreciate your time and your interest in BellSouth. And should you have any further questions, I encourage you to contact Nancy Davis and other members of our investor relations team. Thank you for joining us this morning.

EarningCall_233818

Here’s the entire text of the Q&A from Tellabs’ (ticker: TLAB) 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. Thank you. Just a technical question first, if I could, and then a follow-up question. I did not get that tax rate line that you just gave. You said there would have been 4.5 million and that would have been what percentage? Because that comes out to 10%, as I calculate it. Did I miss something there? Okay. So the question I had for you was on the wireless side. Clearly, there is a large backbone rollout of most of the major wireless companies in North America for data services. The question I have for you is, does the buildout of infrastructure to take the traffic off of those wireless networks onto the wireline backbone require them to, or will they tend to put in the off-ramps simultaneously with putting in the data capability, or will they put in the off-ramps more based off of the timing of the traffic build on a success based spend approach? How should we think about the timing of the rollout of what you will sell to that footprint, relative to the timing of the deployment of those data services capabilities in the traffic build? That is a difficult question, frankly, and we have not clearly modeled the scenarios accurately during the send. But let me first clarify the question. What you're asking is, as more wireless traffic grows, the wireline network will be carrying more of the wireless traffic. And in that scenario, what can we expect as the revenue into the wireline network? Was that your question? Specifically, they are obviously building out a data backbone service capability as they roll out data services into '05 and into '06, whether you be Sprint, Verizon or Cingular. Clearly, there is a footrace going on right now to build out data services capabilities. Data traffic obviously will increase the demand for off-ramps onto the wireline and backbone in order to handle that traffic. The question is, do they build the footprint simultaneous with putting out the data services capabilities, or do they build the off-ramps as the traffic build on the success-based spending basis? I see what you're saying. It's really hard for us to speculate what they will do. But our guess, and this is why we are investing in our Feature Pack 10 on the 5500 which has a lot of data aggregation capabilities, it has a Gig-E interface. Our guess is that, or our scenario that we think will play out is they will be adding aggregation capability from their transport provisioning platform, i.e., the 5500, incrementally as their data services grow. They will be expanding their core data network, which today, is predominantly layered three-based. And that we anticipate, because we have several trials with wireless customers, they will be looking at MPLS as a means to aggregate and boom some of their traffic, and also to support some of those services directly from an MPLS layer. So it's hard to tell right now exactly in what sequence they will play that out, but we certainly have quite a lot of R&D activity, anticipating the scenario I just laid out. I had a couple of questions. Just on the clarification on the book-to-bill, you said it was below 1. That is including the orders for the managed access products that did not ship in the quarter. Is that correct? Some of those orders were taken during the quarter, some of them would've been in backlog. So the answer is a bit of both. Okay. I wanted to get into the gross margin guidance for the fourth quarter. I don't understand why gross margin would be guided down given that you are going to have this incremental 10, 12 million of high-margin product sales. And I would imagine you will see some seasonal uptick on the 5500 in your wireline customers. So can you give some color on that? And then also, if you could give the 5500 mix in the quarter between wireless and wireline. Thank you. Well, our gross margins, as I said, 55 plus or minus 2, depending on the mix. If we have a fairly good managed access contribution, especially on the 8100 product, which is some of the revenue we missed, you are right, our gross margin should trend more towards the upper end of that range, 53 to 57%. For the current quarter, our 5500 was 38% wireline, 55% wireless and 7% other. We have a model for what we think that will be in the fourth quarter, but we generally don't get into that level of detail. I think your question is a fair question. We frankly have felt a bit disappointed that we could not deliver on our guidance. So maybe it's time to be a little conservative in terms of predicting where the fourth quarter margins will be. I just want make sure, now I'm a little confused. I thought in Tim's comments, he said guidance for the fourth quarter gross margin would be flat to down sequentially from the 54% level. Here, let me give it to you in CFO speak. You can say that the mix, both in terms of product mix and geographic customer mix, profoundly affects our margin. As we look, and of course, how the fourth quarter is going to be written is not done yet, and the more wireless obviously 5500 revenue, the higher we would be in the range that Krish talks about. We do see some orders for our 8100 Managed Access product that's in more competitive geographies than they are larger orders that are scheduled for 4Q. So I think I'm trying to give you a slight indicator saying, all things being equal, what I see today is flat to down slightly, but it could be up 2, 2.5 points, it could be down a point or more below that. And it's really a function of the mix as it plays out this quarter. So we do see some orders, sizable orders, for the managed access in more competitive geographies that are scheduled for fourth quarter ship. Hopefully, just a clarification is the assuming that does not include AFC, and just any thoughts in terms of modeling out timing of close there. So, stand-alone Tellabs? Any thoughts now, in terms of timetable, any changes there or what you're expecting, in terms of close? AFC put out a release yesterday that their shareholder approval is scheduled, approval meeting is scheduled for the 30th of November. We have high confidence that that will happen and that will pretty much dictate when the close occurs. Good to know. And then on the 8100, just any comments in terms of that? My understanding is that it's largely an ATM-based platform and some of the people up there up north seem to be moving more towards IT. Any comments on whether or not that's changing the business mix or prospects on that side of the business? The 8100 actually is a PDM-based platform. It has some ethernet and some ATM capabilities, and also has the DSL drops, primarily for business customers. We have, through the launch of our 8600 product which operates under the same umbrella, network management system, we have an evolution patch to handle IT-impacted traffic, and we're having quite a few trials in our data product family related to precisely the upgrade for existing customers. So I think they're covered, in terms of evolution, from PDM two packet either via ATM or skipping ATM and directly going to IP. Could you tell us why the sequential increase in non-operating income, and also new product sales, as a percent of total revenue please? The latter is a statistic that we're not disclosing. The former question, in terms of the sequential increase in fourth quarter, two factors, Gina. One, we expect some integration costs when we closed the AFC deal and fourth quarter has some seasonal factors that just tend to cause it to lift slightly. So we are continuing to work that very rigorously. But at this point, we see a slight lift in that that could be a couple of million dollars off of where we are today. But Jim, in the third quarter, there was a $4 million dollars sequential increase, $2 million on non-operating lines. Could you talk about that? Interest rates was one of the positive things. We did have some gains on sale of short-term investments as we positioned cash for an AFC close, and we also had positive FX impact. And those factors lifted it about $4 million. I was wondering if you could give us an idea on the trials that you went through kind of a number of different trial activity in your data product. When might the bulk of those trials or how might that ultimately result in revenues timing-wise? Just give us an idea of what kind of a timetable we should be thinking about. And then, if you could give us an idea of the split in the 5500 product between line cards and chassis? Thanks. I will have Tim research the answer to the second question while I answer the first question here. We have our data products positioned in wireless accounts, in wireline accounts and in cable accounts where we are working through partners. In wireless networks, we talked a little bit about it to Alex's question. In wireline accounts, which is where we get most of our revenue today, the product is primarily being positioned as a multi-service product. So in a way, it needs to operate between an existing layer 2, be it frame or ATM and an existing layer 3, which is an IP. And so the product gets positioned to enhance the network operations in this particular application, and then it is positioned to provide ethernet services off of the same platform. So that's the multi-service nature of the product. My own expectation, Brant, is this is a fairly technical sale. This is a little bit of, you have to have a champion on the customer who believes in this particular evolution scenario. And as we have seen with some of our repeat business, once they have overcome the initial hurdles of acceptance and rolling this product out in the network, that repeat business comes in fairly easily. Where will we be next year? I fully expect to double our revenue year-on-year, maybe even more. But at this stage, I cannot predict with any certainty as to how quickly we will go from that initial revenue to follow-on revenue, because customer by customer, segment by segment, it's a matter of the customer feeling comfortable that the technology gives them the value that they seek. Brant, on your question about systems versus line cards, the growth in embedded database or cards was 82% of the mix and 18% was for new systems expansion software upgrades. Thank you. I have two questions essentially. One, going back to the sales trends of the 5500 and the mix between wireless carriers and others, my rough estimate is that the other group was down slightly sequentially where wireless was down over 22% sequentially. Just want to see if that is right and if you can describe how much of this is driven by a single customer or multiple customer trends? And then my second question is regarding the managed access group. We talked about the issue earlier of some sales being pushed out. I'm just wondering what happened in the quarter, in terms of normal seasonality? We've typically seen some weakness in Europe, whether or not that was in this quarter? Thank you. We have not done the math on customer shipments by segment on the 5500 quarter to quarter, but I will give you a distribution for second quarter and third quarter, and I think you could work the math out. In the second quarter, 29% of our 5500 shipments were to wireline customers, 65% to wireless, 6% to other. And in the third quarter, wireline was 38%, 55% was wireless and 7% was other. And recall that the total 5500 shipment reduced from the second quarter to the third quarter. Okay, so we haven't really done the math the way it you laid it out, but this should give you some sense of what's happening in the three segments for the 5500. Now on the 8100 and managed assets in general, the 8100 is one part of managed access. Increasingly, we sell it more and more bundled with the 6300. Year-on-year, we were down 10%, and that is largely the mix we had due to the factory transition from Finland to Estonia. Sequentially, second quarter to third quarter, we were down 4%, and it is true that there is a slight dip in the third quarter for managed access products and we come out a little bit ahead in the fourth quarter, and that is the seasonality we see in international markets. I would add to that, Simon, that if you take out the impact of the manufacturing, there was actually some underlying strength in that segment of our business. And, for example, our 6300 product was actually up. So I am pleased with the underlying strength. I think, if you talk to our sales folks, in addition to the $10 to $12 million of orders that we were not able to ship, they would tell you that they have underlying demand that probably would exceed that. So while we could document the $10 to $12 million of things that we have scheduled and could not get built, I suspect that there's underlying strength over there and that as we get the manufacturing situation alleviated, that we will see some continued improvement. Thanks. That's kind of what I was suspecting on the international. Just going back to be wireless, Krish, you commented on the split. I was looking for some sense of customer issues here. Maybe a different way to take a stab at that is, where there changes in your 10% customer mix this quarter versus last quarter? The short answer to that question is no, but the wireless trends at a macro level, they spend more in the first half and less in the second half. And also, we have these two other factors. T-Mobile is a bit careful in their CapEx investments and the Cingular AT&T Wireless acquisition has frozen some CapEx investments. So those are the three things that are affecting our wireless to some extent in the second half. A couple of questions. The first one has to do with the guidance. If I take the 10 to 12 million, or let's say 10 million of international managed access revenues, and put them back where they should've been shipped if there had not been a manufacturing issue and put them into Q3, it would look like we should've been doing around 295 in Q3 or 294 in Q3. And then the Q4 number, the Q4 guidance, if I adjust that down and assume that about 10 million of the Q4 guidance comes from these managed access, then it looks like the guidance for Q4 is 290 to about 305 on a number for Q3 of about 294, and that is about plus or minus 3%. In past years, we have seen the fourth quarter be up in '02,it was 8 9% in '03, it was up 15%, and there seems to always have been a seasonal move up into Q4. And I'm wondering why we're not seeing any move-up into Q4 and any seasonality, and if there is some sort of larger thing at play. Is wireless really slowing down that much that there is no seasonal uptake at all in Q4? How should we look at that? I think the big seasonal uptakes we have seen in '02 and '03, and I wasn't there, so I can't comment with certainty, but I would guess was largely because of a budget flush in the fourth quarter on the wireline side. And this year, we think there might be something. But we also believe that many of our wireline customers are directing a lot of their excess budget, CapEx budget in the fourth quarter, towards strategic initiatives, like fiber to the prem, or voiceover IP. So we're being a bit cautious in planning, or at least guiding you, in terms of a budget flush, which would account for some of the sequential increase 3Q to 4Q, where we suddenly have planned for, it from a production standpoint, if indeed, the opportunity shows up. And I admire your creative math there. You should be a CFO or something. But I would say to you that as you are thinking about that kind of analysis, I think the revenues as I mentioned before internationally were constrained by the supply chain. And I think in a perfect world, we would've seen higher revenues in Q3 as we ship that and potentially higher revenues in Q4 sequentially for them as they were able to continue to sell. So I think that is part of the answer. I think Krish is right on in terms of caution around how the budget flush happens, and if it happens, where the money goes. But Tim it’s actually excellent creative or not. Let me comment one other thing that doesn't totally add up, and this builds on the previous question about gross margin, given, actually two previous questions actually. Given that the card mix was 82% of 5500 sales this quarter and cards have generally higher gross margin than chassis, I would've expected this quarter, despite the lower 5500 sales, I would expect the gross margin to not to have fallen as far. Can you give a little color on I guess why gross margin going forward doesn't, again, get a little bit higher, but also, why gross margin wasn't a little bit higher this time, given that the card mix was still much higher? And why was the card mix so much higher? Let me first talk about the gross margin. 2Q was an aberration, because the margins were unusually high. We had guided you to mid 50s, plus or minus 2%. That is our steady-state model based on mix. Q2 had an unusually high wireless bubble, and that did ferry a lot of gross margin, especially on the card side where we're doing some expansions. Going forward, we feel comfortable about the 55, plus or minus 2%. In 3Q, we did have a fairly large component of 7100 shipment. Most of that product was shipped out sprains and platform and control cards with just a small mix of transponder cards. And as the customer buys more transponders to build up their network when the traffic grows, we expect some of that margin to return to our normal levels. That was part of it. It's also some components for the 8800, since we ramp up in anticipation of more orders there. I'm not very happy with it. I'm making life miserable with folks. So, we're trying to do the best we can. It's not a precise science. Thank you. I would just select a few of our many questions. But Tim, any change in your thoughts on the synergies for the merging companies, in terms of revenues or cost? Yes. I'm going to let Krish comment on that, because he is putting a lot of pressure on me to see what we can do with it to increase in speed. Yes, we had, Steve, early on, we had modeled minimal cost synergies and minimal revenue synergies because the dealers steadily increased. We now are going to be more aggressive on the cost side. In our integration planning exercise, we have identified several cost synergies. I fully expect to share that in more detail either when we get the close behind us or possibly when we get the close behind us to be able to share that with you sometime between closing and our earnings call next time. But we will be more aggressive on cost synergies as we put the two companies together. And then, Krish, since you have the microphone, can you go back, because it was very helpful, a very nice snapshot on your data customers and their status. Can you give us an idea of where they were three months ago or six months ago, in terms of follow-on orders, initial orders, completed trials and stages of trails? The snapshot I gave you was the snapshot as of this week. What was the question about, where were they three months ago? Three months ago, we had very little follow-on revenue, so most of the revenue we saw, there's a little bit of revenue from new customers, but quite a lot of the revenue you saw this time was follow-on revenue, which if you really look at it, is fairly significant, which means that the network has not only proven its value in our customer size, the customer is directing more traffic onto the network, so he gets more follow-on revenue. I think the number of trials that have been launched 26 trials, was probably a number and I'm hazarding a guess here, so don't hold me to it. But that number is up by 5 or 10 compared to three months ago. And we certainly have completed more trials now, that the customer has gone through the specs and gone through their trial plan and we now have 18 customers that have completed their trials. Okay. And then I guess without being too creative, Tim, any changes in the long-term operating margin goals for the Tellabs on a stand-alone basis? I realize all of this changes here. But would you still look at the low 20s, given what we know today as a something if the Company was a stand-alone? That is our target, Steve. You know, we know it's going to take some time to get there, and I think we're talking in terms of months and maybe several years. But let's say absolutely something we are iterating on and we are seeing real progress as we look at our '05 plan, in terms of driving in that direction. So I think, yes, it is attainable. And so we all understand, the 7100, which you had called out as one of the reasons it's doing well, but it also temporarily depresses the gross margins. It sounds like that was just beginning a deployment, so A, what was the magnitude of the increase in the 7100 or what the total 7100 sales were? And the assumption here is that that continues into the fourth quarter. Is that right? We do not break out individual product sales, but it was substantial. We shipped quite a large number of systems to one ILEC customer as they went from completing the trial to field deployment and the early deployment of those shelves and a few parts. But there were quite a few sites that were put up in this last quarter. Now going into the fourth quarter, what does the mix look like? Actually Steve, the same or slightly more in the fourth quarter, somewhat better mix, in terms of the ratio. But it will still be an impact or affect on our margins in Q4. Most of my questions were answered. I have just two questions. The first one is on the outlook for 5500 in wireline. We discussed much about the wireless market. I'm wondering if you have any update on the wireline? If you can give us also the sequential and year-over-year trends this quarter? And then the second question is on advanced fiber. The reported lower-than-expected numbers last night, margins are going to go down by a major amount next quarter. And you have given here a guidance of, or a longtime target of over 20% operating margin. It's difficult for me to see where the consolidation of AFC is . So can you clarify whether your targets are still stand-alone, or you see these targets also true for Tellabs AFC together? I think Tim was answering a question which was specifically stand-alone Tellabs. And given that we have a gross margin 55% plus or minus 2 points, then trying to get an operating margin of 20% plus or minus 2 with an OpEx of 30%, that has been our target model. In terms of with AFC, clearly, the OMP piece of AFC's fiber to the prem business has negative gross margins today. And I'm sure as you heard on the call yesterday, they have a pretty aggressive cost reduction plan. And we have to factor that in, in terms of our long-term gross margins. And we also have to understand the impact of cost reduction on the fiver to the prem equipment as the market moves forward. Clearly, we think that the pricing pressure on AMP, there will be multiple suppliers. We have Tal, in fairness to the team here and at AFC, we really, actually have marked model those scenarios carefully. But our goal very much is to build a very profitable company and we will pick and choose the battles we fight, especially on the access side. I don't have actual specific numbers for wireline, but the fourth quarter in general, the split between wireless and wireline, the distribution roughly speaking will parallel or reflect a little bit of the third quarter unless we get some significant budget flush as customers try to add selectively to their wireline network. Now as I answered on that call earlier, we're not anticipating a budget flush, but I think this year, if any, some of the budget is going towards strategic projects. But we won't know until the last few weeks of the quarter. Congratulations on the Vivaci acceleration. And the question I have is just if you look out two or three years, or is that the time we cross over from the 5500, and when does kind of Vivaci, if you will, cannibalize your 5500 and you sell more Vivaci and less of the 5500? Our long-term plan really is to make the two complement each other, because what the 5500 does is provide layer one provisioning, as well as some select aggregation and grooming. And what the 8800, the Vivaci product does, is layer two mix layered pre-capability around MPLS. So as the networks evolve and as traffic continues to grow, we think that both of them will sit side by side. There may be some minimal cannibalization as they overlap, but my sense is it won't be strict cannibalization because they serve different functions in the network. And then one on the wireless side. When you guys gave your presentation in New York, you had a slide talking about T1 equivalents needed as we going to pure 3G, and you're talking about Verizon's EVDO. If you look at those networks rolling out in '05 and '06 and now Sprint coming on board in the same network, I would think that Verizon being a good customer of yours, would you have better acceleration in your wireless 5500 sales? I don't know if it's better acceleration, but I think you could at least assume a linear growth reflecting the same acceleration, especially data services takeoff and the wireless traffic continues to grow. I think we said in New York on the average from one through T1s, we go to four or five T1s, in terms of connectivity, to a remote base station. And I think data services play out, we certainly can expect over the next two or three years that sort of revenue growth. Now we're also anticipating that, as most of this data is going to be packet-based, the base stations will do some of their own aggregation and grooming to minimize the number of T1s they need, as well as we're planning for some products that in conjunction with our 5500, would allow you to do some of that at the remote base stations. Hi, thank you very much guys. My question had to do explicitly with advanced fiber. I did not hear any commentary on the conference call or in the press release relative to accretion versus dilution. I know some other questions kind of touched on it a bit. But any update on your view about the deal being accretive in 2005? Thanks. George, we need to model that a little bit more carefully, the big swing factor really would be OMP component. As you know, you probably picked that up from their call. And what's not clear to us is how many single-family home units the customer would need next year as they do their rollout and they connect more customers to their FTTP network. I think this is the thing that really affects the profitability picture. Otherwise, we are in the target zone of 50% gross margins across the board for most of our products, in or around 50% as a first part of approximation. So the big question really is the OMP question. Will the customer have multiple vendors? Will the customer mix and match OMPs for multiple vendors? Will they be looking for more single-family home units, or will they be looking for a different mix? We really have not dug into that in great detail, certainly from the Tellabs side. But we should have some of that on our next earnings call. Thank you. Just in terms of the data segment, where are you, you said overall headcount was flat, where you in terms of hiring for sales and marketing for the Vivaci product. And in the past, you've given us kind of R&D spend by product. Has there been any significant changes from past quarters, in terms of that investment? In terms of sales and marketing, we continue to add people selectively on the data side. As we shipped more of our frontline sales especially for the marketing effort towards data, we have not really done significant hiring as Tim pointed out, and our numbers more or less have stayed at or around the 3000 mark for the last two or three quarters. If anything, they have come down a bit. But what we have done is increase the number of data salespeople and the marketing people. I don't have specific details, but that certainly is a trend we're following on the data side. What was the second question? Just in terms of in the past R&D investment by product, you said data was X percent of R&D investment. Can you give us kind of an update as, are the levels of R&D investment by product about the same as past quarters? Yes, about the same. No real change there, except though that as we bring on AFC, we had planned to ship more R&D towards access and we probably have to trade off some of our transport R&D and move it towards access. Well, not that I can specifically point out. I am sure they did their share of wins, especially from new side and we get our share of wins for new side. But in the wireless space and in the other space, that is where we compete with these guys on that product. And in the wireless, like I said, the broader trends are clearly T-Mobile being a little careful in their CapEx and the AT&T Cingular Wireless, so it basically takes two customers out of an aggressive CapEx spend mode. Okay. With respect to the AFCA acquisition, one of the missing components appears to be IP video. Would you intend to maybe partner with someone in this endeavor? Yes. We have one of the applications in our 8800 is indeed to provide switching capability quality video. And in fact, we are in discussions with some customers about the use of that product precisely for that. We will know a little bit more as we respond to some RFPs as to so whether we have some gaps or can we pretty much do it on our own. But we are also talking to some MSO partners, so partners who are suppliers in the MSO field, and we think we will have a pretty comprehensive IP with the offering. We don't really split that out. It's really in the North American, it is really in our transport business. And I think the closest you could come to is maybe we said 38% was wireline ILEC, 55% was wireless and 7 was other. So the 38%, this was a 5500, and now you have to add the 7100 to it because that was the product that we shipped to an ILEC RBOC this quarter. So we don't really have the numbers, but that should give you some sense of what it is. Thank you and good morning. Tim, it seems to me that the answer to several of the questions, Steve Levy, Tal Liani, in particular, with respect to the model and the earnings outlook and dilution or accretiveness going forward is going to depend on how you are going to treat these acquisition-related expenses. Are you prepared at this time to simply tell us what category of expenses you will treat as a GAAP or a non-GAAP measure? For example, integration; acquisition, integrated related expenses. Would that be treated as strictly an operating item, or a non-GAAP adjustment? Can you give us a general picture of how you're going to treat these categories of expenses? Andy, good morning. I appreciate your thoughts along that area. We have not resolved how we're going to handle that. Obviously, there are elements of the deal that we think are important that the Street be aware of, in terms of the tax impact and some of the integration cost and the purchase accounting. But we at Tellabs have been fairly conservative on how we have handled that reporting. So we're trying to find a balance that conveys the proper message that people understand the business and try and make our financial statements as easy to read as possible. And I think until we are kind of staring the purchase accounting in the face and the impacts, and that's something we're obviously working through this quarter. It's difficult to make that conclusive a decision at this point. Thank you, everyone. We will get back to you. There are certain AFC related questions, especially as it relates to accretion and what would 2005 look like with AFC in the mix. And hopefully on the next call, we will have more information on that. Thanks, everyone. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. 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_233819

Here’s the entire text of the Q&A from Tom Online’s (ticker: TOMO) 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. Thank you, sir we move on to the Q&A part of this conference call. If you have any question just press “*” “1”, on the telephone keypad, “#”, to cancel. Once again that’s “*” “1”, for question. Yes. Thank you, and congratulations on a good quarter. And I’m curious about your content origination for music. Do you expect this to be the predominant form of revenue generation in the music area, or do you expect to sign more agreements with the labels themselves and have that as a major contributor to revenue in a year’s time or so? Thanks for the question. This is Jay. We don’t look it as the exclusive kind of one or the other. We view the user generated content as a way we can differentiate ourselves in terms of channels with China Mobile and China Unicom, and actually spur a lot more usage on our website. However, the music labels, at the end of the day, their business is clearly to develop talent. So, I think the majority of music will still be through music labels. However, in China, it’s not owned by just four music labels like it is globally. There is tremendous amount of new music labels popping up, some even focused on just the internet singers themselves. And we are trying to work with that whole value chain. However, I think the one thing that we wanted to point out, but we think we’re doing, that’s quite interesting is, is we are enabling this type of new value chain for singers and song writers in China. Just because there has been so much piracy, one of the most established payment platforms is the mobile phone. And the youth market tends to, this is something that they’re doing today, and it’s definitely a trend that we want to keep developing and be a leader in. Thank you sir, for your question. Next question coming from the line of Mr. William Bean from Hong Kong. Please go ahead. It’s, for example, for music labels they just, all of the three channels are contract with the different service providers. For some big service providers like, TOM, Sina and Tencent, we just have the simple revenue sharing contract with service provider. The second is like Linktone and the KongZhong, they have revenue guarantee, revenue sharing with this kind of service provider. But for some small service providers, they always just one time, kind of one time corporate fee from the small service providers. So it’s more flexible. Okay, great. And could you give us a sense of what’s going on with IVR. This huge growth in second quarter and then, looks like things slow down in the third quarter. For the Q3, IVR was both, the people favor ph for IVR but some seasonal promotions by China Mobile, for several provinces like Guangdong, like Jiajiang ph because they have their own music road shows and a lot of people to promote the IVR services to people to use all the music sending services. This is a seasonal growth for Q3. But we believe in Q4 it’s also have another promotion from China Mobile towards IVR revenues. And that leads me into my last question. Can you give us a sense of the promotional sales and marketing events in Q4 and beyond? Do you have anything big scheduled? We don’t have anything big, per se. What maybe tend to have a lot of ongoing promotions with China Mobile or other various parties. In the third quarter we did a lot with our Love Mobile Music Roadshow. In the fourth quarter, because we have exclusive rights to Jay Chou, he just released a new album. We’re doing a lot of promotions with China Mobile now for his new album. On top of that, we’re also one of the sponsors of the street dance competition at Mzone ph That China Mobile the Mzone ph data brands from China Mobile which we’re one of the main partners in that. So those are kind of the key things I think in the fourth quarter we’re looking at. For IVR also, which is little bit, separate from Lei Lei was talking about, going forward in the fourth quarter we’ve also increased a lot of our partnerships with the TV channels. So I think previously we announced we had about roughly 100 TV channel partners. Now it’s over 300 as we go into next year. So this is a very different kind of TV cooperation compared with Sina because we just have the revenue sharing model. We have no, I mean TV advertisement costs items. Good morning. I am trying to catch up with all the information you were going through and the slides that are still coming up, so you might have covered this, but if you could please review for us, on the wireless front, I didn’t quite catch the projections or the growth trend you had for WAP. And I have couple of follow-ups. WAP was about US$8.4 million in the quarter, $8.36 million to be specific, at about 77% up year-on-year over the same period, and about 7.1% up quarter-on-quarter. Similar growth rate compared with Q2 because China Mobile didn’t want to have a further clean up action, and I think that’s, the China Mobile wants a more and more service provider, key service provider to activate the users. Okay. My second question has to do with Skype. Lei Lei, you mentioned that you were looking to monetizing Skype in China within the regulations. Can you give us some timeframe when you might start that and could we expect to have some meaningful revenue from that maybe in the second half of ‘06? The authorities still are in discussion period with some major carrier in China. And we try hard to join their PC-to-phone on trial in mainland China in some cities. And we believe some major carriers, especially for the frequent carriers in China, they like PC-to-phone services as their voice added services, like the Skype platform. But the one thing I would mention that PC-to-phone services is not value added services. Its basics regular voice services for the carrier. So the revenue share model cannot get much from 85 to 13% because we are in the position of either sales agency for carrier to sell their PC-to-phone services. So we just got agent fees from the total revenue generated from the PC-to-phone in the future. Thank you sir for your question. Next question comes from the line of Mr. James Lee from United States. Please go ahead sir. First question here, can you guys sort of breakout the guidance a little bit on all the product lines for the fourth quarter, if you can? We don’t give specific kind of quarter-on-quarter percentage guidance. But I think in terms of overall, SMS should be relatively stable or flat. The main drivers to get to our guidance range would be IVR and then MMS and WAP. And then Colour Ringback Tones is something which should probably be relatively stable as well, because we’re still doing the promotional activities with China Mobile. Okay. So I assume you have some addition IVR activity, promotional activities of China Mobile going into fourth quarter. So I imagine the revenue growth rate will be similar to what we experienced in the third quarter? Is that right? Is that fair to look at it, Jay? Well, we’re not actually specifically saying 2Q growth rate for IVR. You get me at the back out kind of what we’re saying for our overall growth rate 2 to 4%. However, I think relative to more promotions with IVR, I don’t think that’s going to be as aggressive maybe as in 2Q because it was kind of the new thing. But we are developing more with the TV channel partnerships, almost tripling them going into next year. So I think that’s really the area to focus on. Okay. Great. And can you guys also talk about the online ad revenues. Obviously that was very strong in 3Q. Can you talk about maybe some of the initiative you did during the quarter that sort of help to drive the revenues? Maybe you could highlight some of the major wins you guys did during the quarter on the sponsorship side for your website. Sure. I think one is obviously as we talked about before; we were focusing on where we think we have some strength online, which means things like entertainment and sports. And so far, our sports channel we signed up Reebok as a sponsor. And then for our music services, Sony Ericsson has come on. And then other, we’re also getting a lot of good brand kind of coverage with advertisers because of our longer ph broadband and a lot of the offline stuff we’re doing. So we’re getting a lot more kind of pick up there in terms of advertiser activity coming to us. Okay, great. And last question here, is there any way, can you sort of breakout the revenues by yield distribution channel, i.e. traditional media outlets or carrier channel, and revenue driven from cross selling in your portal, so we can get a sense, success of your individual distribution channels? Well, it varies by different products and services. I’ll give you some high level numbers for competitive reasons. For SMS, over 50% is still from handset alliances, to give you a sense. For WAP, we still rely very heavily on the Monternet platform, the Monternet portal, over 60, 70% distribution. For IVR, the TV, radio is now moving up to 20% plus of the IVR business, but we do a lot of cross-marketing with our SMS for IVR. And then ring back tones, we do a lot obviously through China Mobile. So that kind of gives you a rough sense of where things are coming from. Thank you sir for your question. Next in line is coming, the question coming from Mr. Chang Qiu from United States, please go ahead. Yeah, I have a few questions. For the improvement in gross margin, can you give us some figure, how much of that is due to revenue mix and how much of that is due, if you go maybe this way, if you compare in the same product mind, do you see margin improvement? It’s actually a little bit simpler than that. It’s really, because as a niche platform for primarily SMS has improved so much over the past couple of quarters, we’re seeing a lot higher revenue confirmation rates. And obviously we have very similar costs. And that has really been a key driver. I think going forward and one of the reason why I think you’ll see more stable SMS performance, because we’re now into the 80% to 90% revenue confirmation range. So that’s really been a big driver for our gross margin. So I think going forward I don’t expect we’ll see the same type of improvement from here on out, just because the revenue confirmation rates in my opinion are quite high now. And those are the ones we’re using now to estimate our revenue. Thank you for your question sir. Next question coming from the line of Mr. Richard Ji from Hong Kong. Please go ahead sir. Hi. I have two questions. Number one, regarding UMPAY which we know is the exclusive provider, payment provider for China Mobile UnionPay. And the deal between you and UMPAY exclusive, and then when do we expect a ramp up in the user base? Sure, the UMPAY is a joint venture with China Mobile and China Union. So, is a national wide exclusive rights to the China Mobile subscribers mobile payment business. So this year and next year our first priority target is to do all of the mobile payment users. That means we’re not to acquire the users which is bundle their banking cards with mobile phone number. And it’s very hard to tell our target because we just discuss with UMPAY management team for the next year’s target. I think one of the best ways just to kind of describe where UMPAY is today, what they do very well and why they came to us to work with us, it’s not specifically exclusive, as they have an existing relationship with another player, but after that we’ll basically be exclusive. As UMPAY’s, their key advantage is obviously having been only authorized payment solution provider on the China Mobile network, as well as having the linkages to all of the bankcards in China, which is about 800 million. They are very good technical team and a very good technical platform. However, when you start trying to charge for things in the real world using your mobile phone, it gets a little sticky in terms of being able to make it very easy to use, signing up merchants, user awareness, so on and so forth. They hadn’t done that very well, although they have about 39 users today. So one of the things that we’re doing right off the back when we started working with them is actually we’re now internally testing the product. In our offices in Beijing, our staff now is using the UMPAY service to pay for lunch every day with a couple of restaurants that we’ve trying. So we’re getting user feedback. We’re trying to figure it out. Once we get the kind of things ironed out to make it easier to use, then I think we’ll start going to the market. But we need to get that done first, get the user interface, user experience, which is what we do very well, in our opinion, in terms of mobile content. We think we can hopefully apply some of those skill sets to functionality on the mobile phone as well. Also we believe this is the right choice for the order of mobile payments, just the pay tel bundled with email. But China is a mobile based Internet market, not a PC-based market. So people used to use their mobile phone to get information and some key messages. So bundled with a mobile phone number with the user’s banking card, credit card is the right choice for the users. It’s interesting. And my second question is regarding economics for, user generated Internet music content. What is the current revenue model and where do you see the revenue model evolve going forward? Just to elaborate our Internet communicate, to acquire new Internet sounds. We have a ranking system and we signed a contract with single singers who upload their self-created sounds. And we have a revenue share model with these singers, but only for the wireless revenues. And for the other rights of the singers, like CD publishing rights and some rights just to let them to sign freely with some small music labels, just have the revenue sharing model with single singers. Thank you sir for your question. Next question coming from the line of Mr. Wallace Cheung from Hong Kong. Please go ahead. Hi, good evening Lei Lei and Jay. Well, two questions. First of all, it seems very interesting regarding your growth in the MMS business because some of your competitors basically have given relatively weak guidance versus you have a very strong growth in third quarter. Can you give us some highlights why MMS has been doing very well third quarter and also going ahead? And second question is actually on the advertising business. Any breakdown in terms of the industry groups of customers and any like fast moving consumer groups that we have to watch out for in the future? Thank you. For MMS growth, this growth reason is coming from our cross selling. We just leverage our SMS and WAP platform to sell the MMS products. And the second reason is music related products. We just provide some under payments for Internet music news and information. Also some ring tone push by MMS to the users. So for the content reason, and product reason, our MMS still growing. And the other reason is beneath the platform since the billing rate is higher than Q1 and Q2. And in terms of advertising, we don’t break out specifically by percentage. We haven’t broken it out before. But obviously the Internet companies, auction companies like eBay is a big driver for us. Consumer electronics, mobile companies, mobile phone as well as mobile operators. And now, hopefully, we’re all seeing things like sports companies and other kind of fast-moving consumer goods companies, like cosmetics and so on and so forth. Okay. Just one follow-up, again, on the advertising business. Can you give us a sense like the number of advertisers in the third quarter and for the second quarter? Thank you. Thank you sir for your question. The next question coming from the line of Lee Tae-jin Chun from Hong Kong. Please go ahead ma’am. Hi. Good evening and congratulations to this good set of results. I actually have a question, some questions. The first is on your Colour Ringback Tone. I thought the revenue actually dropped in Q3, so and you mentioned that is because you provided some free services to mobile operators. So I just wondering, do you think this will last? How long it will this last for and when will you start charging again? And also, is that just TOM participating in this free promotion, or is there any other SPs also involved in this promotion as well? I think the whole market, the top service providers, the ring back tone revenue be flat, because of the carrier strategy for this year. They don’t want to focus, like people to change their Colour Ringback Tone. They just want to get more Colour Ringback Tone users. And user acquisition is more important for China Mobile because the subscription fees for the, Colour Ringback Tone is 100% owned by carrier. The service provider only gains transaction fee for the content download, per download for the Colour Ringback Tone. But we discuss with the carrier, especially with China Mobile. They believe the net active users who would never change the Colour Ringback Tone will exist the Colour Ringback Tone services, so they can also gain the subscription, monthly subscription any more. So, for the ’06, they just want to activate the user to change the Colour Ringback Tone content frequently. And we believe for the next year China Mobile will develop the, will combine its service provider to let people to change the Colour Ringback Tone contents than before. What I mean, we do a several promotions with China Mobile to provide some free trial that promote some free content to the end users to develop the user acquisition. Okay. My second question is on your SMS business. Actually, I saw that your revenue grow quite nicely by about 14%. But you mentioned in your last quarter that SMS may not be a strong quarter in Q3 because it’s a seasonally weak quarter for sport events. So I just wondering what is the growth charter for SMS business in third quarter? Sure. There’s two things. One is some products. We released some new music products, called Music Unlimited that based on SMS, where people sign up for a service to receive about 20 or so SMS per month. And then they can basically reply back towards SMSs and download a ring tone, via WAP or via SMS or via MMS. And then that’s actually taken off quite well through print and TV advertising. But I think the primary reason is revenue confirmation rate keep going up, just a lot more than we expected. And I mentioned before, it’s now in the 80 to 90% range, and historically we seen it 70% ph or below. Okay. And you mentioned that SMS revenue may be flat in fourth quarter, but what is the outlook into FY06 for SMS? Okay. And my last question is on your administrative expense. Actually it went up to 6 million, so what is the reason behind? Jay Chang And then we tend, so quarter-on-quarter we had an accrual for a management bonus. As we mentioned before, in the second quarter, we accrued a management bonus for the prior period 2004. And going forward we actually, for 2005 we accrued another in the third quarter, basically another US$1 million. But the amount will be basically the same as 2004 which we accrued in second quarter, and just kind of mixing up numbers here. I hope it’s not too confusing. So for the same amount, we actually accrued about three quarters of it in the third quarter. So in the fourth quarter I would say be more like a quarter of the 1.2 million roughly which we accrued in the second quarter for ‘04, but now obviously we’re estimating for ‘05. On top of that we had some legal expenses, incremental for general purpose usage. But other than that it didn’t really increase a whole lot. Thank you ma’am for your question. The next question comes from the line of Mr. Henry Kwon ph from Hong Kong. Please go ahead. Hello. Hi. Can I have some information on the Indian game, since you have been talking about this. When will we be listed? According to patents ph listed in three years from when you acquired it? That’s still the plan. We would hope that they can pursue an independent listing, based on the business merits. We only acquired the company as of earlier this year in the first quarter though, so there’s still some time to go. In terms of the performance, it was basically flat quarter-on-quarter. But a big reason to do with that was really because one of their major customers and one of the largest operators in India, Airtel actually had an equivalent MISC migration transition as well. So that, the business from that operator actually declined. But it was offset by growth in Europe and US. As well as other Indian operators like Hutch and Bharti as well as Reliance as well. So, going forward though, we do expect to see hopefully more promising things, as well as getting some other game portfolio into China as Java begins to become a bigger business in ‘06 in the China Mobile data market. Thank you Mr. Kwon. Once again that’s “*” “1” for any question. We have a follow-up question coming from the line of Andy Collier from United States. Please go ahead. This will be a little, if you down the road for you at this point, but given the Olympics in ‘08, do you expect any sort of increase in either online advertising or, perhaps, sports related SMS in ‘06 or going into ‘07? For SMS we believe we see there through ‘06 is seasonal SMS growth because we have inclusive rights with CCTV5, which is the largest sport TV channel in China. And for the advertising issue. Jay will? That’s a little bit far out, I think, for us. Our focus is not the same in terms of the portal side as some of our larger portal competitors. We’re really focusing on doing our, the functionality on our portal, the complement of wireless business. That said, sports is a key channel for us. And we hope to cover the Olympics and hopefully gain market share. But that’s, the other competitors have spend a lot of resources on that. And as everybody knows, Sohu announced something with the Olympics in 2008. So I think it’s something that we’re all looking forward to, and I think it will benefit the overall industry as a whole. But not disproportionately, I would say, on our sports channel versus some of our other competitors. But our wireless, definitely, we have an opportunity there. Thank you sir. Once again that’s “*” “1” for any question. Once again that’s “*” “1” for question. There seems to be no more questions at this time sir. Over to you, Mr. Speaker for any closing remarks or any additional comments you want to make. 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_233820

Here’s the entire text of the prepared remarks from ValueClick’s (ticker: VCLK) 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 Dahlia and I will be your conference facilitator for today. A replay of this call will be available by telephone beginning at 4:30 p.m. Pacific time and may be accessed through midnight Pacific time on November 8, 2005. Thereafter it can be accessed on ValueClick's website at www.valueclick.com or www.streetevents.com. Previously filed SEC filings can also be found on ValueClick's site. All lines have been placed in a listen only mode to prevent any background noise. [Operator Instructions] At this time I would like to turn the call over to Mr. Gary Fuges, Manager of Investor Relations for ValueClick Incorporated. Please go ahead. [Gary Fuges, Manager of Investor Relations] Thank you and good afternoon. Welcome to ValueClick's Third Quarter 2005 Financial Results Conference Call. Joining me on the call today are James Zarley, Chairman -- ValueClick's Chairman and Chief Executive Officer; Sam Paisley, Chief Administrative Officer; and Scott Ray, Chief Financial Officer. Today's call contains forward-looking statements that involve risks and uncertainties including but not limited to, ValueClick's ability to successfully integrate its recently completed FastClick merger, trends in online advertising spending and estimates of future online performance based advertising. Actual results may differ materially from the results predicted and reported results should not be considered an indication of future performance. Important factors which could cause actual results to differ materially from those expressed or implied in the forward-looking statements are detailed under the risk factors section and elsewhere in the filings with the Securities & Exchange Commission made from time to time by ValueClick including a tendered report on form 10K filed on March 31, 2005, Recent quarterly reports on Form 10Q, current reports on form 8K, its amended registration statement on form S4 filed on September 27th, 2005 and its final prospectus on form 424 B3 filed on September 28th, 2005. Other factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements include but are not limited to the risks that market demand for online advertising in general and performance based online advertising in particular will not grow as rapidly as predicted. ValueClick undertakes no obligation to release publicly any revisions to forward-looking statements to reflect circumstances or events after the date hereof or to reflect the occurrence of unanticipated events. Thank you, Gary. Good afternoon and thanks for joining us for ValueClick's third quarter 2005 conference call. I'll start with reviewing the quarter's highlights and then Sam will review the quarter's financial detail. I'll return to give you some final thoughts and then we'll take your questions. ValueClick had a great great quarter financially and strategically. The company executed to deliver growth and profitability from its existing businesses while acquiring FastClick to significantly increase the scale and breadth of our online ad network. Through this quarter's achievements the Company is now in the best competitive position in its history to capitalize on the growth trends in our industry. I'll have more to say about the Company's position in our outlook for the continued growth later in the call. First let's review how well the company executed this quarter. This was another strong quarter for the Company with revenue and net income per share and EBITDA exceeding our guidance and consensus expectations. Revenue increased 87% year-over-year to $81.4 million, $2.4 million above the high end of our guidance of 78 to $79 million. We saw particular strength in the lead generation areas of our media business and affiliate marketing. Operating income increased 105% year-over-year to $17.8 million with operating margins of 22%. EBITDA was $22.6 million, $3.6 million above the high-end of our guidance of 18 to $19 million with year-over-year EBITDA margin expansion from 26 to 28%. And earnings per share of $0.13 cents was well above our guidance of $0.09. We also announced today that we're raising our 2005 guidance for revenue and profitability and giving initial 2006 guidance. In 2006 we expect to continue our growth and profitability, integrate our web clients and FastClick acquisitions and expand many of our existing products into new geographic markets. In the quarter, affiliate marketing continued its strong growth increasing 29% year-over-year. Affiliate marketing continues to grow through increased transaction, revenue from existing clients and recently launched programs with new clients. Affiliate marketing also added more predominant clients to its customer base such as Qwest, Vonage, Panasonic and American Greetings. Our affiliate marketing division, Commission Junction, hosted its 6th annual CJ University forum for advertisers and publishers in September. CJU 2005 was another sellout with 500 attendees gathering to network and learn how to get the most out of their affiliate marketing relationships. Feedback on the event was positive across the board as many cited CJU 2005 as the best CJ University they've attended. Technology had another in-line quarter. We continue to expect moderate growth and stable margins in our tech segment for the rest of the year and throughout 2006. The media segment had a very successful quarter with 135% year-over-year revenue growth, though former revenue growth of our media products was approximately 32% year-over-year. Our June 2005 acquisition of Web Clients, a leading provider of lead generation services contributed to the Company for the first time this quarter. In addition to Web Clients, other areas of our Company saw increased momentum in lead generation as well. We believe this strength is due to our significant scale combined with the increasing use of performance based online ad campaigns by traditional brand advertisers. As others have said in the industry traditional brand advertisers are utilizing more performance based ad campaigns in the online channels. I'm pleased to say we're participating in this trend as well. And for ValueClick the sweet spot is in lead generation. Our ValueClick and FastClick networks, Commission Junction affiliate marketing, our proprietary content and our comparison shopping channel all generate leads. Brand advertising dollars are the biggest part of offline ad spending as these funds continue to migrate on line, traditional brand advertisers will be looking for partners that can execute on performance based campaigns. And given the scale that we've amassed in lead generation we are positioned well to capitalize on this trend. We think that these are the key differentiators as we continue to grow our Company. We're also seeing traction with pure brand advertising campaigns. We feel the opportunity will be large in this area and we believe the scale we've added to our display ad network through FastClick acquisition coupled with our optimization technologies will enable us to expand in this important area for future growth. So whether a brand advertising wants a large scale branding campaign or performance based campaign we have a solution for them. If they want to run a broad, long-term program that drives online leads and sales we have the solution for them as well. This brings us to our acquisition of FastClick, which is a powerful transaction for a number of reasons. First, the combination of FastClick and ValueClick positions us as one of the largest display ad networks in the business with reach that compares favorably with the major portals. As online advertising budgets continue to grow, advertisers and agencies will continue to be looking to work with a company with the broadest reach and solutions to fulfill their needs. Second we can capitalize on the cost synergies related to redundant facilities and operating expenses. When we announced the acquisition we said we could realize about $4 million in annualized cost synergies. We have already implemented a significant number of these redundancies and have identified others to raise the potential annual savings to nearly $5 million. Third, we have an opportunity to increase FastClick's gross margins. Each percentage point of gross margin improvement increases the bottom line by $1 million. Our goal is to increase FastClick's gross margin 10 percentage points over the next 12 months. Fourth, FastClick provides us with a search engine marketing solution that can add functionality to our Mediaplex ad serving platform and enable us to scale the small SEM business we currently have in place at Commission Junction. And while FastClick had planned to market their emerging SEM capabilities as a separate product and recognize revenues on an gross basis, we consider SEM a service business and will recognize any SEM revenue on a net basis. Finally, I'd like to give you an update on PriceRunner. PriceRunner continues to perform well in Europe with significant organic growth. And as you know we launched PriceRunner in the U.S. this past quarter. We are continuing to scale its base of paying merchants by leveraging the relationships throughout our divisions. In its October 2005 edition, PC World conducted an independent survey of U.S. comparison shopping sites and rated PriceRunner number one. As PC World's best all around comparison shopping site, PriceRunner beat every other major comparison shopping site in the United States. We are pleased to have this powerful B to C lead generation channel in our portfolio and we're just beginning to tap the synergies between PriceRunner and our other businesses to drive leads to merchants. I'm now turn the call over to Sam who will provide you with more detail on our third quarter financial performance. Sam? Thanks, Jim. Before I discuss our financial results I want to mention that third quarter 2005 results through the full quarter's activity from PriceRunner acquired in August 2004, E-Babylon, acquired in June 2005 and Web Clients acquired in late June 2005. Fast Click, which was acquired in late September 2005, was not included in our Q3 2005 reported operating results. In the third quarter of 2005, ValueClick generated $81.4 million in revenue from our consolidated operations, an increase of 87% over Q3 2004 revenue of 43.5 million and 2.4 million above the high-end of our guidance range. Pro forma organic growth, which includes the historical performance of FastClick, was approximately 29% year-over-year. Our organic growth rate excluding FastClick was 30%. Gross profits were $58.9 million for the third quarter of 2005, an increase of 94% compared to gross profits of 30.3 million for Q3 2004. This increase results from the overall growth in revenue and a greater mix of higher margin revenue in Q3 2005. Gross margins were approximately 72.4% in Q3 2005, an improvement from 69.6% in Q3 2004. Operating expenses, excluding non-cash stock compensation and amortization expense, totalled $37.9 million or 47% of revenue in the third quarter of 2005 compared to 20.4 million also 47% of revenue in Q3 2004. These operating expenses increased 86% year-over-year, primarily due to additional marketing expenses. Sales and marketing expense was 22 million in the third quarter of 2005 compared to 9.8 million in Q3 2004. The $12.2 million increase is primarily attributable to additional advertising and marketing expense supporting the growth of our PriceRunner, e-commerce promotional and vertical marketing sites and European growth initiatives. As a result the percentage of sales and marketing expense to revenue was 27% in the third quarter of 2005 versus 22% in 2004. As a percentage of revenue both general and administrative and technology expense improved in Q3 2005 versus 2004. General and administrative expense was $10.3 million, or 13% of revenue in the third quarter of 2005, compared to 7 million, or 16% of revenue, in 2004. Technology expense was 5.7 million in the third quarter 2005 or 7% of revenue compared to 3.7 million or 8% of revenue in 2004. Amortization of stock based compensation was $70 million during the third quarter 2005 compared to 124,000 in 2004. The decrease is due primarily to our amortization method which charges a higher portion of stock-based compensation in the earlier years of the option investing period. We anticipate stock-based compensation expense will be approximately $1.8 million in the fourth quarter of 2005 and $3.3 million for the full year 2006 due to the inclusion of additional stock-based compensation from the FastClick acquisition. Amortization of intangible assets was $3.1 million during the third quarter of 2005 compared to 1.1 million in 2004. The increase is due primarily to the amortization of intangible assets acquired in the PriceRunner, Web Clients and E-Babylon transactions. We anticipate amortization expense will be approximately $5.3 million in the fourth quarter of 2005 and $21 million for the full year 2006 due to the inclusion of additional amortization of intangible assets acquired in the FastClick transaction. As a result of the revenue performance and increased operating leverage I have previously described the Company generated operating income of $17.8million in Q3 2005, a 105% increase compared to operating income of 8.7 million in 2004. Net interest income was $687,000 for the third quarter of 2005 compared to $1 million in Q3 2004, primarily due to the cash payments associated with the Web Clients acquisition and interest payments associated with our short-term debt agreement. We anticipate that net interest income will be approximately $1.3 million in the fourth quarter of 2005. Approximately $65 million of the cash acquired through the FastClick merger, which was consummated on September 29th, was used to retire the short-term debt agreement. Income tax for Q3 2005 was $7.5 million compared to 2.1 million in 2004. The effective tax rate for Q3 2005 increased to approximately 40% from 21% in 2004 due to increased levels of expected pre-tax profitability, the release of our deferred tax asset valuation allowances in December 31, 2004 and an increasing mix of U.S. jurisdiction taxable income resulting from our recent acquisitions. Absent this increase in the effective tax rate, fully diluted earnings per share would have been about 17%, $0.17 in Q3 2005. Our revised guidance for Q4 and full year 2005 anticipates effective tax rates of approximately 41% and 39% respectively. These figures result in net income of $11 million or $0.13 per share based on the weighted average number of 87.7 million fully diluted shares outstanding. This exceeds our previously issued guidance of $0.09 per share. As described in greater detail in our press release, net income before interest, taxes, depreciation and amortization or EBITDA was $22.6 million for the third quarter of 2005, above our EBITDA guidance range of 18 to $19 million. Q3 2005 EBITDA increased 99% from Q3 2004 EBITDA of $11.4 million. I will now make a few comments on the performance of our media affiliate marketing and technology business segments. Media segment revenue increased 135%, to $58.6 million in the third quarter of 2005 compared to 25 million in 2004 primarily due to strong performance by our U.S. media products and the inclusion of a full quarter of operations of Web Clients, E-Babylon and PriceRunner. Intercompany revenue was nil in Q3 2005 versus 100,000 of intercompany revenue in 2004. Gross margins were approximately 64% in the third quarter of 2005 compared to 54% in Q3 2004, primarily due to a grater mix of higher margin revenue in Q3 2005 from lead generation products in the U.S. and PriceRunner in Europe. Affiliate marketing revenue increased 29% to $19 million in the third quarter of 2005, compared to 14.7 million in 2004. Intercompany revenue in these amounts was approximately $1.7 million in Q3 2005 and 1.2 million in Q3 2004. Affiliate marketing gross margins improved to approximately 88% in the third quarter of 2005, compared to 84% in 2004 primarily through the operating leverage of our consolidated affiliate marketing infrastructure supporting significantly higher revenue levels. Technology revenue increased 5% to $5.9 million in the third quarter of 2005 compared to 5.6 million in 2004. Intercompany revenue in these amounts was approximately $300,000 in Q3 2005 and $600,000 in Q3 2004. Technology gross margins were 78% in both Q3 2005 and 2004. The consolidated balance sheet remains strong with approximately 226 million in cash, cash equivalents and marketable securities and 652 million in total stock holders equity as of September 30, 2005. Capital expenditures were approximately $2 million in Q3 2005 and 6 million for the 9 months ended September 30th, 2005. We anticipate that capital expenditures will be in the range of 7 to $8 million for full year 2005 primarily due to investments in recently closed acquisitions. Based on our outlook in Q3 2005 financial performance we are raising our full year guidance and are providing Q4 2005 guidance. We are also issuing preliminary guidance for 2006. For the fourth quarter of 2005 ValueClick anticipates revenue in the range of 112 to 117 million with the mid point of guidance representing a 111% increase from fourth quarter 2004 reported revenue. EBITDA for the fourth quarter of 2005 is expected to be in the range of 26 to $28 million. Adjusted EBITDA, defined as EBITDA before stock-based compensation, is expected to be in the range of 28 to $30 million. The Company expects fully diluted net income for common share of approximately $0.12 in the fourth quarter of 2005 which is based on approximately 106 million fully diluted shares outstanding. For full year 2005 we currently expect to generate revenue of approximately 299 million to 304 million. EBITDA is expected to be in the range of 78 to 80 million and adjusted EBITDA is expected to be in the range of 80 to 82 million. We expect net income of approximately $0.43 to $0.45 per diluted share. For fiscal year 2006, we currently expect revenue of approximately 480 million to $500 million which represents a 63% growth between the mid points of 2005 and 2006 revenue guidance. Organic growth is anticipated to be approximately 21% at the mid point of pro forma 2005 and 2006 guidance. EBITDA is expected to be in the range of 120 to $125 million and net income is anticipated to be in the range of approximately $0.53 to $0.59 per fully diluted share. The 2006 guidance assumes approximately $21 million in amortization of intangibles, 3.3 million in stock-based compensation, 8 million in depreciation, and effective tax rate of 40% and 107 million fully diluted shares. Capital expenditures are expected to be in the range of 7 to $8 million. Our new 2006 guidance does not include the impact of expensing stock options under SFAS 123 R. Thank you, Sam, and thanks to everyone who joined us on the call today. This was another good quarter for the Company and I believe that the combination of our existing product growth and recent strategic acquisitions have positioned us to become a stronger player in this exciting new industry. We are now a leading comprehensive online marketing services company capable of satisfying online marketing goals with large scale solutions including the largest independent display ad network for branding and traffic-oriented campaigns, the large scale lead generation solutions that tap into multiple online channels such as e-mail, promotional and vertical websites and comparison shopping and the number one affiliate marketing solution for online sales programs and lead generations. We can now approach an advertiser, see what they are looking to achieve online and provide a large-scale solution that fits their needs. We expect this position to generate another strong year of growth and profitability in 2006 as shown in our initial 2006 guidance. We believe we can generate revenue of 480 to $500 million next year and EBITDA of 120 to $125 million and still invest in new initiatives while generating strong returns for our shareholders. We've hit a milestone by positioning the Company to be well-placed in the market with a $500 million revenue stream and respectable profit. We're now ready to take the Company to the next step. And on the M&A front we'll continue to be on the lookout for those companies that fit our strategic framework at valuations that are accretive to our shareholders. We believe this can be done without deviating from our current business model and I believe that we will continue to consolidate our segment where it makes the most sense. 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_233821

Thank you and good afternoon everyone and thank you for joining us this afternoon. If you have not seen press release it can be retrieved off of www.juniper.net or First Call or Business Wire. With me today is Scott Kriens, our Chairman CEO; and Rob Dykes, our CFO and Executive Vice President of Business Operations. Today Scott will begin by reviewing Juniper’s fourth quarter and the full year 2005 performance. He will then spend the remainder of his time outlining how we will use our accomplishments in 2005 to leverage our success into 2006 given the current market trends as it relates to our long-term strategy. Following Scott’s comments Rob will review the detail financial results for the fourth quarter and full year ending December 31st 2005 as well as outlining our financial goals. We will then open the call up for questions. Before I turn call over to Scott, I’d like to remind you that the matters we will be discussing today may include forward-looking statements and as such are subject to the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, including those risks and uncertainties discussed in our most recent 10-Q filings with the SEC. We are also presenting some non-GAAP financial information. A reconciliation of GAAP to non-GAAP items can be found on our Investor Relations web page. Juniper Networks assumes no obligation and does not intended update forward-looking statements made on this call. Scott, over to you? Thanks Randy and Happy New Year to everyone. Today I’ll be talking briefly about the fourth quarter and the full year performance for 2005 and then I’d like to spend the majority of my time focusing on how we can leverage the accomplishments in 2006 and beyond. Last quarter I spoke about the foundation we built and as I look back not only across the last year but over the last 10 years as we approach the celebrations of our 10 year anniversary next week actually. There have been tremendous accomplishments and successes to mark our progress and we are going to continue to leverage these experiences based on the trends that we see in 2006 and beyond. So firstly the results. We had another solid quarter, our 14th consecutive quarter of growth and as you’ll once again see this is reflected in the metrics we’ll review today. Revenues, earnings, cash, customers and market share all grew as we continue to outperform in all of our target market. Total revenue for the quarter was $575.5 million, up over 5% from last quarter and fully diluted non-GAAP earnings per share was $0.20 up from $0.19 last quarter. GAAP EPS for the fourth quarter was $0.17 compared to $0.14 last quarter and GAAP EPS for 2005 was $0.59 versus $0.25 last year. And please see the press release on our website for the reconciliation of non-GAAP to GAAP results. These results are reflection of our direct sales efforts as well as the contribution of our key strategy partners and resellers. And as we look across the full year I’d like to share both our strategy with regards to our partners as well as some numbers, which represent our success in delivering results in support of that strategy. We believe in open standards, and using partnerships to broaden our reach and best serve the evolving requirements of our customers and as many of you know we have a number of key strategy partners including Ericsson, Lucent, Siemens and NEC in Asia. And in addition we announced this morning a formal agreement with our new strategic partner Avaya to deliver secure converged communication solutions to enterprise customers worldwide. These partners has been instrumental in building relationships with our customers and we remain very excited about the strength of these partnerships as we enter 2006. This side-by-side approach with its support of open standards continues to be well received in contrast with end-to-end proprietary alternatives. And it is also important to understand that with our high touch model each and every customer has a Juniper representative who is responsible for direct contact with them as we sell side by with our strategic partners. In total the revenue generated from these four strategic partners grew almost 40% from 2004 to 2005, more specifically the full year growth rate for Ericsson, Lucent, Siemens and NEC were approximately 57, 32, 44 and over 100% respectively, and Siemens contributed greater than 10% of total revenue during the fourth quarter as well as for the full year of 2005. We are also pleased with the product balance across our business. For Q4 the infrastructure products represented 77% of total product revenue while service layer technology products represented 23% of total product revenue during the quarter. From a geographic perspective last quarter, we saw a strong growth in the Americas and Europe including developing markets in Latin America, Middle East and Eastern Europe in areas like Bulgaria and Russia among others. However, we saw a softness in Asia specifically within Japan due to a pause in the build out of its next generation networks or NGN as decisions are contemplated at many of the major carriers and the market prepares for the next wave of bandwidth and services expansion. This is a very exciting time in Japan we will talk more about in just a few minutes. Finally for the quarter we invested in both the market and product development areas announced several new products during the quarter, we are once again recognized as a leader by the industry analysts and realize significant accomplishment in expanding our broader channel presence. So for a quick look back across the full year of 2005, I would like to point to some numbers and some highlights, which has helped our growth, and extend our success. We grew total revenue to over $2 billion, up over 54% from 2004 and nearly tripled the revenue of only two years ago. This is a major milestone and accomplishment for the company. Fully diluted non-GAAP earnings per share was $0.72, up 64% from $0.44 last year and more than a four-fold increase from two years ago. We are generating cash from operations of almost two-thirds of a billion dollars per year ending 2005 with over $2 billion in total cash and investments. Currently the business generates approximately $2.5 million of cash from operations every business day. In the marketplace, we again grew significantly faster than our competitors year-over-year, allowing us to further establish our brand and gain market share in various segments of the market. As an example we were the leaders in Gartner’s Magic Quadrant in all four areas: Firewall, IPSec VPN, SSL VPN and IPS: our Intrusion Prevention Systems, and we are in the No.2 slot in the high-end enterprise router market according to Synergy Research Group, up from 0 in 2004. And in addition we maintain the No.2 position in the service provider EDGE routing category and have done so for more than 13 consecutive quarters according again to Synergy Research Group. And we did all that by expanding our market presence globally and are now doing business in more than 75 countries around the world. We expanded the breath of the channel, growing our sales through the distribution channel by approximately 160% and the number of quality channel partners to over 6000. One example of this success is Ingram Micro, a major distributor of Juniper Solutions whose business now makes them our third largest partner. And we did all of this by staying true to our mantra, which is “Focus”. In the words of our customers we did what we said we would do and this is what the company and Juniper brand is known for in the market making and meeting commitments. We introduce thousands of new software features and a number of major releases throughout the year across several best-in-class platforms including the Multichat, ETX, Matrix and the E320 broadband services router and our infrastructure portfolio. And our security portfolio we introduced the ISG 2000, the SA 6000 and many other products as well as the unified access control, which is an industry leading open standards architecture that helps protect customers existing investments by providing security to the networks and the equipments that has already been bought. And in addition we continue to invest in innovation and we’ll do so again 2006. In 2005 we spent over $300 million in research and development for the ramp of new product cycles, which you’ll see delivered over the next 12 months and we will spend over $400 million in 2006 to both meet our customer requirements and to further extend our lead in the market. So all of that innovation is pointed at some major trends in the marketplace. So let us talk about some of these trends that we see as we enter 2006. From a customer perspective, the network requirements are converging along with the networks primarily along three types of users. There are the traditional carriers, who are now expanding from their stronghold in the physical network with direct access to the subscribers to the delivery of network services for those subscribers in the form of triple and quadruple play capabilities in voice, data, video and wireless. And secondly, there is a new age providers: Goggle, Yahoo, and others who battle for command to the website and the home page preferences from which the user will launch his enquiry into the network for both personal and entertainment needs. And then thirdly, we see the business of our enterprise network customers now more than ever running with an increasing dependency on that network to connect to employees, customers, suppliers and partners in a more sophisticated model of virtual costs and benefits. Among the traditional carriers there’s a wave of next generation network planning, as the migration for multiple standalone legacy networks to a single converged infrastructure accelerates. And I mentioned a slowdown in Japan earlier, this is why we’re seeing the major service providers in Japan who are some of the most aggressive builders of fiber from the network infrastructure all the way out to the home, experience the greatest needs to plan for the next generation of capacity, performance and reliability as they serve an increasingly network literate user population who demands the latest services. And there’s much to be learned here as we believe Japan will set an example of what is and will increasing be happening in other countries of the world as they grow. The second wave of build out will be lumpy but it is enormously important strategically, as it will unlock a level of scale and performance that will fuel creativity and expansion of the entertainment and services offered in years to come. Other examples of these kinds of decision include China Telecom in Asia, the Files project at Verizon and the BT 21C network currently underway in the UK. 2006 will be a year of decisions, planning and some rollout as carriers around the world are in various stages of growth and acceptance by their subscribers. And these decisions will also fuel the continued expansion of broadband wireless and mobility both in the area of DSL and cable, cellular as well as WiFi and will see the continued confirmation that there is only one single infrastructure built around IP, which will support these access technologies as last mile solutions connected to a single network. Obviously this also has implications for the traffic and user profiles on these networks as well. We saw online shoppers spend over $30 billion in this just completed holidays season, which is an increase of 30% this year over last on a very large number, and Ovum has a consulting house that surveys trends, predicts that within the next 10 years the majority of all holidays shopping will be shifted online. There are more than three million songs a day being downloaded from iTunes and more than 8 million videos have been downloaded from that site in the last three months alone. And the growth of use at sites like Goggle and eBay speaks for itself. In the enterprise market, requirements are moving closer to those of traditional service providers everyday: banks, governments, retailers and other businesses large and small demand the same, always on reliability and simultaneous high performance and security as was once reserved for the larger service providers, and this is being delivered through MPLS and other technologies exactly as it is being designed for the service provider. And this consistency is seen as a huge benefit for Juniper in the competitive assessments that are being done today. Security continues to evolve both as a sophisticated requirements in an enterprise network and as a service provided to enterprises through the managed service offerings of the carriers. Application performance and network requirement to ensure the user experiences protected as business processes move online is more strategic than ever, and our capabilities in both website and wide area optimization are big differentiators for Juniper in the marketplace. All these demands are being placed on the network with the expectations that multiple services: voice, data and video will seamlessly and intelligently be supported transparently to users. With expectations are that they will simply click and the device in their hands will respond as needed. And this is easy to say but harder to do and even harder still to do it with the operational simplicity that’s required to scale reliably. So if we couple our accomplishments in 2005 with the trends that we see moving into 2006 what then Juniper Networks going to do. And I offer you two perspectives on this today, from an internal perspective we continue to evolve Juniper as a company and we need to remain agile while focused in order to take advantage of the trends I just outlined. The sheer number of our customers and the visibility and importance of their relationship with Juniper is increasing and their expectations of Juniper are increasing as well. They expect not only best-in-class technology and products from us but integrated and focused answers to their business needs. We must maintain our focus on our service provider and enterprise customers and then organize Juniper product and investments within those priorities. So in that spirit we have evolved our organization as well, with the formation of two business teams: the service provider business team, and the enterprise business team. Both teams will be responsible for the success of all our products and services for the respective customer segment and each will represent the full power of the portfolio to their respective customers. In addition we announced some organizational changes as part of a structured succession plan, which supports these new business teams and you probably already seen the press release outlining the new appointments. And we are very excited to show-off the bench strength of the company with the recognition of Eddie Minshull, Jeff Lindholm and Kim Perdikou, each of whom has several years of senior management experience at Juniper and have all taken key executive assignments. And we are also glad to report on our potential as seen from outside the company as we welcome Paulette Altmaier to Juniper in a key executive role with her wealth of experience, reputation and proven success in the industry. But what really matters is beyond how we organize inside the company, it’s what our talent and focus allows us to do in the marketplace on behalf of our customers, so I’d like to describe first our approach and then our strategy. First, our approach. Our primary goal is the build the Juniper brand and to expand on our trusted relationship with our customers and to provide them the answer to their strategic needs. We are measuring our success and setting our goals for our sales teams in terms of absolute growth and increasing our presence in the process. Winning the game, as we have for the last three plus years is the target we prioritize and exactly which product score the points in any particular quarter is the secondary measurement. This is why we’ve organized around our service providers and enterprise customers and beyond our individual products and our 2006 goals are stated in terms of customer mind and wallet share and whatever mix and products and services are necessary to achieve those goals. All of our customers whether we talk to service providers or enterprises required carrier class reliability. The lines are blurring but this where our opportunity and our leverage are becoming actually clearer than ever because they all need traffic processing infrastructure to succeed, and this placed to our advantage as we’ve seen in the classic enterprise market where we do approximately one-third of business today. As you also know this represent only a small scale of this market and that’s a large opportunity looking forward while our strength in the traditional and emerging service provider market continues to be the foundation of our innovation and growth. Our strategy and the tactics remain the same as they have been since the inception of the company 10 years ago. Our strategy simply stated: Juniper is the best supplier of Traffic Processing Infrastructure for the delivery of Virtual Networks Services. And our tactics: focus and execution as always. The strategy is easy to explain; the networking industry consists of four parts as we see it. The electronic devices we all use, the laptops, cell phones, PDAs, iPods, etc., in short all the users tools for the sending and receiving of information and entertainment. And this is equipment in the category of consumer electronics, high volume standards based, low margin, low cost. Secondly, the entertainment which comes from the movie studios and the music artists; and thirdly, the information which come through the corporate data centers and the websites and the search engines; and finally all of that traffic is eventually sent through the physical networks, the copper and optical cables, the radio base stations and the satellites in the sky. Each of these four elements: devices, entertainment, information and transport is interoperating so that when the user of the device clicks they get their answer. But none of those elements: the user, his device, the entertainment, the information or the physical cable knows anything about each other and they never will and that is where the Traffic Processing Infrastructure comes in. We at Juniper setup the infrastructure that knows the source and the destination of all the billions of people and devices and that’s where the Internet protocol or IP comes in. Then we process over that infrastructure, that’s where we apply the security for example, and then we intelligently manage the traffic itself so that the Voice over IP phone call gets there quickly and with high-voice quality where the pipe opens wide enough for the HD movie or the credit card gets encrypted for the safety of the online commerce. Put it altogether and you have the Juniper strategy: Traffic Processing Infrastructure. Every time you click, we add value. So now lets move it from the strategy and the structure to this specifics and I would like to close with three specific examples, one each for the Traffic, the Processing and the Infrastructure and in doing so answer the top three questions we’ve received from investors over the recent months. Let us start with the traffic. We’ve received a lot of questions about IPTV, one of the most topical types of traffic lately and one that has been marketed hype and claimed as their own by a lot of company’s. But let me give you some facts. According to Ovum again there are about 2.5 million IPTV subscribers on the planet today with the two largest networks in the world representing approximately 600,000 of those subscribers at PCCW in Hong Kong and FastWeb in Italy both running on Juniper Networks infrastructure. In addition to those 600,000 subscribers we’re currently operating in 14 other IPTV accounts worldwide with products deployed in 10 of those networks and trials in four others and if successful we will then be deployed in those as well. You might not know this if one were to judge by the declarations being made about IPTV. But if you separate the market in hype and instead look at the actual traffic and where Juniper operates in the network today, we are doing what we say we will do: focusing on the real customers, supporting the real subscribers. And as an example of the strategy this is the traffic part. So next onto the processing and the network security that’s enabled by processing that traffic from within the infrastructure. Another frequently asked question pertains to our growth in the security marketplace. We began with the security products in mid 2004 and if look at growth in the second half of 2004 when we began officially in the market and compared to the second half of 2005 just completed for an apples-to-apples year-over-year comparison we have grown the security business by over 30%. As I mentioned earlier we occupied the Gartner Magic Quadrant in many areas and are the only company to occupy that quadrant with four separate security offerings in the market today. We’ve grown faster than virtually all of our competitors and significantly faster than those with only standalone security products to offer. The market is evolving and it is moving to integrated networks security solutions, which favors Juniper as we’re integrating the best-in-class products and expanding the functionally of existing products at the same time. Stay tuned for more examples of progress here as we are very excited about the upcoming developments we have in this space. And this is an example of execution in the processing elements of the strategy. Processing of traffic for the delivery of the value-added service of network security. And finally to the infrastructure itself then to the last then the most commonly asked question, which relates to our leadership position in the core. And this is the easiest question of all. We shipped over 100 T640s in the last 90 days alone and we are now shipping the TX Matrix multichassis products as well which quadruples the capacity of the T640 with the roadmap to expand dramatically beyond there. I believe that’s about the same number of units our nearest competitors’ claims to have shipped in total over the last 2½ years. And more importantly the T640 ships with battle-tested and proven reliable modular software that has literally millions of hours of runtime production hardening. And I can tell you that matters when the entire business depends on the rock-solid reliability of the software. So that is the infrastructure story. So put it altogether: the IP traffic leadership, the security processing market leadership, the core backbone infrastructure product leadership, and you have our strategy in action. The best supplier of traffic, processing, infrastructure for the delivery of virtual network services. And more importantly the focus on only that, which is the reason that as we complete our first decade, and in doing so cross over the $2 billion mark in revenues generating approximately $2.5 million of business of cash every business day, we’ve enjoyed the success to make this possible. Strategy, Focus and Execution. So in summary, there are a lot of people in this market with a lot to say, and we have all got to get used to that for the next few years. In fact we can be comforted by all the marketing and the hype that will be thrown around because that’s how you can tell there’s real opportunity. And everybody wants to a piece of it. And that’s a really a sign of the disrupted change that’s underway. For many here Juniper is on the companies that ignore all of that and stay focused on the customers and the strategy, which is where this game will be won. We’ll continue to be prudent financially as well protecting our financial objectives and balancing them along with our strategy and our technology lead and our customers. We’ll invest surgically and will measure carefully and constantly, and this will multiply to many times more than that as a result of our discipline to focus on areas where we can add value. We are at the intersection of opportunity through which the entertainment and the information must travel on its way to the devices and the users to deliver value and every time you click we’re there. We have an obligation to our customers, and an opportunity to deliver to our shareholders, and will continue to realize that opportunity as we enter the second decade of Juniper’s execution. Our strategy puts us right where we want to be in the middle of it all: the traffic, the processing and the infrastructure. We couldn’t be more excited about our position and the encouragement we’ve received from our customers, service providers and enterprises to accept their invitations to sit at their strategic planning tables with them and to play a larger and larger role in the network future. And we fully intend to deliver on their trust in Juniper Networks in 2006 and beyond. All of this is possible only with the support of our employees whose continue commitment and incredible efforts make these results possible as well as our many partners, our customers, our suppliers, and our long-term shareholders. I’d like to thank you all for your continued support and confidence in Juniper Networks. Rob, I will now turn the call over to you. Thanks Scott. I am pleased with all of the financial metrics for the quarter, which I’ll review in detail. However, please remember that our business will be lumpy by application, by geography and as well as by product mix. Total reported revenues for Q4 was $575.5 million, an increase of over 5% from last quarter and almost 34% from the year prior. For 2005, revenue was $2.064 billion, up over 54% from 2004. We are pleased with the quarterly growth in our infrastructure products, recognizing product revenue of $276 million, up over 5% from last quarter and up over 25% from last year. For the full year of 2005, our infrastructure products grew 40% from 2004. We’ve recognized revenue on a total of 2,643 units this quarter and we shipped 40,183 ports, which was up from last quarter. This quarter the core again represented more than half of our infrastructure business which is primarily driven by increased capacity requirements that Scott referred to. This mix continues to affect the oscillation between the edge and the core and is likely to be a continuing phenomena given the specific service provider requirements. The service layer technology revenue, which includes Firewall, SSL, IDP and other security products as well as J-series, Session Border Controllers and application-accelerator solutions totaled $112.5 million. That reflects an increase of about 3% from the last quarter. We are very pleased with the normalized year-over-year growth for the quarter of 25% for security products and 26% including service. As Scott discussed earlier we are focusing the business on customers, specifically service providers and enterprise. From 2004 to 2005, our service provider business grew approximately 53% and our enterprise business grew above 58%. We would also like to share some qualitative information with you regarding each of the market segments. In aggregate service provider technology was flat, we saw growth in the high-end Firewall, SSL VPN, IDP and J-series was relatively flat performance in Session Border Controllers and Application Acceleration Solutions. On the other hand, we saw softness in the low-end and mid-range firewall and a minor contribution from Funk, which closed prior to the end of the year. Total service revenue was $86.9 million, up approximately 9% from last quarter. This increase was due to the increase in professional service revenue, i.e. is training, resident engineers and consulting as well as the growth in the installed base under contract. For the full year of 2005, service revenue was $293 million, up 69% from 2004. The total book-to-bill ratio issue was greater than 1 in the quarter. Siemens was a strong contributor in the fourth quarter representing approximately 14% of total revenue in the quarter and approximately 14% for the full year of 2005. From a geographic prospective the Americas represented 47% of total revenue in Q4 and the growth was driven by increased competition for Triple Play and Quad Play service offerings. The Americas grew 54% from 2004 to 2005. Europe, Middle East and Africa: EMEA represented 31% of total revenue in Q4 with strength across the region including Spain, Finland, France, Greece, UK, Italy and Poland. EMEA grew 60% from 2004 to 2005. Asia represented 22% of total revenue. The decline for last quarter specifically associated with decline in Japan as well as softness in Hong Kong and Korea, which is primarily due to NGN, which Scott discussed earlier. However, looking back at the last 12 months, Asia was a strong contributor in 2005 growing 49% from 2004 to 2005 and Japan grew 30% during that same period. We expect to see continued lumpiness by sierra as quarterly trends fluctuate. However we are pleased with the geographic balance and even with that we continue to generate. Revenue through our direct sale was approximately 30%, up from last quarter and was a refraction of the strength with our service providers in the America’s, what we saw directly with the remainder going to our global and country specific distributors and resellers. We continue to be pleased with the growth in our distribution channel as we maintain the expansion and leverage of our channel presence. As a remainder, all enterprise orders were required to be put through a channel partner, this policy was established to provide a channel complex with the direct sales force. Gross margin was 68.5%, inline with the higher end of our expectations and down slightly from 68.7% last quarter. We do expect gross margins to be lumpy as the geographic and product mixes fluctuate going forward. Service margin was approximately 52% versus 51% last quarter, reflecting an increase in the service revenue. The non-GAAP preferences that I am about to discuss exclude the amortization of purchased intangibles to pay compensation, restructuring the payments and in-process R & D. Please see the press release on our website for reconciliation of non-GAAP to GAAP results. As a reminder, all of the operating expenses include one month of expenses from the recent Funk acquisition. So R&D expenses were $97.7 million, and accounted for 17% of total revenue, which compares to $90.5 million or 16.6% last quarter. This increase is due to the headcount growth with recent acquisitions and increased programs given our focus on internal development. We continue to invest in both standalone as well as integrated products in order to satisfy our customer needs. In addition, we invested on expanding on our global R&D efforts, specifically in China and India. Sales and marketing expenses were $124.9 million and accounted for 21.7% of total revenue, which compares to $116.2 million or 21.3% last quarter. This increase is due to headcount growth including recent acquisitions and an increase to our high touch model for the enterprise opportunities where we’ve already started to see the return on investment as well as continued channel and partner investments and brand development. G&A expenses were $16.1 million and accounted for $2.8% of total revenue, which compares to $17 million or 3.1% of total revenue in the last quarter. Operating expenses were $238.6 million and accounted for 41.5% of total revenue, this compared to $223.7 million or 40.9% of total revenue in the last quarter. Total operating income was $155.4 million or 27% of total revenue compared to operating income of $156.4 million or 27.7% of total revenue in last quarter. Net interest and other income totaled $17.9 million compared to $14.7 million last quarter. This increase is due to the increase in our cash balances as well as higher interest rates. Our effective tax rate was 31%. Non-GAAP net income increased for the quarter to a $119.6 or 20.8% of total revenue compared to $114.7 million or 21% last quarter. Diluted non-GAAP earnings per share were $0.20 versus $0.19 in Q3. For 2005, non-GAAP net income was $430.6 million or 20.9% of total revenue compared with $238.6 million or 17.9% from 2004. On a GAAP basis, which includes the amortization of purchasing the intangibles, the employee compensation, restructuring and payments and in-process R&D of $35.2 million in Q4. Our operating expense totaled $277.1 million and net income was $105.5 million or $0.17 per share compared to net income of $84.1 million or $0.14 per share on Q3. For 2005, GAAP net income was $254 million or 17.2% of total revenue compared to $135.7 million or 10.2% from 2004. Now few comments regarding the balance sheet. Cash, cash equivalents, short and long-term investments were over $2 billion. We are extremely pleased to announce that we generated almost $200 million in cash flow from operations during the quarter. And as a reminder, we used approximately $100 million in cash to acquire Funk software. Accounts receivable was $269 million and day sales outstanding was 43 days versus 40 days last quarter. This is slightly above our target range of 30 to 40 days due to our product mix shift, which caused the component shortage at the beginning of the quarter. Total deferred revenue was $252.8 million, which is made up of service, channel inventory, and product, currently unrecognizable for revenue. CapEx was $39.3 million, up significantly from last quarter due to engineering combination of Doordarshan, India infrastructure and lab equipment and depreciation was $15.4 million during the quarter. Last quarter, we stated that we will be more aggressive with our stock repurchase program, we specifically made the decision however to use approximately $100 million of our cash to purchase Funk software and we will be purchasing common stock. We will continue to look at repurchasing common stock opportunistically. We ended the quarter worth 4145 in total headcount, up from 3784 people at the end of the last quarter, with approximately 140 of the increase coming from Funk software. In addition, we invested on all areas of the company to support and scale the strategy that Scott outlined earlier. Before discussing the guidance, I would like to state that our No.1 goal is to grow revenue and earnings and to deliver right growth within our operating model. We remain comfortable with our long-term model of producing gross margins in the 66% to 68% range and operating margins in the 25% to 30% range. The following forecast and guidance are forward-looking statements and the actual results came vary for a number of reasons including those mentioned in most recent 10-Q filed with the SEC. Now for our goals and guidance. We will again use the same time horizon in which we provide guidance as we did in 2005, specifically the first quarter as well as the first half. We’ll continue to focus on our financial fundamentals and please remember, it is difficult to predict the level of business each quarter but we are managing to our financial plan, and we would like to share some thoughts with you. In Q1, we are currently forecasting total revenue of $565 million to $575 million. This guidance reflects over 25% growth from the same period of last year and takes into account seasonality in the Americas, given a new calendar budgets of our customers that has not been finalized as well as softness in Asia, specifically Japan, which Scott and I referred to earlier. We currently expect similar gross margins to those we reported in Q4 and therefore we are giving the same guidance range as last quarter of 67.5% to 68.5%. As I stated previously our long-term gross margin target remains in the range of 66% to 68%. We are currently forecasting operating expenses to increase by approximately $8 to $10 million in Q1, mainly due to increased R&D investment. Investments in R&D forms a two primary categories: first programs which we committed to in 2004 and 2005, which are long-term development programs comprise of simultaneous investment in both standalone product development programs as well as integrated products. Second, we allocated a couple of million in a proactive way given the opportunity that we see ahead. In addition we’ll have our full quarter of expenses from Funk software as well as an increase in software expenses. That being said there are areas where we are not spending and more importantly looking for savings including holding marketing programs flat, keeping IT flat by moving responsibilities to India, reducing manufacturing cost for off-shoring as well as outsourcing R&D to countries like China and India where 25% of our R&D workforce is now located. This puts Q1 operating margins at the lower end in our 25% to 30% long-term operating model. But I would like to reiterate what Scott said earlier, we believe our investments made in 2004 and 2005 will payoff as we have pipeline of new product being delivered over the next 12 months. We must continue to invest albeit prudently in 2006 to take these products successfully to market, including sales and marketing to the enterprise as well as service providers. I would like to emphasis that we will spend strategically and focus on the areas that give us return on investment for intermediate and long-term. We are also lowering the tax provision in 2006 to 29% to reflect the global distribution of revenue and our investment of those earnings outside the United States. And we expect shares in the range of $610 million to $615 million and approximately $0.19 of non-GAAP EPS. As we previously disclosed, this includes $0.01 adverse effect, due to unrecognizable Funk revenue given purchase accounting rules in the full quarter of Funk acquisition expenses as well as associated strategic investments we made in Q1. For the first half of the 2006 we expect revenue in the range of $1.15 to $1.16 billion, which is up over 20% for the same period a year ago and non-GAAP EPS up $0.38 to $0.39. We see expanded growth opportunity in the second half of 2006 given the expected up tick in the NGN buying as well as our new product cycles gaining momentum. Consistent with our prospectus we’ll update our first half guidance after the completion of the first quarter and provide second half guidance upon completion of the first half. The GAAP EPS target is not acceptable on a forward-looking basis due to high variability and low visibility with respect to the long recurring charges, which are excluded from the non-GAAP EPS estimates. I’d also like to give you advance notice of some minor changes we will be making in 2006. First in Q1 will be required to report GAAP results including options expense and given our goal which is to be transparent, we will provide the details you need to do your analysis on Juniper. However, we will continue to focus our financial objectives based on the pro forma results. And since I’m on the topic of option expensing, the Board of Directors approved an amendment to accelerate their scheme of options granted for the price include to or more than $22 per share, within post sales restrictions excluding officers and directors. Second, effective Q1 the Session Border Controller product family, which represents just over $1 million in the quarter just completed the revenue has moved from the service layer technology products group to the infrastructure product group, given the integration of the technologies that are underway. This will be reported accordingly in Q1. Finally we could do to focus on our objective of delivering high quality financial metrics. Now we would like to take questions, can you limit yourself to one question. Yeah thank you very much. I guess, I had clarification and a question, my clarification was the comments that you made on Siemens. I think you said they were 14% for the year in the quarter given prior disclosures that you have given in your Q’s, if they were 14% for the year, I can’t – it doesn’t seem like it could be as high as 14% for the quarter. So if you can clarify that. My question is on the guidance, the first quarter guidance is pretty clear. On the second quarter given all the projects that you see and the ramp of Japan, why wouldn’t we see a slightly stronger second quarter after it’s seasonally down first quarter? Thank you. On the Siemens numbers, there is huge revenue recorded is what we have. So I will, it will rule a bit while some more on, why you think is there that difference? With regard to the second quarter guidance, we are seeing some very good program rollouts during this year but we believe it’s prudent given the NGM port etc. that we provide the guidance that we do and then we will see how things evolve as we move forward. So it’s basically the timing of the NGM spending ramps, you see it coming, but its just not clear whether it will be second quarter or third quarter or first quarter, it's the timing question here? Nikos, it's got a couple of things, I think it is a timing question as to some of these rollouts. And some of it is trying to get at the magnitude of the services rolled out across these NGMs and some of that growth rate and things like IPTV, some of it is looking at the, particularly some of the volumes of video demand and music demand. I know, you know, the impact of the type of service here on the network infrastructure is dramatic. You can have thousands, millions of people e-mailing and you can dwarf that with the small number of HD movies. So part of what makes it unclear for us is to is to what the magnitude of some of this next generation network infrastructure rollout is going to be is trying to gauge the service mix across it. And I guess all of us see more and more and more demand for the kinds of services, which seem no difference in an e-mail to someone who simply attaches the photo for example, from their cell phone. But for those of us in the infrastructure business, a few photos is worth 100 of phone calls. So that’s the other part of it. It’s just not being sure what mix we will see things like images and music and movies start to populate the infrastructure. But it makes a big difference in mix and that translates into big difference in capacity demand. And then also intelligence needed in the infrastructure so those are all things we just going to wait and watch and see. And then to your question on the Siemens, the numbers for Siemens in Q1 was 13%, Q2 was 16%, Q3 12% and Q4 14% and in the full year it was 14%. Hi, thank you. My question has to do with the acquisitions that you made earlier in the year between Redline, Kagoor and Peribit Network types of things. You went through some detail, great details on the service provider technologies. And in my calculations it looks like they were roughly flat, most of the acquisition in there and the next thing was up a little bit. How do you see in your revenue guidance for the next couple of quarters, I had actually expected those to be a real bit stronger, they sell on to the enterprise, they are usually a little bit more of an end of calendar year fresh for those. Do you expect those products, I guess, Netscreen as well as the acquisitions to stay relatively flat and maybe will they pull back in a weaker Q1 as well or shouldn’t they actually be growing with, as you kind to get further in, like NGM share in this market? Couple of thoughts Ehud, first on year end, we actually have not seen or didn’t see in the year end just completed the kinds of budget flush or year-end activities and that in some years, although we actually haven’t seen that for few years, really so, I guess, that’s still something that we all remember but it isn’t something that we have seen in the couple of years and we really didn’t see at this year either. But to your point about the – to the mix of revenues we look out over the first half of the year, it's quite likely that we will see growth in many of these individual examples, we the application performance technologies, I think will continue to see some strength in various of the security categories and clearly the need for some of the features or the functionality that’s in particular capabilities around optimizing website, managing for distance links like that is relevant. But the thing that affects us a little bit on this also is partly by design and that’s the function of how we are managing the compensation incentives and how we are motivating the field organization. And its even more highlighted by the change, we’ve formalized in the rest of the company organization here this entering the New Year which defined the rest of the business, the way we motivate the sales force which is go into an enterprise account and secure a percentage of their mind share and market shares as a customer of ours. And we don’t motivate the sales force specifically to do that by selling three firewalls and four WAN optimization devices and two routers. We just give them a number to go into an enterprise account for example and established Juniper presence. And so as a result, it distributes their focus more based on the brand presence we are trying to achieve and that is really what translates into the growth of enterprise as you saw, I just talked about here. It doesn’t necessarily translate into a condition where every player on the team scores on every play. And we aren’t really trying to do that, we are really trying to make sure that the brand grows and that the enterprise presence and our strategic presence in the account grows. And if that were to happen all with firewalls, or all with routers or all with application performance products at any instant in time and that will be fine. And in the last quarter it happened more on the products we identified around the high-end of the firewall business in SSL and IDP and was relatively flat. It will probably shift around a little bit next quarter but I just like you to have some color on the way we are measuring and motivating the efforts that we’ve got underway. And I would like to point out, if anyone gets the wrong impression they have that, year-over-year the security business grew 25%, I just want to reiterate so we did see some very good growth rate, we are very pleased with the performance of that business. Yes, it’s also normalized for some of the accounting impacts. So the actual numbers if you would see, if you looked at the financial results it will be lot higher than but for actual accounting results that’s normalized for real activities. We have given exactly that numbers, just a minor amount. We really acquired Funk more for the technology going forward than first revenue contribution. I think it's going to be a significant contributor in our technology on a forward-looking basis. Thank you, two quick, main question is on the enterprise business, sort of that, whatever you are calling at, it looks like particularly last quarter that actually came in on an operating loss and I guess you had pretty significant increase in unit chips about 46%, but I am assuming that that was bundling. Can you just about talk about sort of how you are going to evolve that in terms of bundling products going forward? And then the only other question is, the accounts payables are pretty significantly and just any comments you can provide on that? First of all on the enterprise business we don’t actually report the profitability of that independent so I am not sure where you get in- That was SLP. The enterprise business overall includes a quite of the IDP products and in overall we have a significant sales force dedicated to that and we would generate a profit overall. And again those fourth quarter as well. Okay and then on the SLP business, it was, again a negative 15% operating margin even though revenues were up 8%, you had 46% increase in unit shipped, so the question, I guess is what was going on there and what happens going forward? What is going on Steve is that we are making a significant investments in our sales organization to grow our enterprise business necessarily a portion of that and so we are already driving that plus we have some significant investments on the R&D side in that business. And so probably overall that is an area for focus for us, it is an area for us to really generate some growth in the future periods. And also Steve, its Scott answering just answer up the second question you asked about DSOs. The DSO’s were 43 days this quarter versus 40 last quarter so it’s up slightly partly a function of some later in the quarter shipments out of manufacturing because there is some supplies issues but no more major concern on our part there, and we still expect to be within our guidance going forward. And again the difference between SLP and Enterprise is just a clarification is really around the same point that we want to emphasize is that we are really driving the business towards the total portfolio and enterprise and which obviously includes a several $100 million of routers that get sold into that market as well as the SLP so, its hopefully be helpful for everyone as we get this clarified more based on the customers than less on individual slices of the product portfolio. Sure, thank you. Scott when you are looking at IPTV deployments, particularly guys like PCCW and FastWeb, is there a way you can help us understand bandwidth capacity requirements there and where you – if you tend to see it more at the core first or more at the edge, how do those deployments go about? It’s a great question with unfortunately long answer, but the short version of it is, at the moment we see more linear of what I’d called balanced impact on infrastructure with these types of services meaning that the TV or the video services have launched from the core infrastructures and delivered out through the network. I mean it has sort of an equal burden as it travels but where the network architectures are going and one of the things that I think it’s going to be a fairly dramatic differentiators overtime is something called multicasting and its ability to essentially ship one copy from the core and then start replicating as you move up the tributaries. And its only part of the intelligence that will be applied in the networks as they become more heavily loaded with different type of services and traffic. And this is where I think what’s going to happen in the early days of this, which is the networks because the volumes of these news services are fairly low, this is easier to throw bandwidth at it, but as the volume of - the number of types of services and the volume traffic that is generated by video and other of these things and streaming services versus bulk download services and thinks like that, if that increases the networks going have to get increasingly clever, architecturally and operationally in order to handle that so, it makes it really difficult this is part of the question you know Nikos was asking as well: how do you really know what the mix of service impact is going to be on these networks? And it’s a hard question to answer because depending on the sophistication that’s deployed the networks will become more intelligent, and the impacts will be less but in the first days you’ll see a lot more impact while people just simply throw bandwidth at the problem, and we are seeing more of that today than we assume the real intelligence that’s being designed. And that a big part of this whole next generation network consideration that we’re seeing take place in places like Japan where they’ve got 3 million fiber to the home customers, and they are starting to realize that you can’t roll services out in bulk form at those kind of bandwidth with the tributaries without putting more intelligence and design consideration in the infrastructure so, I mean it’s a kind of thing that we are seeing go into some of the ripple or redesign across the marketplace, and I think we are going to see that continue here over the next year or two as we see this types of services increase. Thank you. My question is on the infrastructure business. When we look at the first half of the year, and some of the guidance in there, can you talk about our competitive factors having any impact at all in guidance, is it primarily these delays in Asia which are causing you to kind of moderate the rate of growth or competitive factors having any impact especially at the edge of the network? Subu, we don’t much change in the competitive situation, it is definitely the case but some of the design pause if you will or refresh is going on and the thinking in Asia has a lot to do with what we see and as much as anything in places like Japan and Korea and elsewhere you see there is a tremendous, like its almost embarrassing speaking of it from here in the United States, how far behind we are or maybe said in the favor of some of these countries how far ahead they are, and not only the rollout of services but the willingness and the options and the comfort with the users and the population have with gaming and instant messaging and movies and music and things like that on all kind of devices the portable to the home and others. And so they are a lot - those are significant consumers are the kind of things that we provide and when they pause and rethink some of this it has more of an impact, but I think the competitive landscape is largely the same, there is people out there trying to bring the cheapest solution to the party and there’s other people who trying to bring the biggest catalog to the party and so we’d like to think of ourselves as competing with the best and were competing with those with the most and those with the cheapest, and that hasn’t really changed and I don’t actually think that it will much. I think we are going to continue to see competitors in this market and we are going to continue to read a lot of press releases and hear a lot of promises and a lot of claims be made. So I’d expect that its not only to continue but probably the volume will probably go up on this kind of stuff in ‘06 but when you get down to network decisions in a short-list and the deployments we haven’t seen much change. If I look the large plan performance by the major telcos for IPTV the new DSM to be going to large system integrators, so many discrete component to work hand-in-hand with each other, what does that mean for Juniper, do you scale the business and make more acquisitions to a have end-to-end product portfolio or do you just focus on the routing component? Actually Mark, it is going to be interesting to see what the rollouts really become, because there is a couple of I think fundamental contradictions in some of the claims that are being made. End-to-end if you disassemble that assertion is essentially a codeword for proprietary, because if its truly end-to-end and there is some benefit in it being end-to-end that’s because there is something unique about the pieces and the way they work with each other and they will only be unique if they were proprietary, I don’t think any of the operators I have spoken to in the last 5 years and its probably getting more intense not less are interested in proprietary solutions. So when someone says they’ve got end-to-end open standards that’s an oxymoron, if it’s end-to-end then there is some benefit in that then it is not open and if there is the benefit then its proprietary, which is followed by another oxymoron, which is the manufacturer system integrator and either your system integrator, which means you’re an honest broker putting together the ideal elements from the market at large and presumably an open standards way or your manufacturer in which case there’s no coincidence that your recommendations as a system integrator equal all of the things that you manufacturer. And I don’t think that’s lost on any of our customers either so again it is the difference between I think a lot of coincidence that are being made and a lot of multiyear and multibillion dollar declaration that we’ve all read and what’s actually going on when you add up the number of IPTV subscribers and the people that are serving them, I don’t disregard the fact that our customers and our service providers are looking for more comprehensive solutions though we tend to believe that what they are looking for are side-by-side solutions and BT 21C is probably a great example where Junipers partnered with Lucent and Siemens in both the core and the edge and BT itself is also coordinating across other companies including our competitors to deploy technologies. I think if we were to look at that example as one it’s probably the more practical example of the kinds of things that I think are actually going to succeed. So you know if you take the part some of these assertions even on the face value of what’s been said it doesn’t make sense in the minds of the customers so I think what you’ll see as a net of all that is continued increasing, in some cases we’ve seen contractual requirements for open standards and for us that will allow us to stay out of the business in building consumer devices for example or stay out of the business of building optical terminals and things that don’t have anything to do with traffic processing infrastructure, but be a very incredible solution for the infrastructure that ties those spare of pieces together and I think that focus is what has been and is going to continue to be the key our success Thank you. Our next question comes from the line of Shah Wu at American Technology Research, please proceed with your question. Yes just a housekeeping question. Regarding Funk software, how do you plan to recognize the ramping for that, will it be would put under or will there be a separate line item, or will it be under the kind of traditional areas? Thanks. Thank you very much. My question is on new product for this year, I think you mentioned that you have a pipeline of products for this year. I was hoping could you please expand a little bit for sort of the direction and the sort of type of products particularly in a routing space for core routers and edge routers, what are some of the features on new things you are working now and the timeline for that? John, the product announcement themselves and the specifics behind those will be forthcoming as we go out through the years so that will be the time we speak in detail but generally speaking what we see is the opportunity for further interrogation and further interrogation of security capability along with the network capabilities and as far as the broader infrastructure portfolio it goes across two dimensions, which need to happen in contact with one another and that would be performance and intelligence. One of the things which its relatively easy, I guess none of this is really simple, but it is relatively easy to improve performance as long as you leave the processing requirement in a simple state and it is relatively easy to do complex processing as long as you don’t have do it very quickly. But what’s very difficult to do is sophisticated traffic aware of processing on high performance infrastructures where reliability is in the case of some of our defense industry deployments is life-saving and that triumphed of need accomplish simultaneously is what drives the portfolio. Most of the translation of that into specific features from someone outside the industry or not deep in the engineering and technology would be very obscure. But once the work is made or when one looks much closer into what that actually takes to do in some of those features and what they mean it is really quite critical to the decision cycle so I think broadly speaking its integration and then it’s the combination of performance and intelligence and these are things that we think we’ve got some unique, intellectual property which is the part of it, but actually what we have this more unique or what’s more valuable to us as we deliver on some of these things as we have practical working experience with systems and billions of hours of runtime of that experience or let us do somethings that we think others are going to have a little time for figuring out. Again we will make specific announcements on the products at the time of their availability but you’ll see us with quite a lot to say this year. Our next question comes from the line of Gina Sockolow at Buckingham Research, please proceed with your question. Ms. Sockolow your line may be on mute, we cannot hear you. Okay. We will proceed with the next question. Scott, I have at least heard in a few conference calls talk about the blurring of distinction between enterprise and service provider products. Yet today I heard you talk about the widening organization around the enterprise team and the service provider team. I am wondering if you see some execution opportunities by separating the teams or if there are other issues involved in doing that? Great question actually Jeff, let me clarify the distinctions. In a short answer, some usually better the longer one but I cannot give you a shorter one. The short answer is it’s the difference between products and distribution. The conversions you talked about and that as we see is around the product and technology side of things, the need for the reliability and the intelligence and the traffic awareness and the security and all those kinds of things. Those are very much converging and whether the end-user is a subscriber of a public network or an employee of a public network or a soldier in a tank for that matter and we serve all three of those customer types. The infrastructure requirements for performance and security range from what I call important in the service provider for example in the business case to really important in the tank. And so that technology and other things required to do that are quite common, the distinction between the enterprise and service providers piece of this is more on the distribution side and on what it takes to work through the channels in the distribution and reseller relationships that are needed especially with a wider range of products and a larger transaction volumes in the enterprise as well as on the service and support side, where in a case of a major enterprise account it is actually similar both dedicated and major account teams as well as dedicated service and support attention but even in those accounts and certainly in the small medium businesses or medium businesses really where we tend to look more, that the expectation of a more complete handling of their requirements and less technical expertise less operational focus, and then of course you would seen in the service providers, so that’s really the distinction between focusing the business teams, and also a more completely managed and integrated solution from a portfolio standpoint in a enterprise or other environment then would tend to be more self-integrated, more managed in the case of a service provider. And proof from that the R&D organization both be still organized around capabilities, or some other structure but not necessarily around service provider or enterprise? But that’s exactly correct, there is still an infrastructure product group, a security product group and an applications product group, those are unchanged but they now become part of two virtual teams for purposes of go to market exercise one for enterprise and one for service providers and so you are exactly right Hi this is Lucas Gwenky for Christin, my question is related to a comment you made at the end of your prepared remarks on the session border controller being now categorized in infrastructure group, did that occur at this quarter I think you might have said next quarter will be the first quarter and if so does that mean that that it is not being sold separately any more? It’s Q1 that we are make you the change, so in Q4 we reported in the SLT product group and as to the products it is still a standalone product at the moment. Well we talked about how we implement towards having more integrated products down the road and so we saw thought it is best to move it into that group, from a product point of view. And then separately you know you’ve disclosed, the new business unit service provider enterprise, are you going to provide any kind of more quantitative details around that going forward? Luke, couple of thoughts, first of all, final part on the session border controller technology, as we talk about we made the acquisition as the company that brought that to us, it always been targeted as an integration activity or integration priority for us, so and that is really the destination of that technology in the industry. But separately in terms of reporting we will likely end up still reporting as we described by product groups that one of the problems with enterprise and service providers is customer type from a pure financial reporting point of view, its not so easy to know, through one or two tiers of distribution exactly what the type of customer is and even within the service provider in case you can have a service provider buy the product and puts it in his own network and sells it sells it as a service, that same customer can buy it and use it internally and the affect the enterprise and can also distribute it and sell it to someone else either as a managed service or as a transfer title, so it gets a little bit difficult from a pure accounting standpoint to be precise about the business but what we do, and what we will do here in just providing as more details as we go forward and as much details we can and obvious is report on both on the products which would be very specific as obviously we can identified by products numbers, and then report as we see it on the business as a percentage of total in service providers and enterprise so, look for both it is only possible to be specific to a certain degree in the customer types. Okay and then finally the service layer technology, what is the next service layer technologies that you are considering, you know either developing or acquiring? Well I would say, obviously something that we can really comment on and we will watch and see how the year unfolds but I think its really more in this category of technology, its more a function of integration and to trying to take capabilities and bring integrated solutions to bear so most of our efforts will be focused on doing that over at least the near-term. Thanks. There has been a article written in China paper and pick up for light reading that the Siemens is interested in acquiring data networking product line from Harbor line, am not asking for you to comment on whether that is going to happen or not, it is obviously has been announced but, the speculation around Siemens especially backing away from USA distribution partner is obviously been out in the field , can you address the relationship you have with Siemens and what do you expect that or give us example of how that business with them is continuing and whether its strengthening or weakening? Sure can, Alex, on the subject to relationship in general its a strong as it is ever been and those relationships are always a function I guess on multiple dimensions, one is that the field and operating levels country-by-country there is deep long term trust built between account teams that are working together and places like BT 21C and things like that, and actually lots, lots of others, as you can see reflected by their continued strength as the percent of total revenues so, at that level there is great strength and depth and I would say concrete port around those relationship and the trust. And that is actually one of the things that takes as you know may take a few years to get there, and because the account team is don’t start out trusting third parties with their own accounts and today we have got very good and strong relationship there. Furthermore when that relationship moves up the ladder, with Thomas and the people that run the company and the divisions that are involved here those are relationships that are also long standing and quite strong so, we have every confidence in the Siemens relationship and what we sees is opportunities for both companies going forward and I can’t speak for them obviously as you say I wouldn’t but I certainly - we view this as a very strategic relationship and have every indication to support that from that every conversation we ever had with them. If you were to look at the Harbor line, is that a complimentary line to your line, if hypothetically it was acquired? Well we don’t I don’t actually know whole what about Harbor because, we don’t compete with them, you have heard and read some of these things but your reference in that had been speculated but, I really don’t, since we don’t compete or see them at any of the deals or markets or business that we do, I can only give you the kind of things that I suppose you can find on their own website about what they do, it just isn’t something that we see in our markets. Also if you are not competing with them then anybody selling them would have to be either complementary which certainly wouldn’t become replacement to your product line. Yeah. As far as, certainly that if there was anything that they had the offer that would be competing it is in something it is ever been seen in any competitive deals we are aware of. Good afternoon everyone. Quick question on allocation of capital, the equivalent 17% of market cap in cash, you are generating $200 million in free cash operations last quarter, realistically how much cash do you need in a realistic manner to run the business and if you have excess cash, kind of why are you buying back stock as it is too low, and kind of you said would on last quarter conference call? Well, Sam, you are right in your observation, there is over $2 billion in cash and we generate almost $200 million in the last quarter, so we are certainly, I guess we are pleased on a couple of dimension with that, those number first of all that the fire power it gives us. But secondly it is actually in my view at least it is the ultimate measure of customer satisfaction which is that they pay you and it is the ultimate measure of the health and strength of the business as it generates cash, so we are continued to be laser focused on the creation of it and to start with that point and in case for example of the recent acquisition of the Funk we chose to use cash for that acquisition instead of the equity as an example of what we have the cash for in order to avoid the issuance of more shares for in that case for that acquisition, so we will see what the market presents going forward as we mentioned in remarks as is still true today there is an authorization that we have that has been given to us by the Board that allows us to do more repurchase if we were to choose to do so and then we will watch and see what the market brings and see there in terms of that kind of opportunities or other considerations that we might use cash for in place of equity. But on the front end of end it though one of the things that everyone should expect as this business is going to continue to be strong generator of cash because to me ultimately that is the measure to help in success of the company and so it is kind of a - it is a primary metric for us around here. I completely Scott, I guess what I am asking is how much cash do you need before you start to look like the bank? Well that depends on who you ask. I guess, if you ask my friend here Bob he likes cash. So he would want more of it, if you ask me I might spend a little more of it. But It’s a careful consideration and all seriousness to look across the industry. I think we are watching some very turbulent time in the market and there are not going to be the number of companies standing a year from now that there are today in my opinion. Most of those probably are not go away and stay away. But there may also be opportunities for us and there aren’t, necessarily acquisitions that could be joint development, investment partnership, marketing opportunities, we have done all of those in our past and want to be armed to do any or all of those things going forward. So it is something that we will continue to evaluate on a regular basis, we have the approvals and the resolve and if we do choose to do simply in the market and buy shares but we also have the experience of using a cash for other purposes, ultimately to the same end of avoiding more share issuance and we are certainly mindful of trying to balance that equation, so we will see what happens over the time to come. We would like to thank everybody for your participation today, there will an audio replay available of this call on Investor Relation Section of our website and in addition you can call 800-633-8284 and enter the reservation number 21280063. We currently plan to report our first quarter 2006 results the week of April 17th. If you have any additional question please feel free call investor relation department. Again thank you for your participation on the call today and have a nice evening.

EarningCall_233822

Here’s the entire text of the Q&A from Audible’s (ticker: ADBL) 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. Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you would like to ask a question, please press “*”, 1””on your touchtone phone and you will hear a tone acknowledging your request. Your questions will be answered in the order that they are received. To remove yourself from the queue, please press the pound key. If you require further assistance, please press “*”, “0”. One moment please for the first question. Thank you, good afternoon Don and Andy. If you could go through again just recap what the percentage of the new subs adds were from committed customers versus other customers. But I added a bit of color in terms of the monthly which was that the committed number in August was 13%, and it was up to 42% in October. Yes. Let me just add a clarification to that, Gene. That’s a percentage of our new Audible listeners. That is of the 61,900 Audible listeners that we added in the quarter. Okay. So did you look at just the mechanics of how this plays out, I guess, that clearly by the month of October much or the percentage of Audible subscribers that came through a committed program were significantly higher. Do the mechanics of this math basically lead to a lower churn in the December quarter? I mean, is it inevitable or is it still potentially something that could go the other direction and be up again in December? Well, we certainly are comfortable saying it’s stabilized. We did report that it was down in October, and clearly the math is kind of accretive in this thing. So it seems to be going the right direction. Having said that, there might be programs that are incredibly profitable or additive and include a churn tick. For instance, we have a tremendous amount of free or incredibly low cost people driven to the site from whatever program or partnership, and a significant percentage of them take free trials. They will exhibit a somewhat higher churn rate, but it’s all good because the people who come up through the other end, they’re long time keepers. And I guess just on a, you’ve been, had the Shuffle program, when, since the beginning of September, or at least as far as kind of it being up in front of Audible’s website? Well, you know, for one thing, it’s a little more expensive for right now. It is an amazing device for Audible. It’s by far the best one I’ve experienced of all the many iPods I’ve been using since they first came out. I agree with you there. They’re actually pretty hard to get right now in the general channels as opposed to the Apple stores. I think what we’ve seen is that it’s an ever more promising environment, particularly since companies that actually make premium content or at least content that we believe we can both Podcast and sell are very interested in what we’re up to. I’m excited about the products we’re abut to unveil and the sort of private response we’ve seen from companies that have been interested. And in general, it’s just a positive trend. Apple is now telling people that 25,000 Podcasts are available through their directory, and that it drives devices; it drives traffic; and I think it’s a fascinating and dynamic world. We also do see a really significant trend which is the more, people in the premium space are interest in using it for snippets and promotions. Our partners at American Public Media which is a Minnesota public radio are using Podcast to actually drive people to their www.audible.com premium product. So I think you’re going to see just a really dynamic world, and I’m very excited about the tools we’ve built. I think it just increases device ownership, awareness of Audible, certainly traffic to our pages at iTunes because the links are right under the audio book link. So we only see goodness. And I guess as a final question is just general health of the Apple relationship. And then what impact did Harry Potter have on the quarter? On that, I never discuss the specific title effects, although I will say that it’s worth understanding that unlike physical retailers or even publishers, we’re far less hit-driven because we have such deep penetration of our backlist and our collection is just about everything sells in a week. So you don’t get the concentration no matter what titles there, even the DaVinci Code which is just a tremendous bestseller for us all the time. And in terms of the relationship in general, we just continue to work together on all kinds of fronts and have a very strong relationship and I think a lot of loyalty between the companies. Yes. Thank you. When you’re looking into the holiday season, are there certain, how are you going to be joint promoting these through the retail channel? And are there any sort of online advertisements that you’re setting up? Yes. We’re always looking at dozens and dozens of different channels, the majority invariable kinds of marketing as well as partnership relationships, Barbara. And we continue to proliferate them and gain awareness, preferably with variable economics underneath it. But I mentioned a couple in the call. I mean, the gift card phenomena, as you’ve probably heard from other companies, is a big hit, but it’s very focused on gift buying. It really is a gift experience to buy. In our case, these cards for $9.99 that give you the first experience of an audio book. And then follow up, the Harry Potter is right now just exclusive on iTunes. Is there a date at which it will be available up on Audible? Yes. There is, but we’re just going to say it shortly will come back to Audible, too. And I think people who watch both sites know that we in the past offered -- we have exclusive Audible audio book content available early at iTunes, so we’re very happy with the whole thing. Again ladies and gentlemen, if you would like to ask a question, please press “*”, “1” on your touch, our next question comes from Mark Mahaney with Citigroup. Sir, your line is open. Great. Thank you very much. A couple of quick questions. First, was there any material revenue contribution from the UK in the quarter? Hi Mark this is Andy, the UK started up in mid-June. We were happy with the results for the first full quarter, but we’re not disclosing them at this time. Second question. I think your full guidance for the year on the bottom line, you haven’t changed. That implies an operating loss in the December quarter that’s pretty similar to what you did in the September quarter, could be a little bit higher, could be a little bit lower. I think that math is right. Is that your thinking, that the operating loss in the December quarter will be similar to what it was in the September quarter? And do you expect these to be the trough loss quarters? Yes, Mark. Andy might want to add to this. But we decided to be conservative. And the main thing to remember is that our revenue rate, the numbers are pretty small and the -- and elements of -- particularly the Q4 season can tip expenses one way or another. For instance, just a big upfront promotion with one of our retailers on $100 off were the taking off of the Shuffle program, can create an amazing effect for 2006 on the positive, but it can also hit the expense line. There’s patterns of gift giving and whether or not revenues recognize from people opening up their boxes at Christmas and downloading it, it just makes it a very iffy thing. Within a fairly small number of dollars, but it does tend to effect the bottom line. So we decided to be conservative. Do you want to add to that Andy? Yes. What I would add to that Mark, is that one of the unique features of the fourth calendar quarter of the year is that it’s just generally our biggest quarter in terms of Audible listen acquisitions, so we spend the most amount of money on marketing. But at the same time, the calendar works against us on a full year basis because we only have a couple of months to earn revenue from those new customers. So that creates some of the dynamics that put pressure on the bottom line in Q4. Okay. And then one last question. Just in terms of the patterns of the new customers that you’re seeing now, are you seeing any major change in the patterns between the products, the books that are being downloaded and bought, you know, say this quarter or two versus what you’d had a year ago? Or are the purchase patterns fairly similar in terms of the products they’re buying? I guess what I’m trying to get at is whether you’re starting to see in terms of the book purchases trends that might indicate you’re starting to tap into a more of a mass market phenomenon than perhaps you’ve had before. Thank you. I’d say that’s a really good question. We do start to see trends with some of our shorter and more generalized content. It tends to be trending up in terms of sales as well as things that are, some of our original programming such as our romance line which are arguably focused more at the main market. So I do see those kinds of trends. The other trend that we do see is that we’re just becoming better at our ability to be strong merchants, and the sales variances when we do promotions that are vertically integrated with our boutique partners and with iTunes are very different. And we’re beginning to see a tremendous delta which is important in terms of both margin control and also just getting the right people what they want. Good afternoon. This is actually Rob Malaise (ph) calling for Barton. I just had a couple of quick questions with regard to some of the lines on the income statement. And, royalties and other content charges seem to be creeping up the last couple of quarters; they’ve been around 36 % of sales. And I know long term you had been looking for more of the 30%. Is that still achievable? What’s kind of driving royalties up? Are you seeing pricing pressure? Hey, Rob, this is Andy Kaplan, royalties really are a function of several things. They’re a function of what people buy; they’re a function of the mix of our business between what we sell to consumers and those titles that we sell through the Apple iTunes music store. We believe and we’re confident that we can get content cost down to our target operating level of 30%. We expect to do that over time. It’s evolution; it’s not revolution. And I think you saw, or you’re beginning to see a piece of that. In fact, this past quarter where our content costs as a percentage of consumer content revenue has started to tick down. Okay. And then also just really briefly, on the G&A line, that seems to have crept up a little bit as well. And you said the new initiative costs are mostly in the operations and the technology and development line. So is there something kind of one-off going on there in the third quarter that brought that up as a percent of revenues? Again ladies and gentlemen, if you would like to ask a question, please press star one on your touchtone phone. Our next question comes from Steve Frankel with Adams, Harkness. Are you there Steve? I think he has dropped. Operator shall we go over to the next question? Operator is he still there? It seems I’ve had that effect before on crowd. So anything if you look at the down-sinking churn, how much of that is the appeal to Shuffle versus shorter commit? I think it’s a combination of fewer trials and fewer trials particularly bought from certain programs that we identified early in the year that were just not productive and were high churn, and the fact that more people are taking Shuffles which just creates a quality of customer who tends to stay with us. And the commitment level creates a qualification as well as a habituation experience, and we’re just keeping those people a real long time. If we look in general at your infrastructure commits that you made this year, my impression that you were a little bit behind in the first couple of quarters. Would you now say you’re caught up in where you thought you’d be in spending that money? In 2005, we will be caught up, so through the end of this year, we will have spent all of the money we planned to spend. Okay, great. And I know you’re not going to give us any details on the UK, but at a high level, are you seeing any different customer behaviors there than here? A little bit. It’s partially because right now there isn’t a lot of shorter content. There definitely is a prejudice for the UK-sourced content with happily we have a lot of us thanks partially to our CBC deal and other key publishers coming onboard. And I think that other than that, it seems to be tracking in very similar ways. Hi guys. Mark Argento, Craig Hallum. Just a couple of quick questions here. I apologize. I’ve been kind of on and off on another call, so I hope I don’t duplicate myself. Could you talk a little bit about the XM deal and when you actually think you can get into the dashboard of a car and really start to lever the education opportunities as well? When do we actually see a little meat behind these programs, i.e., in the form of some revenue? Can you just talk a little bit more in detail on some of those initiatives? Sure. Starting with XM, we have set forward according to plan with XM. We have both of their flagship spoken word programs up at www.audible.com. And in fact, Opey & Anthony is very popular, so we’re already seeing a good sales pop from that. That’s a pretty well known in radio world to do one of those kind of pop following pieces. And it’s the only place you get it is XM and now from Audible. And we’re pretty excited about the programs we just launched, and it’s plays on the XM and also we have a boutique which is one of our 13 operating boutiques which sells audio books to the www.xm.com visitors. It’s in ‘06 that we begin to come together on the technology side, and the focus at the beginning is their handheld lines. The point is that the chip integration that’s involved is obviously transferable into dashboards. I don’t want to be more specific than that. And then education, I think you can assume that the last half of ‘06 is when we see education really start to kick in with the back-to-school season. And part of that is what we talked about in terms of the Pearson study guide products and their 1,000 person channel sales force putting out these extremely innovative new products that professors will be telling students to get from Audible. And in some of the related deals there indicate a rich website that will be speaking to all different categories of education content. SparkNotes is a great company; very, very successful; huge web traffic; and probably the most well known web aide to getting through high school among kids. And so in general, I think we’re pretty pleased, but I’m looking more to the back-to-school season for revenue. Have you generated any revenue out of education or any of those products made available? I think originally you thought you’d have a handful of some of the more common titles available. Well, if you look at Audible Education, you’ll see a soft reconfiguration, a soft launch reconfiguration of the education site which you will see many changes on that coming forward. But you can begin to see that it’s much more richly stocked. And fairly quietly, we’re filling in with a lot more educational content and also redesigned the taxonomy so that our rich education content is presented more powerfully. So, we see apart from that, but in terms of these more channel-oriented elements that comes in next year. Mark Argento Last question and maybe you addressed this earlier. That the Dell deal, did that ever really get off the ground? And if not, what are some of the impediments in terms of working with some of these other companies and doing some co-marketing? Is that a channel that you continue to like, or are you going to try to look elsewhere to drive incremental sub growth? Yeah. The Dell, traffic is pretty much focused on the Axiom and then, it’s a pocket PC, which you don’t hear about as much as other devices. But they sell a lot of them, and actually we have a very strong attachment rating if you go to check out -- as if you’re checking out an Axiom at Dell, you’ll see a very prominent commitment offer that brings the price down by $100. And it’s been really strong. Having said that, all the Dell products including the little mp3 player and DJ are all shipping Audible-ready, but there’s not a very prominent marketing program on those yet. But I think that one’s going very well. And it’s a sum of a lot of different channels, and I see a pretty long list of different kinds of channels of awareness and conversion, and most of them with variable economics. Hi guys. A couple of questions. If we can go back to the UK play, I’m not sure if you’ll answer this, but can you give us a sense of what they contributed in terms of subscriber growth? No. But it was just the first quarter of operation. But no, we’ll start to give more visibility when the numbers are up. But we’re on track in terms of not burning more than $2 million which is what we said at the beginning. Okay. And can you perhaps discuss your churn rate amongst legacy customers who have been with you for 12 months or more? Well, George, certainly the longer a customer has been with us, the lower their churn rate is. And if you look at our base of customers, we’ve got customers going back all the way to August of 2000, and their churn rates are really, really low. So people sign up for the Audible service; they weave it into their everyday life; and the longer they stay with us, the lower their churn rate. Audible listeners including the membership fees and their ala carte buying over plan comprised 80% of our revenue in the quarter. Thank you. During the previous quarter, you had spoken about CapEx being, increased the guidance for CapEx by 5 million saying that you needed it for upgrading the website. This quarter you seem to have spent about $1 million. Do we expect the other 4 to come in the fourth quarter? It will come in on the balance of the year. What I said on the last call was we were going to spend an additional 5 million. You’re exactly right. We spent about 1 million in Q3. We’ll spend the other 4 million in Q4. On that point, capitalized software, this was the first time that you capitalized software. Can you talk to that? What exactly was this software and is this going to be something you do going forward? What I can say about it, Sameet, is part of it was software that we bought from a third party, and other -- another portion of it was software that we developed ourselves. Okay. Final question. Could you, when you increased your price for your high end plan from 19.95 to 21.95, can you talk to what some of the dynamics that you’ve seen since then? Any churn? Has it gone up or gone down either ways? Partly it’s occasionally that the exposure of which offer against particularly the committed programs. But I think it’s also the value proposition of getting two audio books that could cost you $80 in a retail store for $11 a piece. I had a question on Audible Air. I realize it’s pretty early here, but any metrics you can share with us on initial adoption and download activity? No. Except that I can tell you that the happiness of the beta testers that we had on for several number of weeks and the usage, the download activity is incredibly high and people were pretty much transported with pleasure over the experience. Because the reality is that we have an amazing array of subscription programs that are extremely valuable to anyone who cares about their productivity and the level of their, the information they take in. It’s just that the tethering to the computer was occasionally for the busy person, just exactly the amount of, you know, the five minutes they don’t have. And to wake up in the morning and have it waiting for you and to have it easily, the way we do things, you have digital skipping points; you can actually skip through the stories and the paper and the journals. And it’s really brought those products to life in an important way for that user group. And I think the Treo community which very much has its own culture and communications has been raving about it and talking about it. It’s just a tremendous advantage for the Treo, as has the CEO of Palm, so all things are pretty exciting if the early experience is any indication. Sounds good. I was wondering if you could spend a minute talking about the competitive landscape and any changes in the quarter? I did notice that one competitor launched a retail website in October. I was wondering if you can comment on that as well. Yes. There was a competitor that launched in October. And you know, we have a pretty open and happy idea about competition in the sense that we want the category itself to have more awareness. It’s a category that ought to have more awareness, and I think we’ll actually profit handsomely from that because ultimately we have a content franchise that will stand out for a long, long time, and we intend to keep it that way, and access to a large number of devices, notably the most popular ones, would be particular to our service. So we’re welcoming competition. Thanks guys. Early in the year you outlined the target for gross subscriber growth or additions of 260,000. I’m wondering if you still think you can get to that number. And also, in terms of the cost structure, do you think the fourth quarter will be the quarter that will sort of peak in terms of costs, operating expense growth and we’ll start seeing some leverage in ‘06? And then I may have another follow-up. Thanks. I’m sorry. 260,000 Audible listeners. As we said earlier in the call, in Q4 because it’s our biggest season of the year in terms of Audible listener acquisition, expenses are very high in this quarter relative to other quarters. In terms of ‘06, we’re not commenting on ‘06 right now. Okay. And as you sort of look out at I guess fall of next quarter or so, fourth quarter and then ‘06, but even further out, what do you think is the target mix between subscribers coming with sort of committed plans or commitments and without? Should we now see the committed customers as a percentage of total increase? What do you think the long term target is? And obviously at some point more and more customers are coming with their own devices, so I’m not sure what the sustainable level of sort of committed customers is. We’re very pleased with the behavior of those customers and the character of helping them get the device in their hands that creates this opportunity and opens up a new habit. So, it’s not, the penetration level, Richard, at this point is relatively small versus something like the DVD or other devices. And I think that we’re finding every day people who are aware of the service and aware enough to want to have it be part of their lives, but they don’t have digital devices. They’re not early adopters of music players, and we put them in their hands for all the right reasons and they become incredibly happy and profitable customers. But you know what? The people who have come in with their own devices are real profitable, too. So we see it a consistent mix. And over the longer term, you’re absolutely right; it’s not like anybody needs a television to watch TV anymore. They might upgrade, but at some point it becomes ubiquitous penetration. But at this point, it’s ramping. I just want to thank everybody. We’re really proud of the quarter, and look forward to talking to you next time. Bye-bye. 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_233823

Here’s the entire text of the Q&A from TiVo’s (ticker: TIVO) Q3 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. Hi. Could you talk about when you'd expect to see some new marketing associated with the NCTC group start and then maybe talk a little bit about the economics there. I understand it should be significantly different than the large cable MSOs. Thanks. Yes. The NCTC represents a large group of smaller rural cable operators. The arrangement we entered in with them a few months ago is a important marketing program to be able to reach the kind of analog subs I talked about earlier through the cable operator as opposed to through retail. There are I think close to 1,000 members, cable operator members of that group. And we are going through and making sure that we can get them the marketing materials other support materials and some training for purposes of this offer. A couple of the underlying operators have begun to be out in the marketplace. Most are still in a phase of our getting material to them and working through the training process. It is a economic deal that we have not disclosed but I can say it's a considerably better subscriber value to us than the mass deployment type of approach to TiVo that the DirecTV deal represents. Can you maybe say generally whether you would expect to see some movement there by say the first half of calendar '06, then? Well, certainly that's our hope. And after the holiday season where we are extremely focused obviously on retail in our own Internet sales, that will be a much bigger focus. Yes, thanks. Good afternoon and just two questions, if I could. On subscribers. Can you tell us what percent of subs are taking prepay options like the cards you're offering in retail excluding the lifetime folks, and then did you notice a signup rate difference after announcing the Yahoo! and then subsequent the video iPod, PSP announcements? And then I have a follow-up. Thanks. Sure. Well, I think as a general matter I can say that almost all of our subscribers that came on for what we call recurring monthly revenue type subscriptions signed up for a one year commitment. They could have done this either purchasing through retail where when they were activated in the order to get the rebate this was a condition. And as well as those who came to TiVo.com to buy online where a somewhat different approach than a rebate was offered. A bundle offer with a $49 price and one year of service was the approach to getting them to commit to a full year. In both cases, as I indicated, what this does for us is bring subscribers on where the early churn factor which has been a significant part of our overall churn, we certainly hope that we will control much better. But this is an approach that we are looking to expand through testing offerings for more than one year of service, multiple year of service type options that are longer than the one year we now offer but different than the lifetime service which obviously over time deprives us of the recurring revenues from some very enthusiastic subscribers. Just to clarify, I guess I was asking about the prepaid cards that we've seen in retail that what you buy, the ones we saw are 3 month, 12 month, and then they have also a lifetime card available. And then also I had asked about the signup rate to see if you noticed any difference in activations or interest following the Yahoo! announcement or also the video iPod announcements. Well, I can say that for the most part, sales tended to climb over the course of the quarter and those announcements did come toward the latter part of the quarter trying to correct for seasonal adjustments versus the impact of those announcements, I think I'd be guessing to give you too precise an indication there. In terms of the prepaid cards, the major offering in that respect is the three month free service card that one gets if you buy a TiVo at Best Buy, which has been a promotion that they have underwritten largely that's the key means of some form of a prepaid service. Beyond that, almost all the subs were coming on board in terms of the type of commitment that I discussed. Okay. And last question and I'll turn it over. Can you talk a little bit about other services revenues outside of subscriber, in particular ad related, ad revenues for showcases, ad measurement, et cetera? I know you don't want to give a level but can you at least talk about growth relative to subscriber revenue growth? Well, we are seeing more and more advertisers come on board. We had a number of new advertisers, major advertisers come on with us this quarter. I think what's most interesting in terms of the growth prospects there as we are engaged in discussions and have signed deals which take these advertisers up in terms of their commitment for next year. So we are expecting some significant upside potential to our current advertising revenues as we get into next year based on what's already been negotiated by way of deals and a number of pending arrangements. Obviously the most significant thing on the advertising side is to grow distribution, and as our distribution gross the greater the opportunity on advertising. But that is an area where we're seeing a high degree of interest. I have a couple of questions. One you indicated I guess there's not a new hardware platform fort the Comcast box. So how will that box be supporting mobility? Well, we haven't talked specifically about features in the Comcast offering. And at this point I don't have any particular comment on that other than to say that it's possible to support mobility because with TiVo connecting through the PC to accomplish TiVoToGo, to the extent Comcast elects features like that, we'll be in a position to support them through our software. Okay. Switching over to DirecTV, with the significant amount of volume that you guys have put on for new ads, do you have any sense for how much inventory they would have left as a result of them ramping this up? And it does appear like they've had some inventory issues on the NDS box. If they did come to you to fill that inventory is that something you would be willing to fill or would TiVo require a renewal of some sort? Well, I don't want to enter into speculation in terms of possible response to DirecTV. I will say that they do continue to have some meaningful levels of inventory as far as we know both on the standard definition box and the high definition box. And how that will effect their sales going forward for the quarter as they clearly look to market more aggressively their own DVR, I wouldn't speculate on but they do have meaningful levels of inventory. Okay. Last question is just to date what kind of activity have you seen since the holiday season got kicked off? And I guess with the $50 price point. I think there's been some increased promotion by Best Buy that we've noticed. Well, we had a very good holiday weekend. I would say we're off to a strong start. There's been active promotion by retailers. If you've gone into Best Buys you might well have seen major stacks of TiVo's, orange boxes out on the floor, which are creating nice opportunities to make sure people see TiVo's availability. And beyond that, well, we'll see how it transpires but we were gratified by the weekend's results. Thanks, Tom and everyone. I have just a few questions. Tom, you alluded to something I thought was quite interesting which is your market testing right now, idea of improving your conversion of leads into purchasing subscribers and effect when, as you mentioned, folks encounter the point of making the decision whether to purchase the box and then subscribe as well, that's a moment where some hesitate. Where are you in that market testing now? And really what are the kind of decisions that you would be, parameters you would be use using to decide whether you would offer a box up, I assume, fully subsidized or a potentially higher sub rate? And then second question is if you can just give us a quick update of any procedural steps that have to take place in the court case versus EchoStar between now and next March. Thank you very much. Well, on the EchoStar front, we are proceeding to go to trial in March, as you say. We continue to be confident about our case. And beyond that, I really don't have any comment on the procedural issues between now and getting to trial. On the testing front, we are testing a number of things. We have found that clearly some subscribers don't want to have a monthly bill at all. They find a new monthly bill a problem for them. And they may very well like the TiVo service but they'd like to dispense with all payment upfront. And so one of the things that we will be testing is upfront fees for different terms of service, different years of commitment. What we have tested, and we are going to continue to test it more actively because the results were very encouraging, was as I said a offer with no upfront box fee but a higher monthly service fee. And with a significantly higher fee but no need to pay for the box, we did see the conversion rates when people called and then had to decide whether to sign up. Those conversion rates on the decision to sign up were substantially higher with the only monthly fee approach. Now that has some real potential consequences both in terms of improving the net present value of subscribers we bring on, both in terms of higher monthly fees and what kind of service terms and terms of years of commitment we put against those. Again, any number of variations there in terms of what monthly fee might apply to how many years of service you commit to. And we're going to be doing some further testing on that. Particularly testing since we did find that one of the real pitfalls about TiVo had been the ability to get a better understanding of it. You just had a lot of people who had heard about it, had heard people be so enthusiastic about it but didn't really get why it was something that they needed to subscribe to that infomercials, longer form explanations really did generate a very positive level of response. So one of the things that we would like to test is that kind of education and informing somebody about the product but have the kind of no month, no upfront costs but only monthly service fee offer be what's touted on that kind of infomercial support. And that is something we'll be going back into the market to test. There have been limitations on what we could test over the holiday period with just how many offers in local markets you can assess things from at any given time, and there also needed to be some significant systems improvement for our being able to support multiple offers out to the consumer at any given time, which has been a real constraint in terms of just how much variation TiVo could have from a single offer approach. So that's where we're headed. Hi. I have a couple of quick questions on your market segmentation. First of all, have you ever discussed how many over the air households you currently have? And if not, can you tell us if that is a significant number? I don't believe we've ever discussed it. It is, we do have some. It's not a segment we've focused on much and it is not today a very significant number at all. Okay. And then my second question is, it sort of refers to the strategy to go after these analog households. And it's a twofold question. And I'm not baiting. I want to understand this here. First of all, in terms of what we're seeing in the cable business right now is big efforts with many of the MSOs to complete programs such as Comcast digital simulcast which will essentially allow them to rollout a all digital basic tier. And I think that that's one of their priorities to stay competitive against an IPTV offering from the telcos or satellite. One I guess is how do you deal with that? And then on a more philosophical level, it seems that what TiVo is is a fairly sophisticated product with a fairly sophisticated client base. A lot of these people are early adopters. All of the features that you want to differentiate with seem to apply to people who are fairly tech savvy. Doesn't that sort of run counter to who the basic cable sub is? Good questions. On the first, that 36 to 40 million cable home number today certainly will go down some over time. There are different estimates as to what that will be over the next four to five years. But many of the estimates have a healthy mid $20 million number type of basic analog subs continuing. So we have a different number of approaches to deal with what you're suggesting. One is there will be a very healthy basic analog sub population that continues. Two, we do find that a significant number of digital cable subscribers do subscribe to TiVo as well. We know we have some real limitations in our product today in terms of both high definition availability and dual tuner availability. Those are things that we are clearly looking to correct next year which will help us I think continue to reach digital subscribers who may want to opt for TiVo but for those current impediments. And then thirdly, one of the reasons where we did the deal with Comcast and are actively discussing similar arrangements with others is we do think an integrated box when it comes to the digital subscriber will be a key way for us to establish a relationship there. The issue of is there something about TiVo as a product that is not consistent with the tech savviness of the cable analog sub, I think you got to look at that a couple of ways. First, I think we're beyond early adopter use of TiVo. Certainly that was a major part of the TiVo base. But at 4 million subscribers, we clearly have gone beyond a group that I would call themselves tech savvy early adopters. We are consistently seeing anecdotal evidence that one of the reasons that people like TiVo is its simplicity, its lack of a requirement that you have any tech savviness to use it, and that continues to be one of the things that we see resonating well with our existing base and certainly gives us confidence that as we market to the basic analog home, with the kind of explanations that we've been able to put into our marketing material that it's really pretty easy click around the menu stuff that is totally consistent with anything anybody does with a remote control today. So we really do think that is not an impediment coupled with the fact that the returns are pretty encouraging that we have over the last number of months shifted the number of basic analog subs that seem to be coming forward as subscribers. Okay. One last follow-on. In terms of the features and functionality of your box, is there anything that you have been, I mean, other than obviously HD or stuff that's not offered on analog, is there any feature that you cannot offer to an analog home that you can offer to a digital home because of the analog feed? No. In terms of the functioning of the box, I'm not aware of any. The issue going forward in terms of one of the key differentiators of TiVo is its ability to accept a broadband connection into the back of the box for taking video off of the Internet for display on television. That is something that has to do with what kind of Internet connection you have in your home as opposed to something based on being a basic analog sub that would interfere with your feature set. And going forward, we do believe that that broadband connectivity will be a major point of differentiation for TiVo. Hi. Thanks for taking my questions. I wanted to say thanks for the details on the subs. I guess I want to talk a little bit more about Comcast and in the last call you kept talking about mass deployment and now you gave us a little bit of color that it's going to be software in the box. Can you tell us which Motorola box it will be? Is it DCT 2000 is is it their dual tuner DVR, is it their HD DVR? Are you in the test lab? And when you talk about latter half of '06 can you give us some sort of feel as to what kind of quantities we might see? Well, the quantity issue is a function of subscribers opting for it. So I think that the marketing plans that we hope to have in place with Comcast will help drive sufficient volume once we're able to launch it. The Motorola 6412 box is a key focal point. There's a, which is a digital dual tuner, high def box offering. There is a more advanced Motorola box that will be, that the newer box that will ship next year that's an all digital, dual tuner, high definition set-top box as well that this will work with. So it will be able to capture that element of the Comcast set-top box universe. And we are exploring additional opportunities beyond that. Has the software been written? Is it working in a set-top today? Is it in a test lab? Has it been in any field trials yet? When can we possibly see some field trials? Well, we have not put released dates on that. We do have a very detailed schedule at work that the two companies signed which followed up from the original deal which lays out all kinds of milestones for making sure things are properly tested and able to meet the rollout dates that we're looking for. Software is in development and obviously that will be an awful lot of the work that goes on over the next few months is an intense effort at further developing software. And then with respect to the new advertising offering and being able to search on advertising, is that advertising on those commercials going to be downloaded to the DVR and use up memory? In the DVR? Well, for different types of TiVo users there would be a different answer to that question. This will work best in a broadband connected home and the ability to retrieve adds and be able to display them. There would be some use of memory, but a different approach to how they come into the box versus how we deliver advertising-related information today, which is stored differently for nonbroadband users. And that would be a further refinement of our ad search offering to be able to pick up the nonbroadband population of TiVo box users. But I hope that answers your question. Oh, no. No. I didn't mean to suggest that at all. I was just making a distinction between how it would work for broadband versus nonbroadband connected boxes. Broadband connected boxes are an increasing percentage of our overall base but this will be available for most boxes. And then one final question if you could help reconcile some numbers for me. In DirecTV's last quarter call they said they added about 240,000 DVR subs. And you guys are reporting 379. I know that there's an one month lag, but can you give us some color as to why there's such a large differential? April, it's Dave. We believe that that's, the principal driver is the one month lag. Our quarter ends at the end of October. Theirs ends at the end of September. So they're including the month of July in their numbers which is typically a pretty slow month, whereas we're including a fall month which is football season, the new television season, et cetera, when a lot of people are signing up for service. Okay. And last, kind of a housekeeping question, of the lifetime subscribers, how many of those are no longer revenue associated? In other words, you have a certain amount of lifetime subscribers that have basically turned off or have exceeded their four year period and no longer are generating revenue. April, this is Stuart West. I think we actually cover that in the release. So take a look at the footnotes under the tables around sub counts and I think we have that data in there. Thank you. I've got a few questions. Tom, first with respect to Comcast, once you get this software working in a Motorola box with Comcast would that be transferable to other cable operators using similar Motorola boxes? A lot of the work would certainly be. There is some middleware differences in between the approach used by Comcast and other cable operators. It's obviously most usable to the extent they have both the same hardware and middleware approach that Comcast does. But, yes, an awful lot of that software will be available for others. Okay. Are you working with Scientific Atlanta, any cable operator or even Comcast which has some Scientific Atlanta boxes to start getting it ready for an SFA type of platform? We haven't given financial details on that arrangement, but we have over a 40% financial interest in that venture. And since we don't have any cash obligations and success it very much contributes to the value of our interest there. Hey, Alan, this is Stuart. We've got just a few more minutes so I think we need to move on and give someone else a chance to ask a question. Operator let's take the question. I just wanted to spend a little bit of time on the supply issue. You talked a lot last quarter about some of the constraints that came about after the prior strategy of backing off on the stand-alone marketing in an effort to get toward break-even toward year end. And at the same time, now you're kind of saying that you're more comfortable with the inventory relative that's in the channel I guess relative to demand for the holiday season. And I guess I'm just trying to figure out, does that kind of suggest that the supply issue or those constraints that you talked about really have been worked out? Do those still kind of exist? Because again looking a little bit at your revenue guidance, I mean, it's kind of hard to come up with something that would approach, I mean the last year when you did 251,000 stand-alone net adds, I guess that's just kind of what I'm trying to figure out hire. Well, we pointed to our inventory situation last quarter to make clear that the inventory situation would result in our having a lower sub acquisition number in the fourth quarter of this year than last year due to available inventory. We didn't know at the time whether we'd have sufficient inventory or insufficient inventory. What we did know is that given the inventory we did have we'd be coming in with stand-alone numbers that were behind last year's. As we assess the situation and shift inventory into retail, we think we do have sufficient inventory to meet demand. And so we have a mix of product out there with different hours of storage for different kinds of units that are available at different kinds of outlets. But overall our situation is one where we, as we look at it now we believe we have sufficient inventory. Okay. So, okay. When you're saying about meeting, kind of being able to meet demand, I guess that it does seem tough for any way to kind of meet that roughly 200,000 plus net add number given your top line get guidance. What's going on with the demand? That was the reason that we, without giving subscriber guidance which you know we aren't doing going forward, because we did have less inventory available than we did have available in the fourth quarter of last year, there is no outcome for the fourth quarter of last year where we would hit those kind of numbers given the inventory available. Having said that, it looks right now as if we do have sufficient inventory to meet demand. Though we did have a very strong holiday weekend, as I indicated. Hi, Tom, just a couple quick questions. You mentioned in your prepared remarks that you are testing different pricing scenarios for the series 2 boxes. Can you just touch briefly on when you expect to make a final decision and an announcement with regard to which way you're going to go? And then I just want to make sure I heard you clearly. Is the HD compatible DVR, the one with the cable card, set to still debut in January? That's the one you guys unveiled in last years' consumer electronics show. And then if I could have a follow-up with Dave that would be great. Otherwise if you guys want to move on I understand. I don't think we indicated a January date for the HD cable card product. That is something that is on track for delivery next year. It will be later in the year than that. But we are very focused on getting that product into the marketplace. I'm sorry. The first question again? Oh, right. Well, we, you said so you've decided which way to go. I think what is marking our thinking now is that there is not a one way. There is not a single approach. And we will probably come up with a variety of offers to deal with different inclinations that different kinds of television users have about how they want to pay for or bring additional television products into their home. We will continue with our testing in January and the first quarter. We may make some potential offers available sooner than others. We are hopeful to get our IT systems in place to be able to support the kind of retail programs and activations operations issues so that a variety of offers can be put in place. But we are certainly going to continue to test during the first quarter and hopefully shortly thereafter be in a position to have a much firmer sense than where we are now as to how to get the highest possible yield for the lowest possible marketing cost. I guess kind of the answer you gave sounds like you have sufficient inventory because demand is going to be lower than it was last year in the fourth quarter. And I was wondering if you could give us the key reasons why you see it as being lower given that we're beyond the pioneering stage or the early adopter stage. And then also if you go to a zero up front cost on the box will that have any negative impacts on your retail relationships? Well, obviously we are discussing new approaches with retailers. And there are various ways that programs can be implemented like that that are not inconsistent with retailer interest. The demand situation you point to is, I can't argue with your reasoning there that if we have less inventory than last year so we know we're going to have a lower net add number, that suggests a lower demand. Part of that is a function of increased competition, part of that is how we are using our marketing dollars relative to generating demand where as I said we are still very much in a testing and learning mode. Our view being rather than spend at the kind of levels that we did in advertising for the second half of last year, to marshall our resources more carefully, that will help us determine some of these optimal approaches for marketing. But for purposes of demand generation, this year, we may be looking at a different result. I hope that helps you there. And ladies and gentlemen, this will conclude today's question and answer session. At this time I'd like to turn the conference back to Mr. Tom Rogers for any additional or closing remarks. Thank you. Let me just close with a few remarks here. We still have a lot of work to do. But I do think we are making some real progress. We are still, as I just said, very much in a testing and learning phase. Let me just quickly, though, review what I consider the key take aways from today. And I have summarized these on slide 14. DVRs are rapidly penetrating the U.S. market and we believe that that rapid penetration will continue. Differentiated service is going to continue to drive ongoing leadership for TiVo. We expect to continue to play a market leading role when it comes to features. We are refining our subscriber acquisition, learning about the most cost-effective approaches, and we expect those teachings will very much improve our overall business model. We do have a strong IP position which we are going to continue to pursue. We have created some unique solutions for advertisers which as of this week shows we continue to lead the way on demonstrating not only a real ability to attract advertisers but introducing new features which we think will grow those advertising relationships much deeper over the course of the next year. We do see a real evolving cable industry understanding of TiVo's competitive value as well as its advertising revenue potential. And lastly, as we weave TiVo into the approaches of other major media and tech players and pursue a less insular strategy which many have perceived TiVo as playing over the years, I think we will continue to show we are a part of the fabric of the future TV landscape. And just one final note, none of what I've talked about on the phone today would be possible without our employees. TiVo attracts the very best among engineers and other key talent. Our employees really have shown that they thrive on the opportunity to provide innovative solutions that have created the best way to watch television out there today. And that's a big statement. But they are continuing to drive new offerings that will continue to change the technology and the entertainment and the television industries. We're very lucky to have such a great base of employees, and in my first number of months here it's something that I have become quite proud of. So thanks for the great questions today. Thanks for bearing with us on this. Sorry we don't have more time to go into some more depth and we'll see you soon. Thank you. Ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation. You may disconnect your phone lines at this time. 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_233824

Here’s the entire text of the prepared remarks from Sabre Holdings’ (ticker: TSG) 2006 outlook 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 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 today's outlook. So with that being said, let's get right to next year's outlook. And here with our opening remarks is Vice President of Investor Relations, Ms. Karen Fugate. Please go ahead, ma'am. Thank you. Good evening, everyone, thank you for joining us. I am here with Sam Gilliland, our CEO, Jeff Jackson our Chief Financial Officer to discuss our 2006 financial projections for Sabre Holdings and the business units. Before we get started, I would like to remind all of you that some of our comments on matters such as our forecasted revenue, earnings, transactions, operating margins and cash flow, contracts and business or trend information; would constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results 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 reconciliation of our adjusting items and non-GAAP financial measures in our press release and on our Website. Now I would like to turn the call over to Sam. Good afternoon, and thank you all for joining us today for our 2006 outlook call. This afternoon we will talk about how we have invested in our business and executed on the priorities we stated for the year. And how we will use the momentum from 2005 to enhance shareholder value further in 2006. Jeff Jackson is here and he will review a few of our financial successes for the year and our expectations for next year. Also with us today for the Q&A are; Tom Klein, President of Sabre Travel Network and Sabre Airline Solutions and Michelle Peluso, CEO of Travelocity. We told you last December that 2005 would be an investment year to position us for significant financial growth in 2006 and beyond. And in short, we delivered. We made bold investments, appropriately leveraging our balance sheet for long-term growth. We enhanced the GDS with new technology and content. We grew our retailing capabilities. And we expanded internationally. Our investments in Europe through the buy-in of Travelocity Europe and lastminute.com significantly extended our capabilities in the high margin, high growth retail market. Accelerating our top and bottom line growth. To date, our integration efforts have gone extremely well and we are on track to complete integration and begin fully realizing synergies by the end of 2006. Earlier today, we announced plans to sell our stake in Travelocity's German joint venture so we can focus fully on our wholly owned businesses throughout Europe. The acquisition of lastminute.com was the most visible sign of our investments and our success in growing outside the U.S. But our other businesses made significant progress globally as well. Overall, we have increased non-U.S. revenue from 30% to 42% of our total revenue. We continue to use technology to our competitive advantage. Today 100% of our North American travel agencies run on our new air shopping and pricing platform, which makes use of scalable open systems technology. This conversion, which will continue internationally throughout 2006, represents one of the world's largest conversions to open systems ever. We are now beginning to realize meaningful reductions in data processing costs on a per unit basis. We continue to make our GDS offering more robust. We demonstrated our leadership in the marketplace with our agreement with the low cost carrier AirTran in the U.S. We also added more than 8,000 hotel properties this year. For a total of 65,000 hotels, on the way to our goal of 100,000. To give you some perspective on that, 49% of all GDS hotel bookings globally are made through Sabre. We continue to make good progress in our discussions with major U.S. airlines on long term comprehensive agreements. And we expect that with these agreements and our continued focus on cost reductions and retailing initiatives. We can maintain our margins and cash flow in the Sabre Travel Network business for the long term. Meanwhile, we have successfully introduced value based pricing as a core component of our new travel marketing agreements with more than half of our subscriber airlines effective January 1. This new approach offers more pricing options for airlines and more flexibility for our business to efficiently respond to a changing marketplace. We improved our retailing capabilities in 2005. Today 34% of revenue is generated from retailing versus 24% earlier this year. As part of that effort, we differentiated our product mix, growing nonair revenue from 25% to 37% of total revenue. Travelocity continued its impressive performance with substantial share gains versus its online agency competitors. Operating income that more than doubled. And revenue growth greater than 25% each quarter. At Travel Network, hotel revenue increased greater than 30%. Thanks to merchandising initiatives including Sabre surround and hotel spotlight plus the addition of SynXis. So in all these areas, we have done what we said we would do in 2005. And as we turn to 2006, you will see that we are building on the success of this year using the same strategic initiatives to keep us on track. We will continue to grow the scale of our network, which will make us more important to suppliers, travel consumers and retailers. And we will continue to assert our leadership and content acquisition, which we are well positioned to do. We will execute internationally and pursue overseas opportunities, particularly in Asia and Europe where we see high growth prospects. We will capitalize on what we have learned in merchandising and retailing this year. And in 2006, we will move more and more of our technology to scalable, open-source solutions. And use new development techniques to lead in technology and reduce in complexity and costs. As we do all of this, we expect to drive significant cash flow and earnings growth. And to quantify that growth, I will turn it over to Jeff. Thanks, Sam. I will review our 2006 revenues and earnings expectation for total Company and by business unit. The objective of today's call is to provide high level information and therefore not to get too precise with our assumptions. One item to note is that in 2006, all stock compensation will be expensed to comply with FAS123R. In the estimates I am about to provide, we do include the stock compensation expense in our GAAP numbers. But our adjusted financials do not. To bring consistency to the treatment of all stock compensation expense, we will not include the restricted share expense that has historically been included in our adjusted financials. However, even with this adjustment, we would reach our 2006 projected earnings per share. We believe adjusting for stock compensation expense is appropriate, as it is a noncash expense and adjusting is consistent with the practice of most of our competitors. Before we get to 2006 outlook, I'd highlight a few of our 2005 projections. Keeping in mind that we are not otherwise updating the guidance from our November 3 earnings call. First and most importantly, even in a year of strategic investment, we continue to generate strong cash flows. Each of our businesses were solid contributors to this financial performance. Airline Solutions had a tremendous financial turnaround with strong revenue growth and doubling operating income. Adding more than 25 million in year-over-year earnings. Travelocity grew revenue approximately 65% and had operating income growth of approximately 100%. And our Travel Network business grew revenue in the low single digits with a healthy mid-teens operating margin. Finally, we further enhanced our return to shareholders in 2005 by repurchasing shares and increasing our quarterly dividend by 20% last February. It has been our practice to assess and increase our dividend level in January. And we expected that our Board of Directors will evaluate it once again this coming January. Now, moving on to 2006 for total Company. For 2006, we expect total Company revenue to approach 3 billion. That is year-over-year growth of approximately 15%. Adjusted operating income growth is expected to be over 25%. With a mid-teens operating margin on an adjusted basis and operating margin in the low double digits on a GAAP basis. Total Company earnings per share are expected to be greater than $1.70 on an adjusted bases and greater than $1.20 on a GAAP basis. We have not yet set a range around these projections but will do so in our fourth quarter call on February 2, 2006. Regarding our refinancing efforts for the $800 million bridge loan, we are evaluating our options and expect to have clarity in early 2006. However, you will see in our reconciliation schedule, we have made an assumption that most of the debt remains on the balance sheet at an interest rate consistent with our anticipated long term borrowing rates. This assumption is for modeling purposes and may not be indicative of our actual refinancing activities next year. Moving continue to adjusted EBITDA. Total Company adjusted EBITDA is expected to be greater than 500 million. Growth of more than 25% and GAAP net income of approximately 170 million. We expect to more than double free cash flow to well over $300 million next year. With cash flow from operations of approximately 440 million. Looking at each business unit, starting with Sabre Travel Network. Revenue in this business is expected to be 1.6 billion with strong cash flows. And operating earnings and margin improving over 2005 levels, while margins remain in the mid-teens. These estimates include several key assumptions. First, the rate per transaction, including our nontransaction revenue assumes some rates go up some go down. Resulting in an overall blended rate per transaction of a slightly down year-over-year. This includes our assumption for the expected outcome of airline negotiations based on our most recent discussions. Second, transaction volume is anticipated to grow in the low single digits, taking into account channel shift, industry growth, and what we believe to be a conservative share gain assumption. Third, we expect nontransaction revenue, which includes our merchandising and emerging business initiatives to grow at a healthy pace of 15%. And lastly, we plan to reduce costs by approximately 50 million through the reduction in overhead and the slowing rate of growth in agency incentives and data processing costs. Keeping overall expenses flat year-over-year. Adjusted EBITDA is anticipated to be over 300 million growth over 2005. And with GAAP operating income of approximately 230 million. Moving on to Airline Solutions. We believe revenue growth will be in the low single digits. Going into the new year, we already have strong commitments from several airlines to purchase product in 2006. Including leading Indian carrier Jet Airways and growing new entrant Kingfisher Airlines. These carriers are expected to grow rapidly over the next couple of years and already represent almost 50% of passenger traffic in India. Our agreements with these carriers demonstrate our success in penetrating the high growth Indian marketplace. We expect healthy operating margin in the mid-teens and adjusted EBITDA greater than 60 million. With GAAP operating income greater than 30 million. Last but certainly not least, is Travelocity. Revenue is expected to be approximately 1.2 billion, growth of over 40%. Breaking that down regionally. North America growth is projected to approach 20%, slightly above the anticipated industry average. Revenue from our European operations is expected to be in the range of 440 million to 460 million or growth of over 100%. All of our estimates for European operations are based on $1.80 U.S. per British pound exchange rate. Operating income for total Travelocity is expected to more than triple and approach 10% operating margin on an adjusted basis. GAAP operating margin is expected to be in the mid-single digits. These results assume our Zuji joint venture partners exercise their put option and Zuji becomes a wholly owned Travelocity Company. The operating losses associated with the start-up are estimated to approximately 10 million in 2006. Breaking operating income down regionally. North America operating margin, including Zuji, is expected to be in at low double digits on an adjusted basis. And approach double digits on a GAAP basis. Operating margin for the European operations is expected to be in the mid single, digits with an operating loss on a GAAP basis. Total Travelocity adjusted EBITDA is estimated to be over 155 million, significantly greater than 2005. GAAP operating income is expected to be approximately 50 million. Before I turn it back to Sam, I would like to briefly talk about our thoughts on 2007. For Travelocity, we have modeled significant earnings growth in 2007. As this is the year we will begin to recognize all revenue and expense synergies without the drag of integration costs for our European operations. Our goal for global Travelocity in 2007 is operating margins north of 15% and EBITDA margins north of 20%. On the Sabre Travel Network and airlines solution business, our goals are to keep the earnings flat, maintaining mid-teens margins. These estimated business unit earnings, lead us to believe that we could generate earnings per share growth in 2007 of over 15% year-over-year on an adjusted basis. With significant growth in free cash flow and adjusted EBITDA. And with that I will turn it back to Sam. Thanks, Jeff. Before we go to Q&A, let me emphasize a few things. Our strategy for 2006 remains the same. You will see us continue to extract benefits from our scale. We will execute and grow globally. We will reap the benefits from higher margin retail and merchandising initiatives. And we'll continue to use our technology leadership to our advantage. And we believe you will like our anticipated results, more than doubling free cash flow to greater than $300 million. EBITDA greater than $500 million, growth north of 25%. Revenue approaching $3 billion. And earnings per share of greater than $1.70 on an adjusted base basis. So we are excited about our successes in 2005 and our prospects in 2006 and beyond. And with that, let's go to Q&A. 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 Family Dollar’s (ticker: FDO) fiscal Q1 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. At this time, we’re ready to begin the question and answer session. If you would like to ask a question, please press “*” “1” on your touchtone phone. You will be prompted to record your name. To withdraw your request, you may press “*” “2”. Once again, if you would like to ask a question, please press “*” “1” at this time. One moment please. Hi guys, congratulations. I have a couple of questions for you, it’s a thought maybe you could talk a little bit about shrink, and what is it that’s making your season progress right now, what’s the outlook for the next couple of quarters, then I have a couple of other questions. Meredith as we’d discussed over the last several conference calls, we introduced some new technology back last spring, and that’s helping us detect issues much earlier and we’re being much more responsive to those issues. In addition, shrink has been a item, has been #1 on our priority list for a while now. So, the store operations group is really done a nice job, in creating more focus in greater awareness in the shrink area. As you know, shrink is also tied very much to store level retention in the quality of our personnel layer. The rollout of our, our new automated screening package last spring and we’ve around a 1000 stores with the new system now, some of our larger stores, are helping us in terms of free qualifying applicants and helping us with the hiring process. So, when you are looking at shrink, there is no silver bullet. But we believe that we have turned a corner and expect for the current trend of modest improvement to continue through this year. Great, and then maybe, you could talk a little bit more about what you said on the urban initiatives, and it was what Howard was saying about attacking the cost structure. And I guess I am, still, it’s a little unclear to me, in the markets where you have the most trouble. What really has been the obstacle to making this work? Just turnover or, I am not sure, I understand. Sure, Meredith, what we have found is, when we rolled out this initiative to the stores last year, it was basically a one-size-fits-all. And one of the things that we wanted to do this year is to go back and look at each market and make some tweaks and adjustments where appropriate. Most of the stores had did receive the urban initiative, did anticipate and plan appropriately and we had strong leadership in those markets. The markets that were most challenging towards for those markets that did not have is effective leadership as we would have liked, and also had an abnormal amount of new store growth as well. So, what we wanted to do is go back in these markets, in some cases, we added new AOMs Area Operations Managers, in some cases, we replaced Area Operations Mangers, some cases, we expanded, to plan our organizations structure, to include some additional HR, and loss prevention help and we feel very confident that the changes that we are making will take us to a level of profitability in these stores as in most all of the other urban initiative stores. Meredith, I think it’s important to note that what we are finding is that the, the structural and cultural changes are indeed working. So, the issues in those markets that we have not achieved our goals, are implementation transitional kinds of issues, as suppose to something that would indicate that there are inherent reasons in certain markets that the program will not work. So we are, where we are having those transitional issues, we are focusing on the specific issues and the specific market and remain confident that the program will be successful in those markets as well. Great, and then I just, my final question is, there is a pretty big range for your second quarter guidance. And obviously, you are showing very good momentum in both sales and it looks like in earnings. What, in particular, would bring you to the low end or what would bring you to the high end? Is it just sales, or is there some other factor that you think is really important? Well I think the key ingredient is the holiday sales. We also, as a matter of policy are very aggressive in managing our seasonal inventory. So, if there is an issue with seasonal sales then you would have higher seasonal markdowns as a result of that. Those would be the 2 major ingredients that add a little more variability to the second quarter than other quarters. Good morning every one. And I wanted to ask a little bit of the commercial environment in the Dollar Store industry, generally its been, there’s been a lot more promotions with some of your piers, we’ve been seeing a discounts in toys in seasonal, and what are you doing to compete against this retailers and then particularly, at the holiday season, anything different is being planned for post Christmas? Stacy, clearly this is another very competitive holiday season with the, I had a challenging economic backdrop, it’s certainly has been exacerbated somewhat. Family Dollar has taken some very similar approaches to last years. So, for example, November and December circulars are comparable to last year, in addition to that what we have done on a very select basis have taken or accelerated some markdown very selectively on some seasonal categories to take advantage of some of the traffic in our stores and to bring a little more excitement to our stores during this time of the year. As you know, we do have an exit strategy for all of our seasonal goods today. So, this is not something that was unplanned as much as just accelerating, some of the plans that we had undertaken for this year. But, we believe that we are very well-positioned this year, the initiative, primarily the treasure hunt initiative has brought a lot of excitement to our stores, and I think that we are going to end up with a pretty positive holiday season. Great, and I had one other question on your POS, I know that you guys have been working new pilot for POS, and could you tell us about how that’s helping your sort of Techo-process, on accepting debit cards, et cetera. Well, just for in the plan, we are continuing the pilot programs. So, we are not really ready to comment on either the timing of that program, or the benefits we expect to accrue from it. But as we move forward, we’ll certainly keep you up to date. Hi good morning. I was hoping you could talk about what has changed through on their urban initiative markets because your comp sales trend, my understanding is similar to where you were last quarter, and so what’s the source of the increase profitability? Is that; is there a change in the hours, a lot unto those stores? Or was it on the shrink side? Well, I think in, it’s, from an overview perspective, you are right; they continue to comp in the mid-single digits. Now, obviously, and for those stores have been open a year, they are accounting on account. So, that sure does help. And for the others, I think it is a combination of cost/expense controls as well as the fact that we do not have the incremental cost associated with the start up of the program. Okay can you elaborate little bit more on some of the following phases? The pricing strategies you eluded to, I assume that means, the zone pricing and, any update you have on that? And then also, the flow processes in differentiated merchandising? Sure, Mark first on the zone pricing, we continue to believe the zone pricing will play an important role in bringing more opportunities to our urban stores and we expect to gradually relive the benefits of this program. Right now, it’s in a limited number of stores and a limited number of items, but we do expect to continue to gain some benefits from zone pricing. On the slowed processes, one of things that is a challenge for us is doing big business in small box stores, how you club merchandise into those stores, so you do not overwhelm stores within a lot of trade in 1 week, is just one example that is something that we have huge opportunity on, and that’s one of the things that we are working out very aggressively. And finally, the third assortments, how can we better tail our assortments to specific markets, so for example, one thing that we found in some markets, we don’t so know, all because a lot of these stores are on walking streets, they don’t find that well. Or another example maybe some very large items, like an area, we worked at, is too cumbersome to get on a bus. Those are some examples of some, how we will better tail our mix or merchandise in some of those stores. Mark, I think it’s important that you look at each of these initiatives or sub initiatives of the overall urban program. Over some form of time horizon, as Howard indicated for example, the managing of significantly higher sales levels within a smaller facility, it’s a challenge that there might be 5,6,7,8 more actions that will be required to properly address that. We have a taskforce that will be taking one step at a time as we go through that. So, I don’t want you to get the impression that we are going to be solving those problems near-term; many of them are issues that we should be able to gradually improve over a period of time. Yeah, we got that those are not all the easy exclusions. But, my last question is on the increase in the average ticket of this quarter, really I think the strongest increase, I think that I have seen in the business in a longtime, what is that describing, that is that more items in the basket or is there a change in the mix? Thanks. So, I think it’s both of those things, Mark, more items in the basket and particularly as we went into the November period, where we were able to sell some of our treasure hunt type product which is some higher price point product that helped to improve that transaction count, of the transaction size. Mark, from a macro perspective, there’ve been a number of studies of length that have indicated low income shoppers or shopping the less frequently, in response to both the higher energy prices, transportation cost as well as the issues with the pay cycle, and that’s probably having an impact on us, they’re shopping less frequently, but when they do come to our stores, they are buying a little more. And then as, Howard indicated certainly both the food strategy and the treasure hunt strategy and as we’ve commented before the urban initiative are all heading to encourage our customers to buy an additional item. Thanks, good morning everyone. I was just wondering as you might share some thoughts on the competitive landscape as it relates to store openings next year. I think, since you articulated your store growth plans for fiscal 2006, 400 grocery stores, is that all you can, really has come out and said that they are going to open at least 830 stores, so more than twice the number that you are planning for your fiscal year. How do you view that? Patrick, if we are beginning to make some of the changes in our real estate area to improve some of the processes, it would be premature for me to give you a lot update right now, but we remain confident that we will be able to open stores more timely and that we will also be able to accelerate our openings. But, one of the things that we did talk about as you mentioned is, we wanted to slow down that process this year to improve the related processes, and we are working very hard to do that and we remain confident that we will be able to reaccelerate our growth in the future. So, you are not thinking that will present any issues in terms of real estate site selections, but, selections for the current fiscal year? Okay and your growth in stores in fiscal 2006 is going to be more weighted then it has been over the past few years, a little bit back towards smaller markets, is that correct Howard? No, no we will continue to open stores in urban markets, there maybe some slight tweaking, but there is not substantial change there. Okay, and then a second question on product costs, particularly in consumer products, hearing and seeing price increases from some of the big consumer products, manufactures, that didn’t seem to have a negative effect on you in the quarter, is that initiative we should be concerned about? There is no question that there is plenty of pricing pressures out there and as I’ve said before we continued to challenge and fight those as aggressively as we possibly can. We have had to take some price increases and the good news is we’ve been able to pass on some of those price increases of retail. We continue to be very kinds so that the fact that we must remain competitive and our vendors know that we will be challenged in the making some changes in items and categories, if necessary, to maintain that competitive posture. When, now how are you passing those along as it, going from, let’s say, $2 to $2.15 or $2.25 that sort of thing. Are you making broader use of non-even dollar price points? We are doing all sorts of things Patrick; it would be hard to classify one approach in the way we are looking at that. Thank you good morning. Just a couple of quick questions here is there anything you can share just additional color on the gross margin side in terms of what’s been helping, drive the improvement in your initial markets? And also, in terms of, as you are decreasing your inventories on the softline side, do you think that there is opportunity from that perspective in terms of improving markdowns over the next few quarters? Thank you. Shermin, one of things that we highlighted and solved, as we were rolling out our foods and we needed to come up with some initiatives that would help offset some of the pressures from that margin, one of the things that we’ve really seen a nice improvement in our margin is some of the treasure hunt type product that we’ve purchased particularly into this holiday season. And generally that higher margin product that we’ve had success with, so we still are not raising what our expectation is for the margin for the rest of the year, but I frankly think that we do have opportunities to do an even better job of presenting and buying some of this treasure hunt product. On the apparel side, we absolutely focused on reducing markdowns there, as indicated, on the parallel inventory levels being down 6% and comp sales not being down that much, we are increasing out productivity of those categories and hope it to continue to do so. Great, and then I just have one other follow up advertising side, in terms of your circular. Can you show to us just what your schedule might be looking like over the next few quarters and then just in terms of any binding you have from your customers, in terms of various stocks? As I have indicated before, one of the strategy behind the circular program is to highlight some of the new seasonal product that we have purchased as well as some of the treasure hunt product. The timing of those circulars is generally around a, an event in the future. So for example, the November circular and December circular were relating to holiday merchandise. We’ll probably have something in the spring or early spring to try to highlight some of our spring type merchandise and, we will give further information as we progress in the years, to win the next circular that will be coming out. Hi, first regarding a higher occupancy cost, in your new stores, what was the reason against the new stores coming in at 85% compared to having coming at 90%? Is the higher occupancy expense, a ratio of that happening, or is it a repay to real estate market? I think it’s like anything else Jack, as number of say deposit over 500 stores, its 13 months worth of openings. So it reflects a total range of things to include sales performance and more rule markets, sales performance in the urban markets. So, I think it, basically is something that we have looked at and targeted 85% to 90% of an average store sales is being the place that we’d like to be and what that enables us to do is properly balanced a neat subject as maximizing the opportunity within a given market, which gives you some level of transparence with the needs for, initial performance of the new store. Like, there is a higher occupancy cost is also a, a reflection of having to pay more in terms of the real estate market itself? For the biggest drivers of our de-leverage of occupancy cost were utilities, utility was more than half of the increase and depreciation. So, it wasn’t the base ramps. Okay. Regarding the stock compensation expense, could you let us know what that, what that was in dollars, because you didn’t have that expense year ago, so if you had it rather comparative on the expenses? Yeah, Jack if you add the expensing options with the other programs which is really what the extend of the non-comparable expenses; it’s roughly $3 million. 3 million. Okay and regarding the remaining 6.9 million shares authorized to be purchased. I think the, the initial 10 million shares are estimated in shorter to you about at 19.95 a share, now that the stock is pulled out a share higher. How is that additional cost absorbed? Basically, we will have a true up when the bank actually purchases the shares and that throughout will be based on, on there, the acquisition or the average due opt price during the repurchase time period. So net-net, if their average is $22 a share we will end up getting $220 million for those 10 million shares. Okay and one last thing, in terms of your sales expectations going forward, you expect approximately the same comp store sales gains for January and February as you do for December despite the fact that the 2 year comp store gain for January and February is significantly higher than for, than the past 2 years for December, which was less than 5% than the January and February on 2-year basis were over 89%, so I was just wondering what do you expect to occur in January and February to help your comp store sales? Jack, I call out to December last year was one of our best December’s in a long time. Also the mix of the product in December is much more proportional to discretionary spends which you’re impacted to a greater degree by things such as energy costs and decline real wages et cetera. January and February are predominantly driven by core consumables and during the January and February time period, this year we will have more coolers in place and we’ll be better prepared to respond to our, our customers day-to-day needs. And what about the higher heeding cost for January and February this year was little much higher for your customers and have more of an impact on them, how did you expect that to affect this spending? Thank you, what is your plan for inventory at the end of this quarter and are you searching for a permanent replacement for indiscernible for softlines. And then my final question is are, is there anything else there you’re working on, on the SG&A side, in terms of managing expenses, obviously its been difficult with utilities and rollout coolers depreciation, but I am just wondering if there any other initiatives that you would be able to discuss on the expense growth? Thanks. Christine, from an inventory perspective, we continue to hope to gain productivity in our inventory and would like to see it continue to gradually come down, I think we’re making some progress there and would like to see continued progress. In regard, to the replacement of our softline’s position, yes we do have planed and are looking for a sofline’s person as we speak, Jim you want to add some regard to the expense, question. Yes, I think managing expenses is a, ongoing initiative quite frankly and we’ve, we do have a number of things going right now in that direction. Clearly, the largest single expense that we have is store level payroll, so our focus there is in the area of A) controlling the amount of payroll per store, B) making sure that the, we enhance the productivity of the labor that’s in the store to the extent possible. For example, we’re working at the move; we having a limited number of stores now, a store portal which enables the in-store personnel to move effectively manage labor through that. We’re also looking at things such as outsourcing, we have outsourced a bit of our data processing work; already we have other areas that we have used outsourcing as a vehicle for reducing cost. We’re looking at centralized procurement and then had a number of options over the last several months that have been successfully reducing our cost. So we’re going to keep working on that area and we think that we will overturn be able to more affectively leverage expenses. Thanks. One question on the urban initiative, have you’ve been able to sustain improvement for the stores with program that’s been in place but long as, what are the trends for the first vacant stores. David we, we first vacant stores are the stores that we will do pay a lot of attention to, to ensure that they do maintain the agreement they work on and they, we were pleased to say that they are doing quite well and the trend is positive in those first vacant stores. Thanks, so just a little bit more color on, on the advertising circular, we know that, the November one, sounds like it, it drove some nice treasure hunt products which helps your margin, what about these circular that broke in early December, is that also, is that also successful in driving some of that type of product? Yes, yes we’ve, we were pleased with our December circular results, we will add a little more color to that after we released our December sales. Yet, it sounds like you, you still not looking for a growth profit, pickup is that just, the acknowledgement that January and February probably turn more, more basic or it was the December circular, that does not give you a gross margin lift as expected? No, as I said Michael, we’ve, and we would like to give more color to that after we’re done with December in the quarter. Depreciation is up for, for a number of reasons which we’re using a fairly short period for depreciation, depreciating choose many at least all improvements in many cases 5 years, so that has accelerate depreciation. We also have a number of projects that are resulting in the adding of additional capital expenditures for example, our loss prevention efforts have resulted in the adding of additional detective devices at the store level. So, it really is simply a result of a shorter period as well as our capital expenditure program. So, a real quick, and only 2 more questions, so should we expect that to continue as a model of this year and then on the CapEx, I did noted that it was up year-over-year, I think your full year plan was about 12 million to 15 million which was down from a year ago, is that still before your CapEx plan? It is, I think what you are saying now is that, we’ve got a distribution centre that actively under construction so that giving us fairly a significant amount of CapEx in the first quarter. But our plans for the overall year remain to have CapEx down slightly. We are, and began addressing the depreciation issue, we saw it growing at a rate faster than what we’ve targeted as we discussed earlier we are targeting to move our SG&A breakeven point back down to the 3, 3.5 comp level and part of the effort to do that will be to make sure that we affectively manage our CapEx and the related depreciation. Yeah, thank you very much. How many stores are currently on zone pricing and how will that role out continuing, can you quantify the impact so far on zone pricing, then a couple more questions if I may, what are you doing with consumables beyond the coolers in the stores or you increasing the amount of consumables in your stores as you rolling your new stores out and then can you comment on any items that Dorlisa Flur may have identified and, in her area that you see improvement coming? Let me start with the last question and you may have to remind me of the first 2 as we get in here, Dorlisa Flur is leading our strategic planning effort and there is a number of things that we’re looking at there to continue to drive comps and then to improve profitability and we will talk about those as we continue to develop our strategy. On the consumable front, as we’ve talked about for quite a long time is the, extremely important part of our business, the additions of coolers to our stores is an area that is brought more consumable sales to us as we’ve seen basket size increased, as the result of those cooler stores and we continue to see if that would be an important part of our comp store growth over the next, over the next year. And then finally, on the zone pricing as I talked about zone pricing is something that we continue to believe in and will continue to bring us opportunities to improve our gross margin over the next several years, right now it’s in just a very limited number of stores and a very limited number of items but we expect that to grow over the next several years. Any, can you qualify how many stores you expect to have a zone pricing say by the end of this next year? Okay and on the, on the Dorlisa’s strategic planning effort when, when would you expect to be able to bring some of those items forward as far as, those initiatives? That’s okay. We actually have implemented some of those initiatives already, the cooler initiatives was, a initiative that was the under her direction, so you’ve already seen one that something that we’ve talked about is extremely important to our growth. By the end of this year, we will have half of these stores rolled out and hopefully in the near future over the next couple of years, we will be able to complete the chain rollout of coolers. We’re also looking to see how we can better leverage that traffic and haves a complete food assortment to take advantage of some of the traffic that we are getting out of our cooler program and there is a number of things it would really be premature for me to talk about at this point, until we are more fully developed in some of those categories in areas. I guess that counts, points to the question that I was asking on consumables, I was saying beyond the coolers, the addition of the coolers to the stores, are you increasing the amount of consumables in your stores beyond the cooler? Yes, one of things that we think it’s an opportunity for us and that’s what I was trying to say before, it’s the leverage through the food business a little more effectively. In other words, we have a pretty limited food assortment today, is they’re opportunistic to further grow that to drive traffic in our stores as we are driving traffic with the, the addition of the cooler program. So, consumables will continue to grow as a percent of our sales as they’re having a stronger comp increase in some of the other areas. So, that alone will increase the amount of consumables that we are selling today. And the size of your stores, your existing store base. You can move those consumables through a store of existing size or should that lead us to believe that possibly your store size going forward maybe larger? No I think we are not looking to expand the size of our stores, what we done over the past several years is we allocate space within our stores, to gain productivity within our stores, our current store size. So we like operating small box stores and think that the opportunities are more how we can better utilize space within the existing footprint. Okay and then finally, your store openings, I know in the past, it really haven’t been that smooth as far as the number store are reaching, opening each month. Did you expect any smoothing out of our store openings? Yeah, that’s one of things that we talked about is why we slowed down our new store growth this year to 400 stores was to improve the profits as an opening stores and to have a more even flow throughout the year. That is a very big goal of ours this year. Thank you, at this time, this concludes the question and answer session. And I’d like to turn the call back over to Ms. Rawlins. Thank you, Carrie. Thank you again for your continued interest in Family Dollar if you didn’t get your question today, I’ll be available all week, and we’d like to wish you all a safe and happy holiday. 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_233826

Here’s the entire text of the prepared remarks from InterActiveCorp’s (ticker: IACI) Q3 2005 conference call. The Q&A is in a separate article. 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. Michael Savner, Banc of America Securities, Analyst Justin Post, Merrill Lynch, Analyst Mark Mahaney, Citigroup Smith Barney, Analyst Anthony Noto, Goldman Sachs, Analyst Michael Millman, Soleil-Millman Research, Analyst Imran Khan, JP Morgan, Analyst Jeetil Patel, Deutsche Bank, Analyst Heath Terry, Credit Suisse First Boston, Analyst Douglas Anmuth, Lehman Brothers, Analyst Robert Peck, Bear Stearns, Analyst Paul Keung, CIBC World Markets, Analyst Scott Kessler, Standard & Poor's, Analyst Thank you, and good morning. Joining me on this call is Barry Diller, Chairman and CEO. As you know, we may during this call, discuss our outlook for future performance. Also, you are aware that there are risks and uncertainties associated with these forward-looking statements and our results could be materially different from the views expressed today. These risks have been set forth in our public reports filed with the SEC. We will also discuss certain non-GAAP measures. And I refer you to our press release and the Investor Relations section of our website for all comparable GAAP measures and full reconciliations. With that, Barry will make some comments, after which I will go through some additional items before going to your questions. Barry? Good morning. Today we're reporting excellent figures, the fourth consecutive quarter we have done so since announcing the spinoff of Expedia last December. Revenue increased 55%, operating coming before amortization by 103%; both growing faster than in quarter two. Each one of our sectors performed well and margins expanded for most, which reflects the scalability of our operations, even while many are in earliest stages of growth. We don't expect the hyperlevels of growth to occur every period. For the next year, we're going to invest even more in our businesses. Their prospects are great and they deserve to be pushed aggressively. That may produce short-term anomalies quarter-to-quarter, but we don't want to run our businesses quarterly. We're here for the long-term and we won't sacrifice a nickel of appropriate investment in order to make a number. Contrary to the flavor of the day, IACs actual advantage is that we are a conglomerate of multibusinesses, online and offline. And we're building scale and expertise all over the place, where our content ranges from products to services to information to search. Here's an astounding fact. Well, at least it's astounding to me. I just learned from the most recent comScore data -- comScore being an independent group that tallies traffic on the internet -- that IAC had an audience of 258,856,072 coursing through our sites in September. I can't vouch for this precise number, but give or take whatever millions, it's an extraordinary audience. An audience that is composed of people looking to buy, learn, search and explore. Make whatever you will of it, but every day, we're making the inner relationships that can only be accomplished in the very much interrelated conglomerate of IAC. Now, some highlights about our segments. In Retailing, HSN improved over the second quarter. And while that's still not anywhere near the growth we want, it's got many aggressive and innovative initiatives of building. Our Cornerstone acquisition brings instant breadth and depth to our merchandise mix. Bringing these great brands on air is a key part of our strategy for next year. And HSN.com continues to outpace online retail industry growth rates, increasing sales by more than 30%. In Ticketing, it's been a great concert year. Everywhere at Ticketmaster are other initiatives to drive sales. Our 'sell more tickets better' program that delivers incremental sales, accounted for 9% of our domestic ticketing revenue. We also sold 110,000 tickets via TeamExchange, our online marketplace where season ticket holders can sell tickets they're unable to use. Last year, we had 23 teams enrolled, today it's 34. Over the next few weeks, Ticketmaster is launching a great new product going beyond sports to single ticket buyers in concerts, arts and family events. TicketExchange will provide event buyers a secure place to shop for guaranteed primary and secondary market tickets, while leveraging Ticketmaster's efficient TicketFast online delivery. It's TicketFast that allows customers to print the tickets instantly on the personal computer. It's a technology that's been adopted by more than 2,000 venues, 37% more than we had last year. We began installing the scanning equipment about three years ago. A real innovation in ticketing. Now, it's our own internet turnstile for developing new markets. Our Lending business closed nearly $10 billion in loans in the quarter, with revenue in mortgage, re-fi and home equity loans all up. LendingTree's brand has 80% awareness. And with all the groundwork intricately now laid, we're bullish about our ability to increase share, even in an environment of rising interest rates. Online mortgage is still a pitifully tiny percentage of the market, which gives us enormous runway to grow. In Real Estate, we're still laying track for the online transition that is inevitable. We have now got 1.5 million listings available through RealEstate.com. With ServiceMagic, we have the nation's leading online marketplace which connects home owners with home service professionals. It's continuing to grow and innovate with the new online directory for small and medium-sized home builders. Ask Jeeves' priority is to gain share and we are doing just that. 6.4% of queries in September which is up 25% since January's 5.1%. And we estimate that Ask posted the largest annual and sequential gain and retention among the major search engines in September. Now, one month is hardly indicative of much, but we'll take it each month until we have reached parody with the larger players. Citysearch is now IAC's second most trafficked site, in part by doing a great job in online marketing. There is no company that has as much expertise across dozens of sites in optimizing search results. Just one of the benefits of being a multibusiness enterprise and we're extending every best practice we have throughout our system. Evites unique users are up 30% to 4.4 million, page views are up 43% to 452 million. Not bad for a little business that people everywhere love using. And it's practically never spent a dime on advertising. On Vacations, we launched Live It Up, an online travel and a lifestyle membership club with a full-range of travel offerings and benefits, from specially priced travel packages to 24 hours a day, seven days a week, personal assistance, identity theft assistance, discounts in IAC products and services and the ability to earn and redeem points. In Personals, we now have a new record of 1,200,000 subscribers. To those who say this catagory is saturated and stagnant, you should know that during it's first year of operation, Match.com registered 60,000 new members. Now, every day we register more than 60,000 new people on Match properties. We're number one in the U.S., the UK, Spain and Europe overall. Match is growing two times faster year-to-date than the 9% growth rate predicted for the industry by Forester. And we've just launched Chemistry.com, a new premium site which has begun testing in four cities. The results we're showing today continue to validate our multibusiness concept, which I have certainly been underscoring this morning. It's all still in the early days, as is the internet way of accessing information, goods and services and I can't imagine both not growing a pace. Now, Mr. McInerney. Thank you, Barry. To reiterate, IAC's third quarter results were very strong, driven by solid operating performance across all sectors of the Company. As you all know, we acquired Ask Jeeves and spun-off Expedia over the summer. Accordingly, results for Ask Jeeves are included in IACs Q3 results from July 19; while Expedia's results prior to the August spin-off are treated as discontinued operations. For the quarter, revenue increased 55% to $1.5 billion. And operating income before amortization grew by 103% to $156 million. Excluding results from Ask Jeeves, Cornerstone, which we own for the first quarter and not in the year-ago quarter, and spinoff expenses of $2.1 million, revenue increased 28% and operating income before amortization grew by 83%. IACs GAAP operating income was adversely impacted by a one-time, non-cash compensation charge of $67 million, which relates to the treatment of vested options in connection with the spin-off, resulting from adjustments made to preserve the value of IAC options post spin. To be clear, this was entirely mechanical in nature. No incremental value was given to any option holder and this charge is not expected to occur. The accounting rules dictate a charge because of the spinoff-related adjustment. Adjustment EPS was $0.32 for the quarter compared to $0.19 in the year-ago period. While GAAP EPS was $0.19 compared to $0.24 in Q3 '04. In addition to the non-cash charge just mentioned, GAAP EPS was impacted by a lower contribution from discontinued operations. Expedia and other discontinued operations were included for the full quarter a year ago and not the in the current year. For the nine months ending September 30, free cash flow increased 3% from the year-ago period to $223 million. Free cash flow grew more slowly than operating income before amortization, due primarily to higher cash taxes paid, capital expenditures and working capital requirements. In general, Q3 is not a strong cash flow quarter for us, as we build inventories in our re-selling and discounts businesses in anticipation of Q4 and remit cash to ticketing clients for event sales in Q2. I also want to point out that this quarter made two slight modifications to our definitions of non-GAAP measures, which can be found on page 16 of our earnings release. Adjusted net income now excludes non-cash income or expense relating to changes in fair value of derivatives, or what the accounting rules call derivatives, created as a result of the spin. What this means is that we have an obligation to deliver IAC and Expedia shares to holders of the convertible debt we assumed in the Ask Jeeves transaction. Per an agreement between us, Expedia has an obligation to deliver their portion of this, but due to the specifics of the technical counting, each quarter we have to mark to market our obligation to the convertible holders because of this construct. In this quarter, it was actually a gain in our GAAP numbers. But regardless, we believe it's appropriate to exclude this non-cash item from adjusted net income. The second change is that free cash flow now excludes taxes paid on the gain from the sale of our VUE interests. This is completely a technical adjustment to the definition. We don't include any of the proceeds or gain from the sale in pretax flow, so it would be totally distortive to include the cash taxes owed. With that, let me comment on financial items from the businesses, beyond what is included in the press release. Our Retailing sector reflects the inclusion of Cornerstone this quarter but not in the year-ago period. HSN US had improved performance after a sluggish Q2, with revenue growing by more than 8% and operating margins up slightly. Gross profit margin was down in the quarter, due primarily to discounting of inventories which accumulated after the slow Q2, but we were able to offset this with a host of operating efficiencies affecting both our variable and fixed costs. Cornerstone delivered double-digit top-line growth on a proforma basis, with solid contributions from Ballard Designs and TravelSmith. From integration perspective, we're making progress. Bringing the great Cornerstone brands to life on HSN requires many elements; having the right inventories, the right sets, the right on-air guests, to name but a few of these. We have been experimenting since the close of the transaction, all the while laying the track for deeper integration going forward. We're on track with the real benefit yet to come. Services grew operating income before amortization 91% this quarter, which certainly exceeded our expectations. Ticketing had another excellent quarter, thanks to the strong summer concert season, as well as increased sports event sales, primarily from baseball, where five of this year's post season teams were ticketmaster clients. We sold 28% more tickets worldwide as compared to the prior-year period, driving revenue higher by 25%. International acquisitions accounted for 5 points of this growth. So it was a strong organic growth quarter. At the same time, international ticketing revenue is now 25% of total ticketing revenue. Moving to Lending. To increase transparency for the first time this quarter, we've broken out Lending and Real Estate as separate reporting segments. These businesses continue to benefit from very close coordination under Doug Lebda's leadership, but they certainly have their own dynamics. And we thought it would aid in your understanding to show them separately. Lending continued to pose strong growth with many of our key growth initiatives bearing fruit. Our strategy in Lending is simple; to drive ever-increasing numbers of high-equality leads through our service and provide these leads to either participating lenders in our exchange or close them in our own name; in the latter case, immediately selling the loan. The strategy is mutually re-enforcing as we make more money on the loans we close in our own name, allowing us to increase on and offline advertising dollars to increase the number of consumers we can drive toward our service. This strategy is working. Critical enabling pieces of this include first, having a great consumer front-end and a recent redesigned and simplification of the site that has improved conversion. Second, we are working closely with our network lenders to ensure they get the right leads in predictable and growing volumes. Finally, we have a myriad of initiatives to grow our purchase mortgage business, which quite naturally, has been slow to develop, given the predominance of re-fi volume over the past few years. And this, too, is working. In addition to breaking Lending out as a segment, we have added a new metric to our release, which is Transmitted QFs, which increased year-over-year by 52%. QF's are the number of customer qualification forms placed with at least one lender which we think is the best single indicator of unique growth in our overall lending business. It's also important to point out that there are some seasonality in the consumer lending business, so while we expect very strong year-over-year growth for our lending business in Q4, and that of course is what's key, sequential results might be more flattish. I also want to take a moment to highlight our Home Services segment. We estimate the advertising market for Home Services categories to be at least $10 billion, spread over many traditional forms of media. ServiceMagic is simply inventing a better way to match home service professionals with consumers in need of service. Service professionals pay for highly targeted leads in the service categories and precise geographies in which they're interested. We have a clear leader in a catagory which is in the early stages of development. Like with Lending, we've historically seen some seasonality in this business, as home owners turn their attention away from repair and remodeling in the fourth quarter. Sequential results may reflect this, while we expect year-over-year growth to remain strong. In Media and Advertising, Barry highlighted Ask Jeeves market share trends. I would only add that progress from the reduction in the number of paid advertising links on the site is at or slightly better than hoped for. We told you last quarter that we expected the change to reduce year-over-year revenue growth at Ask Jeeves to the low double-digit range in the short-term and Ask came in at 15% top-line growth in the third quarter. Switching to Membership and Subscriptions. Vacations grew revenue by only 4%, but operating income before amortization grew by 18%. This is the same general pattern we saw in Q2 and the underlying causes, a tight supply environment and migration to the internet, remain the same. Personals reported a record quarter. Revenues grew by 33%, while operating income before amortization grew by 271%. This significantly enhanced second-half profitability as expected, as we have aggressively moved our marketing span to the first half of the year to fit the more natural seasonality of the business. This trend should continue in general in the fourth quarter, although we don't expect the effect to be quite the same degree, since we increased marketing post-labor day after being quiet in the summer. Turning to our balance sheet. During the quarter, we repurchased an approximately 9.9 million shares at an average price of $25.10. Subsequently, from October 1st to October 28, we repurchased an additional 8.2 million shares, bringing the total amount of shares repurchased since the beginning of the third quarter to 18.1 million and leaving the total authorized amount of shares to be repurchased at an approximately 7 million shares. We finished the quarter with net cash and securities of $1.4 billion. Proforma for taxes to be paid in connection with our previous sale of the VUE interest, the maturity of the senior notes this fall, share buybacks through October 28th, and excluding LendingTree loan debt that non-recoursed to IAC, we will have $1.3 billion in net cash and securities. Given these moving pieces, for clarity we added a table to our press release on page 8, which will walk you from our actual net cash to our proforma net cash. In closing, I would like to reiterate that our results this quarter, in combination with the growth initiatives, some of which we touched on today, reflect our continuing committment to both driving near-term results, while constantly investing in and focusing on our longer-term strategies. As we're fond of saying, we most emphatically don't manage our quarter-to-quarter results. And we certainly would like to believe our discipline of operating allows us to take both near and long-term opportunity as it allows. We're equally proud this quarter of our strong year-over-year growth, and the fact that we have just launched, or are about to launch, exciting new services in many of our principle businesses. At this point, I would like to open it up for questions. As always, we would like to accommodate as many people as possible on this call, so we would ask each questioner to please limit their questions to one or two max. Operator?

EarningCall_233827

At this time I would like to everyone to Nokia's fourth-quarter and full-year 2005 earnings conference call with our host Mr. Bill Seymour, Vice President of Investor Relations. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instruction). I would now like to turn the call over to our host Mr. Bill Seymour. Mr. Seymour, you may begin. Ladies and gentlemen, welcome to Nokia's fourth-quarter 2005 conference call. I am Bill Seymour, VP of Investor Relations. Jorma Ollila, Chairman and CEO of Nokia, and Rick Simonson, CFO of Nokia, are with me today. During the call we will be making forward-looking statements regarding the future business and financial performance of Nokia and the mobile communications industry. These statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external such as general economic and industry conditions as well as internal operating factors. We have identified these in more detail on pages 12 to 22 in our 2004 Form 20-F and also in our press release issued today. Our aim is to finish the call in approximately one hour. To view the supporting slides while listening to the call please log onto www.Nokia.com/investor. For your convenience a replay of the call will be available beginning two hours after the call ends today until Tuesday, 7 AM Helsinki time. The call will be archived on our website. With this it is my pleasure to pass the call over to Jorma. Jorma, please. Thanks, Bill. Welcome to the show. Ladies and gentlemen, I'm extremely pleased with the performance of the Nokia team in Q4 and 2005. In 2005 Nokia achieved record-breaking device volumes and had healthy device market share gains. Our 2005 net sales grew 16%, the highest growth we have had since 2000, and our EPS grew by 20%. We grew faster than the market in Q4 in device volumes year-on-year as well as sequentially. Nokia Network's sequential sales growth far outpaced the market in Q4 as well. There are a number of accomplishments to highlight in the fourth quarter. Nokia device volumes of 84 million were up 26% sequentially and 27% year-on-year leading to a market share of 34%. Based on our estimates Nokia is the only vendor of the top five to gain share sequentially in Q4, all the other players, including the number two vendor, lost market share. We're the clear number one device company globally. We are number one in all of Europe, all of APAC, Middle East, Africa, Southeast Asia Pacific, China, Russia as well as India. And we are number one in GSM, in EDGE, in wideband CDMA and in smart phones. During the fourth quarter we have made great progress in our entry-level business. The US market overall, CDMA, clamshells and wideband CDMA. And we continue to make good progress in steadily improving our mobile device portfolio. During the fourth quarter we introduced 20 new handsets. Nokia Networks had a strong quarter with sales up 25% sequentially and operating margins of almost 14%. During the quarter we bought back 121 million shares for a total of 315 million shares repurchased in 2005. Now I would like to make some brief comments about the overall device market. According to our estimates the fourth-quarter mobile device market was 244 million units, representing a year-over-year volume growth of 25% and sequential growth of 23%. The slide shows the detailed regional and technological market statistics as estimated for the fourth quarter. In general the market in the fourth quarter developed the typical way you would expect for a holiday selling season. But I would like to highlight a few specific points. Firstly, the global CDMA market was up 45% sequentially and in Europe, where our WCDMA share is strongest, the market saw tremendous growth. According to our estimates the global WCDMA market totaled 44 million units in 2005 and we believe that this will at least double in 2006. And it is also worth noting that the India market, where Nokia is a strong number one, continues to do extremely well growing over 20% sequentially. The device industry continued to grow at a very fast-paced in 2005. Nokia estimates that the global device market grew 24% in 2005 to 795 million units. A key driver of this growth was new subscriber additions in the emerging markets, a traditional Nokia stronghold. 2005 global net subscriber ads were approximately 420 million. We closed the year with an estimated 2.2 billion mobile subscribers globally, yielding a global mobile device penetration of 33%. Next I would like to cover some market share dynamics of our device business. Our fourth-quarter global device market share grew to 34%, up 1 percentage point sequentially. In terms of the specific markets for the fourth quarter. First of all US, we made excellent progress in the US market in the fourth quarter. Our volumes grew by close to 70% sequentially resulting in significant market share gains. We made very significant gains in our GSM market share in the fourth quarter and in CDMA our volumes were up over 100%. Our market share in the US was over 20% in the fourth quarter, moving us up to number two in the US, clearly closing the gap on the leading player in the market. Secondly, China, we did continue to gain share in China in the fourth quarter, marking ten quarters of uninterrupted market share increases. We closed the year with over 30% market share in China, ten percentage points higher than the previous year, further distancing us from the number two player, Motorola. And thirdly, the wideband CDMA market; we also there saw strong sequential growth in the fourth quarter in the wideband CDMA market. Our volumes grew by close to 80% resulting in significant global market share gains, solidifying our number one position in the technology and closing in on 30% global market share. For all of 2005 our global market share in wideband CDMA more than tripled. We also strengthened our position in APAC, driven largely by our continuing strong share in India. Our position in the fastest-growing market in the world continues to be extremely strong. We are number one in India, number one in Russia and number one in Middle East and Africa and number one in Southeast Asia Pacific. We estimate that on a sequential basis our sell in share was weaker in Latin America and Middle East Africa markets in the fourth quarter. These high-growth markets tend to be volatile and market share fluctuations are typical from quarter-to-quarter. We have taken actions to improve our position in these two markets and do anticipate that our share in both markets will rebound in the first quarter. There has been a lot of discussion about our share in the emerging markets, especially in light of the present GSMA handset awards. However, despite these developments, we estimate that we gained share in the emerging markets in the year of 2005. I would now like to discuss the ASPs and other portfolio dynamics of our devices business. Nokia fourth-quarter device average selling price was EUR99, down 3% sequentially. This is in line with our expectations and as we communicated to you coming into the quarter. As we predicted, the ASP decline was driven primarily by a seasonal shift in our units towards the lower ASP markets and the typical fourth-quarter mix shift to the low end in general. I would now like to highlight a few significant products for us in the fourth quarter. The 1100 continues to be top-selling product family with over 60 million units sold in Q4. As we have said, we are renewing the 1100 product family, systematically replacing it with our new lower-cost entry-level platforms. The 1110 and 1600 are the two primary entry-level products based on our new low-cost chipset. These two products were up over 300% in volume sequentially in the fourth quarter from already good momentum in the third quarter. The gross margins in our entry-level business have improved every quarter since the second quarter and the renewal of the product portfolio has been the primary reason. The 6101 GSM clamshell has been a hit for us. It was our third-best selling product family in the fourth quarter and our second-best selling product in both North America and Latin America. It has had a double impact. It is the first product to truly address our challenges in the clamshell market. And it has also had a significant positive effect on our US market share in the fourth quarter. The 6101 has been very well received by the US carriers and consumers because of Nokia's leading user Interface and quality, especially versus the competitor's offerings. As I mentioned earlier, we've continued to lead in the smart phone and wideband CDMA market. Smart phones now constitute over 10% of our device volume and close to 30% of value. Nokia continues to have the strongest wideband CDMA portfolio. Our wide band CDMA portfolio has much higher than average device margins leveraging a distinct cost advantage and a lead in the implementation of 90 nm chipsets. The 6630 and 6680 continue to be in the top ten for both revenue and profits in the fourth quarter for Nokia. But we are now seeing momentum behind the newly introduced N70. In the fourth quarter the N70 was already top five in revenue and profits in Nokia overall and was multimedia's number one product in revenue. This was achieved even though shipments began only in September. The stainless-steel 8800 slide phone continues to be a highly coveted and highly profitable model for us. Demand continues to outpace our growing supply as people discover its distinct elegant design in more and more markets. Now I would like to discuss our product lineup for the first quarter. We expect the following products to be the most significant in terms of shipments. In entry we will continue to ship the 1100 in big volumes, but, as I said, we are seeing that our new entry products such as the 1110, 1660, 30 are gaining ground fast. In the midrange we expect 6230i, and 6101 will continue to sell in high volumes. The new 6111 and 6280 slide phones should also ship in good volumes. In high-end and smart phones we expect to continue to ship N70, 6680 and 8800 in high volumes. Now I would like to talk about Nokia Networks. We expect improved results compared to the third quarter. But the Network's team performed even better than expected in the fourth quarter, both in terms of sales and margin. During the quarter we announced a number of GSM network expansion deals including a US$141 million contract with BSNL in India. We also announced a joint venture with China Putian to focus on R&D as well as manufacturing and sales of 3G network solutions for TDA, CDMA and wideband CDMA technologies. And at the Nokia mobility conference in Barcelona we and launched the highly innovative Flexi wideband CDMA base station which can deliver operators site cost savings of up to 70%. Thank you, Jorma. Ladies and gentlemen, let me touch on the financials in some detail and first looking at the P&L. In the fourth quarter net sales were up 23% sequentially and 9% year-over-year, and on a constant currency basis sales growth was 13% year-on-year. Gross margins were up sequentially 40 basis points to 34.1% driven primarily by improvement in Network's gross operating margin. Reported group operating margins were down 50-basis point sequentially to 13.2%; but, if you exclude the special items related to both quarter three and quarter four, the operating margins were up 90 basis points sequentially to 13.5%. This improvement was driven primarily by improved networks margins and overall lower OpEx as a percentage of sales. So while the reported OpEx was up 90 basis points sequentially as a percentage of sales to 20.9%, again, excluding the special items from both quarter three and quarter four, OpEx was down 50 basis points to 20.6% of sales in quarter four. Sales and marketing was up sequentially as a percent of sales in quarter four and was a primary reason why we didn't deliver a bit more operating leverage in the fourth quarter. Strong marketing programs in multimedia and mobile phones contributed to most of this increase. Multimedia marketing programs in the fourth quarter include the continuing expenditure for the overall long-term establishment of the Nokia N series and for specific key products shipping in the quarter such as the N70. For mobile phones the 6101 and the imaging driving 6111 and 8800 were some of the big programs. The 6101, 8800 and 6111 are both positive brand drivers, but let me emphasize that they also are positive strong profit drivers. So we think the marketing spend being put against these products is well spent. As we discussed in our capital markets days recently, we are putting processes in place to make sure that we are spending our marketing wisely. And as we've also explained, we are measuring ourselves against new return on investment metrics for marketing, resulting in actions to make sure that we're getting the most bang for the buck. As Jorma said, Nokia Networks had a strong quarter. Better than we expected in both sales and margin. On sales much of the upside came late in the quarter and from a variety of customers and regions as the holding was able to execute well and deliver on some late quarter orders. Gross margin, it benefited from scale leverage from the higher volumes in Q4, regional mix and good product mix. And the operating margins clearly then benefit from the higher gross margins, the lower objects as a percentage of sales versus third quarter when you exclude Q3 special items. So as you can see, networks in the fourth quarter gross margins and operating margins benefited from a large sequential increase in sales. Networks operating profits are sensitive to top line sales given the higher OpEx requirement, and in this regard we should face the typical margin dynamics in the first quarter in networks given the normal first quarter decline in sales that are expected in the industry. Enterprise solutions, enterprise solutions results were disappointing and also significantly contributed to our inability to show that, a bit more operating leverage in the fourth quarter I referred to. The enterprise derived sales in the fourth quarter 2005 were impacted by the delayed operator acceptance of the Nokia 9300 enterprise smart phone in the US as well as some declining demand for our messenger product portfolio, all of this resulting in lower sales in all major markets. Enterprise solutions operating loss of EUR136 million was primarily impacted also by lower device volumes and a EUR29 million charge taken during the quarter. Enterprise solutions is taking steps to better address the corporate market including the pending acquisition of Intellisync, a leader in wireless messaging and mobile software. We are working hard to put together the leading package of enterprise devices, security, software, applications and services and we are convinced of the overall market opportunity and Nokia's coming financial success in this space. The new recently announced E series range truly is leading in all aspects and has had very positive reception from the corporate community and from operators. These products will not materially impact enterprise solutions revenue until quarter two, so Q1 will continue to be challenging. We strongly believe that the enterprise model is still largely untapped with incredible growth potential. Nokia is well positioned to exploit this and we are putting the pieces together to make it happen. Then a few specific financial items for 2006, and this is really a recap from the capital markets day and you should use for your modeling. We estimate that the tax rate for 2006 would be approximately 27%. We continue to estimate CapEx will be approximately EUR800 million and estimated depreciation and amortization will total approximately EUR800 million. Let me now review the fourth-quarter special items. Overall the net impact of the special items to diluted earnings per share was negligible. So the EPS excluding special items was 25 Euro cents, same as the reported number. And in terms of specific items, we took a EUR29 million charge for enterprise solutions restructuring primarily related to headcount reductions. Also in the quarter our tax rate in the fourth quarter was 24%; this lower than normal tax rate was a result of a EUR48 million onetime benefit from a tax refund. As I mentioned earlier, operating margin, excluding special items, was 13.5% versus 13.2% as reported. Let me update you also on the TELSIM auction in Turkey. As reported, TELSIM was auctioned for US$4.55 billion in December. Nokia's proceeds from the sale equaled 7.5% of the auction value, or US$341 million. We believe that we will be able to collect the proceeds sometime in the first half, but the exact timing during the first half remains somewhat uncertain. So for your modeling purposes as well the proceeds should be considered a special item. Next some very brief commentaries on currency. The fourth-quarter reported year-on-year sales growth was 9%, on a constant currency sales growth was 13%. On a sequential basis we saw modest benefits to sales growth from currency. Next let's look at some of the balance sheet and cash flow items. Inventory decreased sequentially in the fourth quarter reflecting a strong seasonal device market and healthy sell in for Nokia devices. Accounts Receivables were up sequentially due to customer mix and of course strong fourth-quarter sales growth. Operating cash flow was EUR1.1 billion in the fourth quarter, sequentially down from the third quarter driven, again, primarily by the higher receivables in the fourth quarter. Capital expenditure EUR183 million, up over the third quarter as planned, and CapEx for 2005 totaled EUR607 million, about as we estimated. Year end our net debt to equity was minus 77%. I'd like to emphasize here we managed down our cash and other liquid assets as planned and as communicated to you through our continuing significant share buyback. Our cash and other liquid assets stand at EUR9.9 billion euros at the end of 2005. During the quarter we repurchased 121 million Nokia shares for a total of EUR1.8 billion. This takes us to 72% of the value and 59% of the volume of our current share repurchase program. During 2005 Nokia returned a record EUR5.8 billion in dividends and buybacks to the shareholders. Let me summarize a few of the relevant Board of Director proposals that came out today. Nokia Board of Directors proposes today an annual dividend of 37 Euro cents per share. This represents a 12% increase to the dividend of 33 Euro cents per share of a year ago. The Board also proposes today a new 2006 authorization to buy back up to 405 million shares with a maximum value of EUR6.5 billion. All of the Board proposals are subject to shareholder approval in conjunction with our annual general meeting on March 30th. With this I'd like to now hand it back to Jorma. Jorma, please. Thanks very much, Rick. I'd like to cover the first-quarter and 2006 market and Nokia outlook very briefly. For the first quarter of 2006 Nokia does expect the overall mobile device market volumes to reflect normal industry seasonality following a strong fourth-quarter selling period. We expect our own share of the device market in the first quarter to be flat to slightly up sequentially, up year-on-year. We also expect the Nokia device average selling price in the first quarter to be flat or slightly down sequentially driven by a regional mix shift. Sales in our network business are expected to experience a seasonal decline in the first quarter, but be up year-on-year. For the full year 2006 we expect the mobile device market volumes to grow by more than 10% from our preliminary estimate of 795 million units this past year in 2005. We also expect that the device industry will experience value growth in 2006, but expect some decline in industry ASPs, primarily reflecting an increasing insight from the emerging markets. Nokia expects that the majority of the growth and over 50% of industry units in 2006 will come from emerging markets. Nokia expects that the replacement market will account for over 60% of industry device volumes in 2006. Nokia expects moderate growth in the mobile infrastructure market in euro terms in 2006. And our goal is to increase our market share both in mobile devices as well as in the infrastructure market. We are indeed entering this year with a strong product portfolio; great products are key but we are also taking actions to turn this critical product momentum more to our advantage. We have the most extensive distribution network in the world and we have one of the world's leading global brands. We will continue to leverage and extend these advantages. For example, in 2005 we conducted what I believe to be one of the broadest and most sophisticated segmentation projects in the consumer goods industry. The survey consisted of more than 60,000 hours of interviews done in 16 countries. In 2006 we will systematically apply what we learned from this study in retail. Last November we opened our first flagship store in Moscow and we are already seeing some very good traction there. We will be rolling out flagship stores in many more prime urban spots in the world, different parts of the world in 2006. Finally, thanks again to the exceptional Nokia team for delivering such excellent 2005 results. And we really are eagerly working on a great 2006 to happen. So I'll now turn to Bill for some final comments. Thank you, Jorma. Will now continue with the Q&A session. In order for us to be able to answer the questions properly please limit yourselves to one question only. Operator, please go ahead. I'd like to ask two questions on multimedia division. Can you comment on the N series volume expectations in terms of what kind of approximate share of your total shipments in 2006 you hope to come from N series branded products? And second, when you talked about multimedia related marketing spending being higher than what you would perceive as normal levels, how much longer do you expect that to continue? Thank you. Thanks for the question. It's clearly, if you look at the N series products, I think the comment would be that the second half performance overall for how we were able to ramp up and get the real volumes going with some real complex products was exceptionally good. So the ramp up capability that was demonstrated by the business group and the organization working on that was exceptional. So that really accounted for the better performance for multimedia than what we expected when we looked at the plans for the year 12 months ago, and really is ahead of plan overall. I don't have a figure, but it's a, the majority of the products already towards the end of the year were N series and will continue to be. The N70 being the top revenue generator among the N products, so I might even say that it's the great majority of the multimedia products being from the N series, so it's really moving towards the N series branded products within the division. Your second question related to the marketing and I think a couple of observations there. First of all, we have done a lot of work in terms of understanding the productivity of our marketing and sales on one hand and then the R&D expenditure on the other hand. What sort of gross margin are we getting short- or medium-term from those investments is a very major management parameter to follow and have systems in place to, not only to monitor but to get real planning understanding on what needs to be done. And I think, so we have a systems in place, like Rick mentioned in his presentational comments. So when we look at the marketing, and as you know, let's leave R&D, that question I'm sure will come later. So the marketing and sales costs have been under special scrutiny. And what is so interesting to see is now that we have had a higher level really for five quarters, five past quarters, what's interesting to see is that we see tremendous response and the response time is adjusting to be shorter than what we initially felt. So that when we really started towards the end of 2004, our investments in sales and marketing at the higher level and have been increased during the past year. We have seen not only our product awareness, but also the, sorry, the brand awareness but also the brand preference numbers in different parts of the world where we make those marketing investments to rise. And it's a careful balance between marketing based on brand support on one hand and then on the point-of-sale marketing support that we give. I think my comment would be that the high marketing expense, which many analysts, I understand, when they were looking at their models, the "high marketing expense" which we are said to be continuing to have, had actually brought tremendous results. I mean the results are there. Those results will even be amplified during the next 18 months when we have further interesting products. I think my comment would be, going forward that this is an industry which in the way that we kind of always saw but perhaps even amplified will always be both high R&D as well as high marketing cost. The successful companies here will have a high R&D and high marketing costs. And the question is how effectively you can focus and direct both of those costs. I think that as a percentage of revenue we obviously, reasonably soon we hope to see the marketing expense to go down and that needs to happen. How fast it will come, we will monitor that on a quarterly basis because in order to get this productivity aspect right. I'm sorry this was a longish answer, but this is one of those issues which we have worked on extensively and have nothing to apologize for the high-level because the results are there and they will be further coming in the next quarters to see. Can we just touch on the North American market a little bit? You talked about some real, real good share movement there getting back to 20%. Just give us your sense on how you view the sustainability of those share gains, particularly in light of some of the technology changes that are going on here moving from CDMA to EVDO and the move to WCDMA. So if you could just talk about how you feel about sustainability given the product cycle over the next few quarters as well as the technology changes. Thanks. Thanks. If you look at first of all how after three not so good quarters particularly we were able to come back very well starting towards the end of the third quarter and now having what I would a very respectable quarter in terms of the share development in the final quarter. It's really coming from good products, both the improved GSM as well as the improved CDMA products. When I look at the momentum that I see as we speak in the US it's going to continue or extend into Q1. So this is not a one-off and we obviously see that we are well-placed to continue that momentum based on the discussions we have with the operators in GSM and in wideband CDMA when we go forward. But also we, as you know, we will be bringing a DO product and the CDMA recovery and getting back on track and into volume deliveries there to the key customers. That is very much happening. So being above 20, that's the first step. Now we will be stabilizing at a level which is above 20 and then going to the next step and really establishing ourselves hopefully as a strong contender for the number one position. That's not for me to talk about because I'm here for the first and second quarter. I think it will take a little bit more; so you'll have to talk to my colleagues and I'm sure they will enlighten you in the next conference call. Are you okay with that, Rick? I've got a quick question on your emerging markets business. You mentioned in the text that you lost some market share in Latin America, Middle East and Africa. You said that you were hoping for that to bounce back in Q1. I was hoping that perhaps you could go into a bit more detail as to what it was that caused that market share to erode? Was it product issues? Was it pricing issues? What it distribution issues? Was it increased competition for example? First of all, Middle East and Africa. Our share is very high and in that sort of a situation, when you have typically volatility in terms of some deals which have been priced at levels which don't long-term, which aren't destructive long-term for anybody. And then we decided to say no, we will not be party to this sort of an extravaganza just doing business for one-off. You know, then that very easily shows in a bit of a lower level. So it's this strong presence that we have which every now and then gets, because of the non maturity of the distribution on a broad basis in Middle East and Africa gets sort of disturbed, disturbed with spot deals. I think that's perhaps the best way to describe that dynamic. We are miles ahead in terms of building our distribution broadly in that region and we expect to be real strong and come back. So nothing special, difficult volatility and also some sell-in/sell-out issues there so our sell in doesn't necessarily tell the story about how the product moved from the shops. And that one can say knowing exactly that our trade inventory situation, channel inventory situation is very solid all the way in that region. On Latin America, that's traditionally an extremely fluctuating market in terms of deals moving back and forth and a lot of changes between different players. We have historically been either number one or two. There's one guy who's sort of very close to us and we tend to swap places quarter-to-quarter. So there is nothing special. Our somewhat lower than typical share was to have more than anything else coming from us not participating in some out sell CDMA action which was there in the market. That you can always take if you want, but if you decide in a good quarter with volumes moving otherwise, as was the case with us, why go in there? So nothing special. I don't think there's a big story, that's kind of what I'm saying. Thank you, good afternoon. Jorma, I just want to get your sense on, I think some of the concerns that people or the call might make that, okay, well, Nokia, obviously you guys do great when there's a component tightness. So in the fourth quarter you definitely gained market share. You outperformed any of your competitors, there's no question about it. But then people say, okay, well, in Q1 there's a competitor who has several new product lines they could not execute in Q4, but they're going to deliver, come out with a more competitive offering. When you look, you've probably got a couple months already of the sense how the competition is doing with some of the new products. You have new products, I understand Japan and Korea are flat so you don't participate. So maybe on seasonal levels you're a little weaker because you don't play in those markets. But in your respective market what's your sense, how are you doing competitively against some of those new products? And related to that, because the big part of your story I think in the second half of the year is if you guys get right enterprise business that would be huge upside for the story; that's such a big market. Now it's a little bit underperforming. Are you accelerating some product developments there? Could you just touch on the milestones we should be looking? Because that's somewhat under performing but that's also such a huge area of upside for you down the road? Two questions. First of all, we don't see any new pressure, new market dynamics coming from any one competitor in Q1. Our channel inventory situation is very good. I don't know the situation with other people exactly, but I think it's okay overall in the marketplace. So there shouldn't be any overhang. This is a healthy transition from Q4 to Q1. And that is coming through when you look at how the order book and how shipments are moving in the first five or six weeks which we have good visibility. So we feel good about our position with our products and nobody has come in with something which would make us feel that there is a new situation. There is not. Then on the dynamics towards the second half vis-a-vis the potential presented by the fact that we have been so heavily on the investment mode and continue to be. And the enterprise solutions, with that being such an early phase of the market with a lot of complexity in getting the solutions as well as the handsets which support those solutions to really get going. And I think obviously we have a lot of potential to turn this around into a much, much improved result in the second half. Yes, we are working very much toward second half being significantly better. You're already starting with some volumes of E series which we have launched during the second quarter, but you're putting on a finger in the second half is exactly correct. Okay, thank you. But bottom line from the European markets or American markets at least, some of the thin phone factors from competitors, when you compare them for competitive reasons, you don't think that's going to impact your market are, at least based on what you see so far? Just two questions if I could. From an earlier question you talked about the market share gains in the first quarter and momentum in North America. Will that likely continue to put pressure on gross margin sequentially in the first quarter? And then second, Jorma, music continues to get a lot of attention in the mobile world, do you think the ecosystem is there? It appears to be very fragmented, a lot of people doing a lot of different things. Do you think that will be all in place to drive this market as we come to the second half and into '07? Thank you. On the music side, do you think the ecosystem, which appears to be very fragmented now, portals, Apple's doing what it's doing, do you think that will be sufficient to actually drive this market towards the end of '06? Or how do you see that developing and Nokia's relationship? Okay, so first of all, on the momentum and its impact on the gross margin in the, the US momentum and its impact on the margin. If you look at the gross margins in the US, the gross margins are slightly lower than the corporate average in the US because of the lower ASPs. US average ASP is lower. And so, but it's interesting because if you have a new good product like we have had a couple, as mentioned, in the final quarter, our ASP in the US went up from Q3 to Q4. So it's not so straightforward in what happens. And I wouldn't sort of draw a conclusion that there we go; the US is going to have a big impact. No, it certainly will not have a big negative impact. At worst it's muted and at best there can be good contribution coming from volumes and then the right kind of mix of midrange and the higher end phones. Because we are also making sure that the, we could benefit from the retail traction that we have for our high-end product even if we need to build a distribution, which is a retail distribution rather than through the operator. So I think we are moving nicely not with an explosive speed because it's difficult to do that ever in the US So don't count on having a big negative impact. No, there will not be one with us moving. But it's not a big positive impact either because of the intrinsic nature of the ASP level of the market. On music, yes, I think it was said that 2005 was going to be the year of music. It's all relative, it's in a fragmented way towards the year-end and everybody became aware. I think 2006 will actually be the year when it will be very broadly accepted and broadly a phenomenon in devices. We will be looking into music increasing in importance throughout the year accelerating towards the second half. So it will probably not be a big story, dramatic story in the first quarter or so, but then working towards the second half. There is a very positive expectation there and the volumes will be significant. I was wondering if you could maybe just touch a little bit on the pricing pressure, especially with Motorola trying to go more into the emerging market. Can you maybe talk about any pricing pressure you might be seeing in those markets? And then, also you touched on given your large share and brand in some of those markets, any price premium you might have on some of those low-end products? That would be helpful. Thanks. That's obviously an issue where it's about product and cost competitiveness, that's number one; number two, it's about brand; and number three, it's about distribution. And all have an importance. The relative importance of those three in the emerging markets varies from whether you are in an urban environment in Shanghai or whether you are in a countryside in India. So the relative importance can be very significantly different, but your overall business model has to be in shape in order for you to be successful. And I think that the fact that we have invested in a patient way into that has really paid off. And if there is somebody trying to catch us you can bet that we will be running with some really good sneakers at a faster pace and making sure that there's a gap. And it really, really comes about the overall business model, overall value chain being in good control. We did gain share in 2005 in the emerging markets overall. So if you look at Africa, Latin America, Asia-Pacific, India, China, Russia, if you take overall we have looked at how did we do. We gained share and it came in the first half because of the 1100 being in very, very good shape as a product and the second half increasingly 1110 and 1600 starting to perform and giving a real sort of spread of products. Not just one product priced desperately, but rather getting a breadth of products and that will be the story also in 2006. There will be new products. It's not that we're sort of phasing out some products which you saw in Europe or in the US two or three years ago that we would now then start shipping them. No, they are custom-made to emerging markets and cost optimized and feature optimized. So pricing pressure, no, we have not seen here. Had we seen significant pricing pressure you would not have seen the 17% margin in mobile phones in the fourth quarter. No, it's been well controlled in terms of good balance between taking deals and getting the volumes as well as making sure that we get a good return for our shareholders. And I think our folks; they are very, very good at doing exactly that in the field. So it's a great organization in that sense and if you look at the gross margin of our entry product line, it has improved since the second quarter of last year. So we have improved our gross margin in the emerging market product line since the second quarter of last year. So that's kind of as a summary the story about the price pressures and this and that competitor heading towards what used to be easy for us. No, this is not easy. This is challenging, but we are getting higher gross margin as a total impact of those factors which I mentioned. A question for Rick. If we look at the trend in your device gross margins, they've continued to I think reach new lows. And I'm just wondering as we head into now 2006 and level to about Q4, is that probably a low? Because I'm just thinking, you've talked a lot about the transition to your new low-cost platform. At some point I'm assuming that helps gross margins a bit in that part of the business. And I think you almost already said that there's some recovery already happening there. And also you've got the rise towards 3G where you've said before your profitability has materially accretive. So I'm wondering, is this the bottom and should we see a recovery or are there some other factors maybe in the early part of the year that may impact gross margins? Thanks for that. Why don't we talk a little bit of the positive and the negative factors of what will drive gross margin? I think Jorma outlined in the opening remarks and then with the question of Mike's really on this low-end, we are seeing the refresh there, positive impact there on the gross margins. It's something that we talk about a lot, last quarter and the quarter before that as we rotate from the 1100 to the 1110, 6030 so-called Scott chipset family. And I'd amplify there that we're talking about what kind of price premiums can you get there. Well, obviously initially when you come out with the replacement products for the 1100 you get some initial price premium while they're both selling in the market. But importantly what's happening is what we talked about, that many people are choosing the 1600 as their first entry phone. That's color. And again, to me, to my mind, way of thinking, that is kind of a price premium or a price step up, it's a rotation up that gives us opportunity. And so we are executing that, as we said. We're seeing the benefit there, but we don't stop there. Like we talked about just a number of weeks ago in December in New York, what's the next step? Well, it's the low-cost single chip entry and, again, we expect to have the combined benefits there of some, again, some bill of material cost advantage compared to the current platforms and then you get this effect of having new product in and you can work up the ladder. So that's a positive impact. Clearly WCDMA, the 3G device is our strong position there and the potential for the industry where we think volumes are going to more than double plays into our favor and we continue to ramp some new products in the mid to high-end. In the nearer term on gross margins, if you look at Q1, you look at there's a little bit of the normal seasonality in terms of regional mix development. We talked about share expecting to be as a percentage of our overall mix a bit higher in North America in Latin America, as we talked earlier, and those are going to, that does have a little bit of pressure, as we talked about; not extreme but some muted negative pressure on gross margins there as they're lower than the global average. It's both in general of the North American and Latin American market and then specifically also related to CDMA portfolio which has a little bit of the pressure the other way. So again, and we pointed out earlier on this low end side, we still haven't made the full rotation away from the older product family, the 1100 to the new Scott family. Remember, that's in transition. We're still selling more volume of the 1100 than we are of this new family. We said that it would be towards the end of '01 when we start to have that crossover point going into quarter two is what we talked about with you. So that's kind of how I see the dynamics. Clearly in the fourth quarter, as I mentioned, overall corporate gross margin improved by 40 basis points. But as you can clearly see, that's primarily driven by networks, the pick up there above, in general and a little bit above expectation. And of course that will have a little pressure and normal seasonality in the first quarter. So that's how I see kind of the pluses and the minuses there, Kulbinder. Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today we made a number of forward-looking statements that involve risks and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that cause such differences have been identified in more detail on pages 12 to 22 of our 2004 Form 20-F and also in our press release issued today. Thank you and have a nice day.

EarningCall_233828

Here’s the entire text of the prepared remarks from Multimedia Games’ (ticker: MGAM) fiscal Q4 2005 conference call. The Q&A is here. Good day, everyone, and welcome to the Multimedia Games fourth-quarter fiscal year 2005 conference call and webcast. This call is being recorded. (OPERATOR INSTRUCTIONS). At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Clifton Lind. Please go ahead. Thank you, operator. I want to thank everyone for joining us on the call. With me today is Craig Nouis, our CFO; Neil Davidson, our VP of Finance, and Randy Cieslewicz, our VP of Tax and Budgeting. The fourth-quarter operating results are reviewed in today’s news announcement, and shortly, we will provide some additional financial detail. In addition, on today’s call, I will review our plans and expectations for further revenue diversification and our prospects for fiscal 2006. But first, Julia Spencer will get us started with the Safe Harbor language. Thank you, Clifton. I need to remind everyone that today’s call and simultaneous webcast may include forward-looking statements within the meaning of applicable securities laws. These statements represent our judgment concerning the future and are subject to risks and uncertainties that could cause our actual operating results and financial conditions to differ materially. Please refer to the “Risk Factors” section of our recent SEC filings. Today’s call and webcast may include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found on our website, www.MultimediaGames.com, in the Investor Relations section. I will now turn the call back over to Clifton. Thank you, Julia. Q4 FY ‘05 revenues were $36.9 million, EBITDA was $20.7 million, and for reasons that I will detail shortly, diluted EPS was $0.10, coming in at the low end of the guidance range we provided at the time we reported Q3. Despite the transitional nature of fiscal 2005, Multimedia reported full-year revenues of $153.2 million and EBITDA of $89.5 million, both of which are largely in line with our fiscal 2004 results. During Q4 FY ‘05, there were four factors that warrant a quick review. First, while we projected higher average hold per day for the network, the actual hold per day was slightly below our third-quarter levels. This was due primarily to the deterioration in the hold per day of our Alabama charity placements, a trend which we expect to reverse with the deployment of our new platform and our new content. Our Alabama charity offerings have not been refreshed since installation, and we have recently taken steps to correct this situation. Second, while our Class II standard-sequence bingo games operating in Oklahoma continue to hold their own against similar games offered by other public companies, they are not as attractive to players as the predrawn games and the keno games offered by many of our nonpublic competitors. And therefore, we continue to lose some floor space in Oklahoma. We have remained on an uneven footing in Oklahoma, as operators have not yet converted in mass to games played under the tribal-state compact. Due to this delay, in about two weeks, we will begin re-releasing all of our Class II games on the new Class III platform developed to support the games played under the compact. We believe this will allow us to better compete with the other games in the marketplace. On a positive note, we recorded an increase in average hold per day for both nationwide Class II Reel Time Bingo placements and for the games played under the Oklahoma compact in the smaller halls where we placed them in early fiscal 2005. These games continue to build loyalty with our players. Third, even though we reduced fourth-quarter SG&A costs by 9% compared with last year, during Q4 FY ‘05, we incurred higher-than-projected SG&A costs, including unanticipated legal expenses, repairs and maintenance of player terminals that we prepared to place in new markets in the immediate future, but which we had not pulled the trigger on at the time of our last conference call, and then, higher-than-projected Sarbanes-Oxley compliance costs. These items in aggregate obviously reduced our diluted earnings per share. And finally, even though we had a slight increase in the number of non-Legacy player stations during the quarter, we lost [floor] space to nonpublic competitors in the Class II markets, including Oklahoma and at one facility in California. As was the case throughout the year, we have had a large number of player terminals on hand, many of which are being depreciated despite not being “in revenue.” We hope to correct this situation in the next few months, as we will outline later in the conference call. In a few minutes, I will review our placement plans for these units in FY ‘06. During the past three months, we have refocused our development resources on our most tangible near-term placements and opportunities, including: upgrading the Oklahoma and Alabama offerings; new terminal placements in Iowa and an international market, providing a new sweepstakes system for an existing market; and, completing architectural changes that will allow us to pursue new opportunities previously unavailable to us because we could not interface to back-office systems using older architectures. We have also made preparations to address new charity opportunities in two additional states. Also in FY ’06, we will make additional progress on our goal of revenue diversification driven by new markets, new jurisdictions and new product opportunities that we are working on today. Craig will now provide some additional insights on the financials, and I will come back to provide an overview of our expectation for this upcoming year. Thanks, Clifton. We provided details on our operating results in this morning’s press release, so let me take a few moments to review a few additional items. As noted in our press release this morning, while we had previously forecasted a quarterly sequential increase in SG&A expenses, actual costs in the fourth quarter were higher then projected. Our September 2005 quarterly SG&A of $16.1 million included unanticipated legal expenses, and repair and maintenance of player terminals that we expect to place in new markets, as well as professional fees related to Sarbanes-Oxley compliance. On a year-over-year quarterly basis, SG&A expenses declined by 9%, or $1.5 million, as we continue to follow through on cost control efforts. Depreciation expense increased as a result of the year-over-year increase in the total number of player terminals in our rental pool, both deployed in the field and in storage awaiting redeployment. For the full year, depreciation expense rose $17.5 million, or 50%; however, on a sequential quarterly basis, it was down approximately $500,000, or 4%. The sequential quarterly decline resulted from fewer deployments of new player terminals into the rental pool. For the full year, amortization expense rose $2.3 million, reflecting our continued investment in intellectual properties, game content and systems. On a sequential quarterly basis, amortization expense rose $427,000, from $1.2 million in the June 2005 quarter, to $1.6 million in the September 2005 quarter. Combined depreciation and amortization for the 2005 fourth quarter rose $3.4 million, or 31%, compared to the prior year period. Based on our projected capital expenditures to the upcoming quarters, we expect the recent quarterly trend for relatively flat depreciation and amortization expense to continue. Our cash position at September 30, 2005 decreased $5.8 million from June 30, 2005, reflecting cash advances of $17.6 million related to development agreements during the quarter, and $1.3 million for share repurchases. Looking forward to FY 2006, we expect to advance an additional $39 million under our development agreement commitments. Net borrowings under our credit facility increased by approximately $4.6 million from June 30, to $39.8 million as of September 30, of which approximately $27.8 million was drawn under our revolving line of credit. As with the decrease in our cash position, the increase in borrowings under our credit facility was primarily driven by the development agreement advances made during the quarter. Our cash flow from operations was approximately $20.9 million for the September 2005 quarter. Accounts receivable increased $8.1 million, to $18.8 million as of September 30, 2005, from $10.7 million as of June 30, 2005, due primarily to billings for the Israel lottery system sale. Subsequent to year end, we collected $4 million of the outstanding balance for Israel, and have also collected several past due balances from customers, which reduced our receivables to be in line with historical levels. Of the $17.6 million advance for development agreements, $9.7 million was recorded as a note receivable, and $7.9 million was recorded as an intangible asset. Primarily as a result of these advances, intangible assets have increased from $45.3 million as of June 30, 2005 to $53.7 million as of September 30, 2005. As a reminder, we amortize the intangible assets related to the development agreements over the life of the contract, which is typically 6.75 years. The amortization, or accretion of these contract rights, is offset against revenue and can be found as a reconciling item on our cash flow statement. Under the purchase terms of a vendor contract during the fourth quarter, we purchased 1,125 player terminal cabinets and will purchase an additional 1,625 player terminals during FY 2006. With these cabinets and the player terminals we currently have in our rental pool awaiting deployment, we believe we have sufficient player terminals to meet our FY 2006 requirements. For modeling of capital expenditures, in addition to the player terminal purchases and development agreements advances previously mentioned, we expect our maintenance CapEx to remain flat at levels of $4 million to $7 million per quarter. Primarily as a result of share repurchases of 1.2 million shares during fiscal 2005, our weighted average common shares outstanding for the September 2005 quarter has been reduced to 27.1 million from 28 million as of September 30, 2004. Finally, effective October 1, 2005, we adopted FAS 123R in accounting for our stock options, and have elected to use the Black-Scholes model. We are currently in the process of evaluating the model inputs, and have provided guidance excluding stock option expense. I will now turn the call back to Clifton. Clifton? Thank you, Craig. In fiscal 2005, we increased R&D spending by nearly 40% over the fiscal 2004 levels, reflecting our commitment to continuing technological innovation. This commitment to R&D, coupled with the aggressive efforts of our sales and marketing staff, the unsurpassed quality of our development and test staffs, and the extraordinary service provided by our field service staff and our customer service staffs remain the primary factors that are driving our ability to locate and pursue new growth opportunities, such as the electronic instant lottery arena, and placements of our MGAMe™ casino management tools for the video lottery, charity and Native American markets. I would like to review our fiscal 2006 strategies for new market placements, systems enhancements, and for new player terminal offerings. Multimedia’s anticipated placements and improvements in the earnings capability as measured by the hold per day are the strongest potential drivers of increased net income and increased fully diluted earnings per share. As we are already recording depreciation for a majority of the terminals we have on hand, any terminal that is placed “in revenue” will be additive to earnings. So it should be clear once I review our terminal placement opportunities why we are so upbeat about our ability to deliver quarterly sequential EPS improvement throughout fiscal 2006. Let’s start with Oklahoma. The Oklahoma transition to games played under the compact continues to move at a slower pace than we expected, and for that matter, than we are willing to accept. While we continue to expect conversions to games played under the compact, which, as I noted earlier, have the potential to generate higher hold per day, we believe that our tribal customers might continue to maintain a large number of Class II games at their facilities. Accordingly, we are introducing a new platform for both video and mechanical variations of Reel Time Bingo this quarter, and we believe that these will be well received by our players. In addition, we intend to release a massive amount of new content for both the Class II system and the Class III system. Our strategy is to offer our customers the most advanced systems and content regardless of whether they continue to operate Class II games, convert to the games played under the compact, or choose to do both. This is why we have decided to re-release our Class II offerings on the new platform, allowing our games to compete better with the other games that are not played under the compact that are now offered in the market by approximately 35 competitors. Before the end of the month, we will also begin to introduce the new games and platform in Alabama, thereby refreshing and updating our games with the new video and mechanical reel product with features and content similar to [those] we are about to release in Oklahoma. Also during the next quarter, at our largest facility in Alabama, we expect a facility-wide conversion to Multimedia’s proprietary cashless card system, which will become the designated currency standard for all vendors’ player terminals. This will create a common currency so that cash players, who might not previously have taken the time to sign up for the facilities designated MGAM player tracking system, will now be entered into our player tracking system and cashless card system. There are a number of additional charity jurisdictions we believe will open over the next several quarters, and we will report on the progress in those jurisdictions on our upcoming call. What our shareholders should be most excited about is the progress we have made in developing new products for the domestic and international markets. An example is the planned launch of our new promotional sweepstakes system, which will be coming up in the very near future. As the exclusive system provider for a designated facility, our sweepstakes system will support a digital communications and computer center in which the owners have invested several million dollars to create a facility that will benefit the citizens and the community. In addition to providing our system, we are delivering a large number of video sweepstakes readers which can be used by the players to view the results of their sweepstakes entries in an entertaining fashion. I’m particularly pleased with our rapid time to market in fulfilling our customer’s request for this new, unique and proprietary sweepstakes system. In addition, our architects, designers and engineers have demonstrated their ability to develop a system requiring massive data communication and data storage capacity. This system could play a huge role in a large number of additional markets. Over relatively short time [periods], our system is expected to process billions of transactions, and this attribute should further solidify Multimedia’s role as one of the top providers of gaming systems in the world. Giving the timing of the opening of this facility, we are projecting just a small contribution from this operation in our December quarter. However, we are very excited about the potential size of the new sweepstakes revenue opportunity as a contributor to profits in the upcoming quarters. We see a large number of applications for sweepstakes, promotional, and “amusement with prize” systems in other markets, and we are aggressively pursuing those opportunities. Those of you who attended the G2E [Global Gaming Expo] Show in September know we expect to enter the Iowa lottery market with what we believe will be the state’s most advanced offering. Initial placements in Iowa are expected early in Q2 FY [’06]. Also in Q2 [FY ’06], we plan to make initial placements of bingo games in an international market, and we are now in the process of finalizing our business arrangements at this time. As the originator of electronic linked bingo-based games, Multimedia is well positioned to bring to that market an innovative offering, which will be a variation of the games that we currently play in our other Class II bingo systems in Alabama and Oklahoma. In addition, we see many opportunities worldwide to take this system into new markets, and we are aggressively pursuing those at this time. With the upcoming release of the new products in Oklahoma and Alabama, the launch and initial placements of our sweepstakes line, the revenue generated from our highly successful launch in Israel of our electronic instant lottery ticket product, and the benefit of the placements in Iowa and possibly [of] a small number of internationally based machines, we will enter the second half of fiscal 2006 with a higher level of diversification than ever before. In addition to the progress we will make in the next 120 days, we believe that there will be additional diversification opportunities in the back half of FY ’06, with additional installs in some of the new markets we just discussed. And the New York lottery’s video lottery market seems to be on a full speed ahead basis. The installed base of the player stations in the New York system will increase very dramatically in this next fiscal year, and not only will we be at a run rate which will surpass break-even, but we can also anticipate contributions to earnings per share [when we achieve] the run rate we will be at after all of the new facilities scheduled for this year are opened. [This will be] followed by the planned opening of an additional facility in fiscal 2007. Our New York lottery system is stable, proven and ready to accommodate an expected significant expansion by both existing operators and by those tracks still to come online. Multimedia’s central system in New York is proving to be a model for lottery directors and other jurisdictions. Next week, we will be showcasing that product and our Israel instant lottery ticket product at LaFleur’s Ninth Annual Conclave in New York. We have also aggressively launched a domestic and international marketing program, which will be highlighted to the lottery directors at that time. Craig has spoken to our expectations for expenses, maintenance and project CapEx, and the completion of our development funding programs. Reflecting these expectations and putting a good majority of the player terminals we have on hand “in revenue” during FY ‘06, Multimedia will begin generating growing levels of cash. We expect to allocate this cash flow to reducing borrowings under our revolving line of credit, [to] share repurchases and investments in new markets, and [in] technology to further extend our long-term diversification and growth potential. We continue to evolve and innovate our technology to provide solutions for product introductions around the world, product introductions which will primarily be placed in emerging markets, and we have our expense control programs in place at this time. Together, these factors should drive earnings higher in fiscal 2006, and we are excited about the quarter-to-quarter opportunities that we see. 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_233829

Welcome to the Abercrombie & Fitch Fourth Quarter Earnings Results Conference Call. Just to remind you today's conference is being recorded. If you have a question at any time during today's conference you may signal us by pressing "*" "1" on your touchtone phone. We will open the call to take your questions at the end of the presentation. Now I would like to turn the call over to your host Mr. Tom Lennox. Please go ahead, sir. Good afternoon and welcome to our fourth quarter conference call. After the market closed, we publicly released the quarterly sales and earnings release, balance sheet, income statement and an updated financial history. If you haven't seen these materials, they are available on our Web site. This call is being taped and can be replayed by dialing 888-203-1112. You will need to reference the conference ID number 3097441. You may also access the replay through the Internet at abercrombie.com. With me today are Mike Jeffries, Chairman and Chief Executive Officer, Mike Kramer, Chief Financial Officer, and Brian Logan, the Company's Controller. Today's earnings call will be limited to one hour. After our prepared comments, we will be available to take your questions for as long as time permits. Please limit yourself to one question so that we can speak with as many callers as possible. Before we begin, I remind you that any forward-looking statements we may make today are subject to the Safe Harbor Statement found in our SEC filings. Now to Mike Kramer Good afternoon. Net sales for the fourth quarter were $961.4 million, increasing 40% over last year's fourth quarter sales of $687.3 million. With comparable store sales up 28%. For the quarter cost by brand were as follows in the adult business, Abercrombie & Fitch, comparable store sales increased 18%, men's comps increased by mid-teens, women's increased by high-teens. In the kids business, Abercrombie comps increased 59% with boys comps increasing by mid 30s and girls increasing by high 60s. Hollister, same-store sales increased 34% compared to last year with Dudes comp increasing by low 30 and (indiscernible) is increasing by mid 30s. On a regional basis, the business was consistent with each region generating comparable store sales, increases greater than 25%. Fiscal 2005 net sales were $2.785 billion versus $2.021 billion last year, an increase of 38%. Comparable store sales increased 26% in fiscal 2005. The fourth quarter gross profit rate was 66.5%, 20 basis points higher than last year's rate as 66.3%. The increase reflects an improved shrink rate and initial markup with little changed in the markdown rate versus last year For fiscal 2005, the gross profit rate was 66.5% versus 66.4%, an increase of 10 basis points versus last year. The gross profit rate increased reflects higher initial markup and a reduction in shrink, partially offset by a slightly higher markdown rate. We ended the fourth quarter with inventories up 59% per gross square foot at a cost versus last year. This is less than the guidance we provided on our third quarter conference call. When we estimated the year-end inventory per square foot would reflect slightly less than the 87% increase reported at the end of the third quarter of fiscal 2005. Going forward, we expect increases in inventory levels to continue to moderate, ending the first quarter of 2006 with a slightly lower increase per foot at cost when compared to the fourth quarter of fiscal 2005. Stores and distribution expense for the quarter as a percentage of sales decreased 210 basis points to 30.5% versus 32.6% last year. The decrease in rate versus last year resulted from the Company's ability to leverage fixed cost due to significant comparable store sales increases, partially offset by increase store management and loss prevention programs. For the year, stores and distribution expense as the percentage of sales decreased to 35.9% versus 36.5% last year. The decrease in rate versus last year resulted from the Company's ability to leverage fixed cost due to significant comparable store sales increases partially offset by higher store payroll cost. For the fourth quarter, Marketing General and Administrative expenses decreased to 120 basis points as a percentage of sales, to 8.4% from 9.6% last year. The decrease in rate versus last year resulted from leveraging of marketing expense and home office payroll, partially offset by increased legal expense. For the year, MG&A expense was a 11.3% of sales, a 160 basis points lower than last year’s rate at 12.9%. Excluding previously reported non-recurring charges of fiscal 2004, and the third quarter of fiscal 2005, MG&A expense as a percentage of sales was flat to last year. For the fourth quarter operating income increased 57% to $267.5 million compared to a $170.2 million last year. For the year, operating income was $542.7 million versus $347.6 million last year, an increase of 56%. Net income for the quarter increased 58% to a $164.6 million versus a $104.3 million last year. Fiscal 2005, net income increased 54% to $334 million versus $216.4 million last year. Fourth quarter net income per share on a fully diluted basis was a $1.80 versus $1.15 representing an increase of 57% versus last year. For fiscal 2005, net income per share on a fully diluted basis increased 61% to $3.66 versus $2.28 last year. Net income per share include the after-tax effect of previously reported non-recurring charges of $0.09 for fully diluted share in 2005 and $0.27 for fully diluted share in 2004. During fiscal 2005, we repurchased 1.8 million shares in the open market as part of our previously authorized share repurchase program. There are currently 5.7 million shares remaining under our existing repurchase authorization. During fiscal 2005, we take dividends totaling $0.60 per share to shareholders, a 20% increase compared to last year’s total dividend of $0.50. The Board declared the quarterly dividend of $17.5 per share payable on March 21, 2006 to shareholders of record as of February 28, 2006. During the quarter we opened 6 Abercrombie & Fitch stores, 2 Abercrombie Kids stores, 17 Hollister stores and 2 RUEHL stores. We ended fiscal 2005 with a total of 361 Abercrombie & Fitch stores, 164 Abercrombie Kids stores, 318 Hollister stores and 8 RUEHL stores. For fiscal 2006, we planned to open approximately 12 new Abercrombie & Fitch stores, 19 new Abercrombie Kids stores, 64 new Hollister stores, and 8 new RUEHL stores, total square foot each is expected to grow by approximately 11% in fiscal 2006. For fiscal 2006, our planed capital expenditures would be between$ 405 million and $415 million, approximately $216 million of this amount is allocated to new store construction, remodels, conversions and improvements to existing stores with a remainder related to home office and distribution center investment. Now, I would like to discuss our financial targets for the first half of the current fiscal year. We have decided to provide guidance on a seasonal basis, since we believe there is more clarity in the near term. As you will recall, we revised our guidance several times last year, as business trends became more pronounced. Thus we will provide an outlook for the Fall season, when we report our results for the second quarter. The Company recently annualized strong comparable store sales growth, which started in January of 2005, reporting a 33% comparable store sales increase in January of 2006. We believe the strong comparable store sales growth in January was due to a continuation of strong sales momentum, gift card redemptions, and the benefit of unseasonably warm temperatures. Consequently, while we can sustain positive comp store sales increases, the increases will not be at the level reported over the past 13 months. We expect net income for fully diluted share for the first half of fiscal 2006 to be in the range of $1.23 to a $1.28 including a charge of approximately $0.08 attributable to the adoption of FAS 123(R). On a comparable non-GAAP basis, excluding its expense related to FAS 123 (R), this would represent a 21% to 26% increase on a net income per share basis compared to last year. Now, Mike will comment on the business. Good afternoon. Fiscal 2005 was a very successful year. Each of our brands exhibited strong growth, which allowed the business to generate record sales and earnings. Our success during this period is of the result of our ongoing commitment to protecting and enhancing the long-term strengths of our brands. To do so, requires a delicate balance between reporting near-term profit growth and investing in new organization, never as this spin more evident than in fiscal 2005. We made essential investments throughout the year, initially focusing on the stores organization, where we drastically improve the shopping experience for our customers and later in the year at the home office by broadening the merchandising and design organization. Despite these major investments, we still reported a 43% increase in operating income and a 48% increase in net income per share for fiscal 2005 excluding one time charges in both years. By businesses, each of our brands performed very well throughout fiscal 2005. For the year, the adult business Abercrombie & Fitch achieved the comparable store sales increase of 18%, demonstrating excellent growth for matured business. The business was consistently strong throughout the year, with both the men’s and women’s businesses performing very well. With limited opportunity to see here additional domestic model locations, expanding the ANF business would be driven by opening select flagship locations combined with international expansion. As many of you know, we opened the first Abercrombie & Fitch flagship store in Fifth Avenue during the fourth quarter. The store performed extremely well throughout the fourth quarter exceeding our initial sales productivity expectations. We also opened our first Abercrombie & Fitch stores in Canada during the quarter. Stores are off to an amazing start with productivity above that of our average US Abercrombie & Fitch stores. In addition, we are planning to open flagship stores in the Grove at Farmers Market in Los Angeles this summer followed by the London flagship store in the spring of 2007. During the fourth quarter, we opened 3 Hollister stores in Canada. These stores are also exceeding our expectations with productivity above that of our average US Hollister stores. At this point, we are only half way to Hollister’s domestic store potential. Over the next few years, I expect the brands iconic status to continue to strengthen. The results achieved with that brand, however demonstrate how solidly this concept performs, achieving net sales in fiscal 2005 of approximately $1 billion and sales of $528 per foot. For fiscal 2005, net sales increase 72% with comparable store sales increasing 29%. With the comparable store sales increase of 54% in fiscal 2005, the Abercrombie brand not only generated the greatest productivity increase, but also had a gross profit rate above both Abercrombie and Fitch and Hollister. While it is unrealistic to expect the brand to sustain its recent dramatic comparable store sales increases, we are convinced that the Kids business will continue to achieve solid results. I am pleased with the progress made during fiscal 2005 with a RUEHL business. When we initially introduced the business last call, I do not believe the assortment reflected the casual sportswear trends consistent in our other businesses. Given our understanding in the trends age, we have adjusted these assortment to reflect more casual trends, since then the business has responded to this adjustment and I am very pleased with the brands positioning at this point. The business performed well during the fourth quarter and we are still expecting RUEHL to be profitable by the end of fiscal 2007. After such an amazing year, we have faced with the challenge of improving what has become a huge, very successful business. While it is difficult to predict what business trends for fiscal 2006 would be. It is certain, that productivity increases will moderate during the year, based upon the extraordinary comparable store sales increase achieved in fiscal 2005. Despite this challenge we will operate the business as we always have, we will protect and enhance the brands thus insuring our long term success. Now we are available to take your questions, please limit yourself to one question so that we can speak with to as many callers as possible. After every one has had a chance, we’ll be happy to take follow up question, thank you. My question is this, I guess in terms of the sales gains, and the productivity gains that you achieved this years may be Mike and Mike will commenting on it, coming out of the year for the year-end total, can you gives us stands for how a split between the comp being driven by number of transactions and AUR increases and then how we ended the year and what you see I guess this is your biggest opportunity going forward, will it be driving the transaction in this store, do you still have opportunities for your AUR next. Yes I’ll comments and then I will have Mike talk little more qualitatively, but we actually didn’t see an increase in our transaction in our stores as well as our AUR, I would say that is roughly 50-50 split, in terms is there, -- we believe strongly that the future growth is going to come from transaction growth, having said that I think that we will take some opportunities, pricing changes as we see to that but we don’t see that as of right now, do you have anything to add Mike. Hi thanks, first I would say congratulations to everybody, its really terrific quarter. One follow up and one quick one, the follow up was just Mike you just said that taking optimistic pricing increase as you today, going forward, can you just elaborate and what that being or kind of clarify that. Let me speak for Mike, that would be in the Abercrombie & Fitch brand as we have seen putting a lot more quality in to a specific product we have taken some prices up as we saw yet there instance the basic follow and going Abercrombie & Fitch the price was raised from $39 to $49 last fall because we just felt so much in to the product and saw that we could sustained as kinds of increase those kind of things will happen within the Abercrombie & Fitch brand, I don’t expect many of them to happened because I am very happy with the price levels there and we clearly and harvester in kids will stay exactly where we are in terms of price, thank you John. Great, thank I had a question on your CapEx numbers for 2006, you were a little fair that we are looking for and if you could just gives us some detail around that and why you are seeing such an acceleration in the CapEx that would be very helpful. That Kimberly this is Mike Kramer, I would be glad to answer that. As we've seen tremendous growth in all of our brands and we have to continue to build infrastructure for continued growth as we indicated $260 million is going to be targeted towards store build to remodels, on top of that there is $80 million that were going to be spend building another distribution center here on our campus in New Albany, Ohio. We’re also going to be investing significantly in our IT infrastructure as we continue to grow and see,-- that we need to enhance our business, more importantly we able to drive more efficiency in our business we go forward. I’ll comment beyond that we are initiating and investment program in the Abercrombie & Fitch flee, that I am very excited about as you know we have a fleet of stores that really started 1994 and we continue to update them rather than, to a go for total remodels. We are padding some really exciting elements to those stores over the next 6 months, we were spending approximately $30 million on the Abercrombie & Fitch fleet too updated to really enhance the store experience. We are spending $10 million in Hollister, which is essentially an expansion of the video wall system that is currently in that chain. So, between the 2 chains, $40 million to enhance the customer experience. Yes, thanks, question on the merchandized margin side. How they come in versus your plans for Q4 and do you think we should expect flattish merchandized margins going forward? Thanks very much. Brian, our answer to the second part of your question, you have been listening to me for about 14 years, and every quarter I have said do not build into your model of higher merchandized margin than we have achieved in the past and I will continue to say that. We hope we can do better. The first part of the question was against plans. We actually performed just little bit higher than our plan, but right on the mark. Thanks Brain. Yeah, thanks a lot. Can you talk little bit Mike about where you see opportunities for some further expense to leverage and we got some in this quarter, that was impressive but what’s is the track going out and will that potentially lead to some operating margin improvement in ‘06 versus ‘05 given that were still below peak margin, thanks. Well, we are going to continue to see some operating margin improvement at the store level, which we’ve indicated in the past. We are continually focusing on the same areas that I have discussed in the past, primarily store payroll and we are continuing to do that. Now, in terms of MG&A, there we probably will not be leveraging MG&A and tell probably latter part of this year, as Mike and I both indicated we are going to continue to invest in the business, we are not going to invest in the business at the rate that we did in the previous spring, but we will be continuing to invest in the business. Now, one of the areas that we are going to be investing in the business is IT and those investments are in churn, going to churn around, it will be able to drive some efficiencies throughout the organization in terms of headcount. So, again in short, we are focused on the same areas that we talk about in the past in terms of driving efficiency and then we are also going to try to CAP technology help us in that capacity. I think the biggest controversy of amongst the three it is your inventory levels Mike in anyway. So, I was wondering, if you could just give us some more detail on the subject maybe how clean it is, but even more importantly some details on how you pioneer going forward other than what you have given us, maybe when the turns are going to start increasing, again some thing like that? Let me take that on Joe. Our Spring inventories on an average to our Fall inventories on average sports store basis to last year, which for what percent, And they clean last year on an increased volume levels, we think they are extraordinarily fine. So, in terms of seasonal, fashion merchandize, extraordinarily clean, I think the whole inventory is very clean and let me take this opportunity again to discuss, how we look at our inventories. We planned them in different segments. We planned basic Denim as one category, where we've said that our markdown risk is appreciably less then impassion merchandize. Those inventories are extraordinarily well balanced at this point, you will see those inventories will be more efficient with those inventories as we move from this season in December and in this fall. The fashion basic component of our business is those back up to Denim that Denim inventories as you know we’ve invested in heavily, we’ve very happy with those inventories and their levels will in fact moderate as we go through the year. The second category is fashion basics, which includes polo shirts, applique logo, T-shirts those inventories are up to last year or own plan and its extraordinary clean. Third classification is personal care up to last year business performing very well, extraordinary we clean inventories we’ve cleaned our any non go forward fragments. The fourth category is fashion, this is the category that we control very, very tightly, because there is markdown risk in fashion. Fashion, consist of anything that has to markdown within a season, we would consider that to be to -- it include some Denim items. As we said in the past we take markdowns on fashion Denim as we saw we took markdowns on embellished Denim, we took markdowns on some fashion back parked denims and in the future we will continue to take markdowns on fashion Denim that would include our as we’re fix line which is a premium denim line but that is included in the fashion in acquisition of our business. We plan that inventory would downside in terms of the sales to protect their margin. So I am very, very pleased with our inventories how clean they are, and how we projecting go forward. This is Mike Kram, I want to add to that well I know the controversy out there exist, I don’t understand that given the large success that we’ve actually seen over the last three quarters. Again to state our past in terms of the strategy, you did see a significant amount of increase year-over-year two to three quarters ago. We believe that the increase presentation on our store also added to the sales volume, and the experience within the store. Again as you continue to see on a quarter-by-quarter basis, we indicated on this particular quarter an increase of 59% on a cost basis on a unit basis is in the low 40s when you saw 33% comp coming out of the quarter and as we’ve also stated we will continue to see moderation in that particular percentage. Thanks guys, Mike Jeffries as you reflect back on the past year. How do you spend your time on prior year, can you may be just talked about some of the differences from ’05 versus ’04 and also how are you thinking about it, going forward if there any changes in demand on your time, thanks. I spend my time, as most of you know, on primarily on merchandising and design in the business and have done so. We will continue to do so, I have spent expect more time this year on, I would say managing the total business as we run the business with a leadership group, very focused disciplined kind of way but the majority of my time is still spend on merchandising, design, marketing the business where I think I can make the biggest difference. We have an extraordinarily talented leadership team, functional leadership hugely strong in this business and the fact that we have very hands on control where I do at this point I think it has been hugely beneficial to this business. We as a team are marching in the same direction, and I guess make a lot of confidence in the future. Couple of quickies, one is will you comment on your comfort with Q1 consensus, which you think is $0.59 or $0.60 and what’s the realistic growth rate for the store and distribution expense in Q1, and then last one would be, in what quarter should inventory growth be inline with sales growth, in dollars? Hi Stacy, I'd like to just start comment, we'd rather not comment on key census, we provided our own range and we'd like to stick with that. Part 2, in terms of the store and distribution in terms of Q1, in terms of growth rate, we're actually going to see again as I said earlier on the call, we're actually going to see leverage, but in terms of growth rate, we're going to probably see the consistent cost with regards to the distributions center, but in terms of other store level basis, I would, build into your model as certain amount at the variable in a per store basis, I don’t want to really comment other than that. We've indicated in that particular line item, we believe that there will be on leverage, I just don’t want to give any more guidance just compare to that. Again, there is liability with regards to the payroll as long as you have models, they really good mix between our fixed and variable, you should be able to know that number providing the sales. Can you talk a little bit about the product process, you've mentioned before the facility that you building on your headquarters, in order to speed up the lead times and perhaps, give you better sense of product, how is that, is that impact 2006 and how do you see that in impacting in each of the businesses, thank you? Hi Dana, I think we'll start to see that impact on this year, I can't tell you how great an impact it will be because we are just getting on her feet with that, as you know it’s a really advanced center enables us to be technically superior in the product categories if we go after, and we would hope would, speed up time to market for each of the categories. We haven’t build anything into our model, that would cause for the result of that, but we should see some result, I can't tell you when. I'm very excited about it, Dana this is my time, I just want to congratulate you on your move, yes. Now what we haven’t quantified, I mean, what I can tell you is in terms of 2006, we're targeting another 6 stores. And what I will tell you is, excuse me, another one store, only one more store in terms of 2006. This is something that we were going to be, go in a very moderate phase. Depending on the success of the stores that we have in a ground today which we've indicated, we were very pleased with, and will continue to look at real estate as it presents itself, as you know, there are very few cities, with the population density that we would like, but we'll take a look at our strategy in Canada on a evolving basis. Could you give a little bit of an update on the internet business and specifically how is it relates to the international side of it and, if you can talk about that across the brands, Kid Hollister and of course the core Abercrombie brands. Well, in terms of e-commerce, we actually have recently in terms of the quarter we’ve actually seen the pretty sizable increase and, our sales year-over-year, not just expensive we’ve seen in our four wall stores, but we are recently pleased with the recent results and as we'd indicated on some of the past calls we’ve initiated some brand protection industries, that have impacted our International sales. In terms of International we’ve actually seen a slight decline because of that, but we will start anniversaring those initiatives that we put in place in terms in Q2, so, we anticipate a little turn around from that perspective. But again were very pleased with the result that we saw in Q4 and our direct in consumer business on a buy brand basis, I would say that the year-over-year growth was probably consistent with regards to our stores. What we are doing from a brand protections standpoints such as the point of reference plans we're reducing the content of sale items on the Internet, I think what we've seen is some of the international customers in buying a fairly large quantities we would also limited the quantities that they can order, just to protect the brand from being exposed to secondary market. I think this is a just a really good time to state again what we've gone public with, the amount of money that an effort we’re putting into protecting these brands, not only for the domestic growth of the brands but for International growth, it's a very serious enterprise as far as this point. Hi guys, Mike, to see the MG&A line, was actually sequentially down in the fourth quarter, is there anything to note there, and you've talked about continue each to invest in the first half in level out so, should we be thinking that based this the fourth quarter number, and then the second question is, a year-ago you were talking about closing those kids business, now you are starting to open, is it too early at this point to talk about how many stores you think you can have? Yes, well let me address the latter part of your question first is, we are very excited about our kids business extremely excited, and we actually think that the result that we’ve seen have really open this up to probably another 100 plus potential locations that we can expand the Abercrombie kids brand, we’re extremely excite about. Let's talk about MG&A expense in terms of the decrease rate. However, this was driven by the fact that there was significant amount of one time adjustments in Q3, let me remind you some of those. The severance package related to Bob Stinger which was roughly $13.5 million and then, we also had a success there ride of about $2 million, let me take those out of the equation is roughly flat and in terms of on a go forward basis, you are going to start, you are going to see a slight increase, as we continue to add an investment in our business, I indicated that we're going to invest some in IT, and we are going to continue to invest in Mike’s design in merchandise business. You just are not going to see any more near the rate that you've seen in the spring of that last year. I'm just have a follow up question about IT, can you talk a little bit of, what types of initiatives you might be looking at and then as far as options exempts clients to that $0.08 is equally spread out between the two quarters and is that kind of the run rate for Q3 and Q4. Thank you. It's actually the spread of that’s 123 is actually a 55, 45 split. You will see the run rate drop a little bit after that due to some investing, some of the stock options that were outstanding. So types of initiatives with regards, there is going to be a significant amount of the initiatives with regards to IT is, as we growing our business, prior to last year, we didn’t invest significantly in our IT infrastructure, with the significant growth that we saw and actually exceeded our expectations we’ve seen some cracks that we're actually going to invest and really take advantage of the significant growth in our business and profitability, reinvest in the business so that we can move the business forward. And in terms of specifics I don’t really want to get into that but rest of the share we are going to remodeling doesn't investments ensuring that were getting a pay back. Great job, great job on the inventories, every thing looks great. Just a couple of questions Mike, when I think about how is your comps in '05, I guess it was a combination of great fashion, higher average unit retails and I think to some extent the investment in the higher payroll, how do you look at driving comps in '06, do you see its much grow some average in retails or will you at the marketing expense for you also the in store service, or experience levels and how do you feel about the level of fashion units in the business going forward versus how you quantify it last year and then I have a question for Mike Krammers well thanks. Okay, you are, we are, I am very satisfied Janet with where we are in terms of the retails buy brand. I said that there might be slight increase within Abercrombie & Fitch brand, but I am not anticipating anything major, so the answer is we are going to grow the business with transactions. And will that come from new fashion or will that come from spending more in marketing to drive more customers, how do you see building manually And we don’t as you know drive the business with marketing, we drive that with fashion and the in stores experience and I would hope we are getting better at the in stores experience we have invested a lot more there we did last year although we should start to see some efficiencies with that expenditure and we are getting better at running the stores, I think the systems are better, we are running an operation that does a better job of getting good support from the customers I think the stores operate just a lot better this time than last year. We will continue to enhance that in stores experience just to doing what we now had a too better, I hope in terms of fashion I think we should definitely be able to drive the business from a new fashion point of view I think we're leadership position at this point. Having all said of that I don’t think we can expect the level of comps this year that we saw last year, however I am fully expecting them to be positive and good and you had another question for Mike. She is gone. Thanks Janet Great thanks, good afternoon everyone. I was wondering in light of the revised CapEx guidance and some of your more opportunistic goals for growing the Abercrombie Co. International trends, if that has any implications for the cash on the balance sheet, how you are using that now in the past given as a target or cash that you would like to maintain in your certainly well ahead of that. Can you give us some sort of how we should think about use this cash and whether not that target had moved, thanks very much. And I guess, I can answer that the target has not changed. I mean Mike is already indicated that we are going to be between $315 in terms of cash, obviously in term of the increase CapEx we feel comfortable with that is going to allow us to grow the business more and we talked about in terms of excess cash the strategy has not changed to the extent that we had excess cash, we may go back out of the market, so really the strategy hasn’t changed. Good afternoon congratulations. Quick question on wall, I think you have been planning for about a $20 million operating loss this year, do that pretty much come inline and I think you have said, you are expecting to be profitable by the end of '07. Did you give any guidance for '06? We did not give any guidance, we actually do have a glide past to that profitability in 2007, the $20 million did come to provision but we don’t plan on indicating few what 2006 is but we are well on that glide past in your earlier call which regards profitability in 2007 I have a bigger picture question and I wanted to know if you could comment on how you feel about the profitability of stores in Europe versus the stores in US that you are looking out with the crystal ball, what you think and do you think that once you penetrated the domestic market with Hollister, is that also be international brand, and your products been so hard, I know I am not look at lot of small questions, but I never ask questions, It’s a loyalty, if you haven’t apart of having a loyalty program I know you have to need it one you probably don’t but just anything that Its on the way, clearly there is an opportunity for Hollister International we see that with the opening in Canada, it is always been our goal that we would go there after we’ve learned our lessons with ANF, but clearly that’s, that is a huge opportunity. Loyalty program, we had a loyalty program of source that was not financial but that was kind of little bit financial within Hollister and we’ve just continued because this was not effective and driving the business there at all. To response to the European profitability, I will turn it over to Mike. Yeah I can actually handle that I mean again we’re working through our strategy for Europe but I had to be cornered I would actually say that the profitability in Europe will be consistent with US, may be slightly higher as everybody knows the labor cost in Europe are higher as well as our rent on a gross profit basis however the offset of that is the effect that due to the iconic nature of our brands we may be able to charge higher price when we do in United States, so again the other things become, but again we, I think that the expansion into Europe is definitely going to be even or creative to our current operating margins. Thanks I just had a quick follow up on the fourth quarter comp number, if you could break the comp increase or down by transaction and average you know retailer, average sellers sale by brand that will be really helpful. Thanks Yeah in Q4, Kimberly the transactions in adult business were up 12 and the kids business they were up 50 in the Hollister business they were up 23 and then average transaction value is what we preferred offer and average transactions in adult business were up 11 average transaction in kids business were up 9 and then Hollister up 10. I want to talk a little about where you’ve modified the press release assortment towards the cash, have you adjusted your thoughts regarding the accessories, handbags as a result of the shift more casual, can you talk about how the accessories are performing versus plan and you know may I guess, I have a follow up question after that. Okay it’s a really good question Barbara, the answer for the question is yes, we are clearly adjusting the handbags, to a more casual attitude in assortment and because I have to, they have to live together, I think our handbags have been beautiful but little serious for the business that we want to run. I think we have most to learn in the handbag business we are committed to that business we are selling lot of handbags, but we have to continue to adjust yet to the handbags driven more of casual attitude, with sports wear specialist, we are not handbag specialist but we are investing in the business and we will get it. The other question I have is, in the past Hollister operating margins at run had in the core ANF, this is happened in 2005 as well. Hollister in terms of adult comparison, to adult for this several year, it remains the same. Hollister is higher and our operating margins than a adult gross margins, excuse me. Well thanks good afternoon every one. I want to ask also about rule. You talked I think Mike last quarter about the difference in performance between the different location that you have opened, I think you call that sort of a peered performance some are terrific, some are good, one I think you talked about was, your expression with that also I think, but, I just wondered if you've been able to change thing there of the performance of those stores working more inline and, in terms a 8 unit you are going to open this year, are you trying any thing different or there it going to be all mall locations. If you could give us a little bit more color on what you are doing with this role this year? Of course, we're going to be small locations because we're the mall business that's where we do business. We continue to have five terrific stores and, one I caught to admit failure it's still bad, and we have not, although it's improving, it's not improving that a faster I'm afraid, all of the real stores are increasing their penetration to be ANF stores and there existing malls, but clearly there we have one that is still poor in relations to the volume potential in the mall, and once their and in five are really good. So I can't report to you that the core has got in really good but we're working on it. And I’ll add to that in terms of the age size for terms of 2006 were very, very excited about our real estate for the real brand in 2006. And, in this stores that we have bring on operate had, had really high penetration to the ANF stores, so we are very just above rule. Hi, I had two more questions first. If you could talk a little bit about the sales course grip for at the end of fiscal ’05, relative to peak and, when you take your get to peak and if you will be able to get back to take, and also Mike, if you could talk about the investment that was made in the higher still payroll, what’s the degree of success course on that, do you see continuing having the higher store payroll level or what requirements if you might make to that program, thank you? Two very good questions Janet first I’m actually what you bought up the sales first preferred. Our peak was actually generated back in 1999 and was about $505 per square foot, where the year all of our brands on average generated $464 per square foot, well on glide past towards that peak. One thing that I do want to point out those how the Hollister brand have exceeded that peak at $528 per square foot, so we are very excited about that brand, as well as all of our brands on the way to beating and exceeding that keep back in 1999. In terms of the investments in terms of our highest stock payroll absolutely do we feel that it's within that it's paid off the impact program paid off significantly, obviously the four coverage is paid off significantly as well in terms of sales, that’s we also indicated on several comment in terms of our strip, was that we saw reduce shrink, which we think that the enhance customer service actually added to that. So we're really excited about that on a go-forward basis, do you think that the payroll will be at the same levels that we have today. The payroll will be at a level consistent with the sales that are needed to get the efficiency that we want. We are continually looking at driving the same customers experience at a lower dollar. So we are going keep doing that but I got to tell you that these are paid off, and we are very excited about the success that we have seen and we hope that. You are seeing that same customer experience that lot of people having last year, which is been extraordinary. Any other questions. Ladies and Gentlemen, that will concludes today's Abercrombie & Fitch Fourth Quarter Earnings Conference Call. I'd like to thank you for joining us today. Wish you all good afternoon.

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Here’s the entire text of the Q&A from Cendant’s (ticker: CD) 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. I have a couple questions, and I'll make them brief. First, with regard to the spin-offs, these spin-offs are of a tax-free structure; there have been some rules in the past limiting the amount or focusing on the amount of time after which something can happen to one of these deals, these structures usually a year. Yesterday on your call you basically said that once these entities were free and clear what they were free to be acquired or whatever on their own. Is there going to be some prohibition of some time difference after the period of time that the spin-offs occurred? Jeff, the way the tax rules work is if you spin-off pursuant to a plan, a scheme, a wink or a nod, it's not going to be tax-free. Period, end of story. So we have no plan, scheme, wink or nod. No dialogue, no discussion -- if somebody approached us we would say go away. That said, the day these companies are public the boards of those companies could entertain an unsolicited offer from a potential buyer that had not begun prior to the date of the spin-off. And it wouldn't begin prior to the date of the spin-off because we wouldn't have dialogue with anybody. Because the last thing we need to do is to affect the tax-free nature of the spin. Hopefully that answers your question. Yes, it does. Question two, Orbitz and your GDS business -- I'm sorry Orbitz and your online business overall, how is it tracking in your opinion relative to your competitors domestically and internationally, given that you cited some disappointed because of the shift, the online off-line shift going on with regards to suppliers? Think you've got to be careful with percentages, Jeff. Let me deal with the easy one first. Ebookers is not tracking as well as our other international competitors are. And I think it is largely due to some of the problems we've had in conversion and a more difficult integration than we had anticipated. We do think that is interim and we do think that the transition to the Orbitz technology will, once again, ratchet up their bookings growth. Because as you know, the market is growing in the north of 25 to 30%. In Orbitz is where you've got to be careful of the numbers. Our merchant hotel numbers versus 2004 are up pretty substantially in the 35 to 40%. But recall measuring against a year ago Orbitz had just gotten into the merchant hotel business, so it has somewhat of a low base. So on a percentage basis we are probably doing better than our competitors. But I think overall we did fall short of our forecast, and I believe that the amount by which we fell short of our forecast is probably consistent across all the online services. As we've said before, that in periods of strong economic demand the chains domestically can aggregate their own demand, and they allocate less rooms to the online merchants, at least on a merchant basis. And my sense is this is consistent across all the online businesses. So we are down from forecast, but on a percentage basis we are up a lot. I'm sure up a lot more than the other online services. And on this point with regard to ebookers, what are the issues? You've talked about certain integration issues. Could you elaborate on that a little bit, and also perhaps talk about how if and when the integration finally occurs, if it is that late on in 2nd half of 2006, how is this going to help? In other words, are we going to see a bump from ebookers in the fourth quarter of 2006? Will it be -- up enough to move the needle? No, I think -- look, Jeff, you know we've seen ticks up in Cheaptickets conversion almost within three weeks to four weeks of implementing the Orbitz technology. The problems with ebookers are not dissimilar than we talked about a couple of years ago with Cheap Tickets. Its content and functionality. And I think that we are working as fast as we can to implement the Orbitz technology there. We are putting as much of our hotel content as we can on the platform, but the platform really can't support substantial amounts more of content. So you are kind of chasing your tail. And we are -- I guess the answer to your question is that I do think that we will have this done by the middle of 2006, and I do think it will impact the back half results. Okay. Next question, can you just give some idea obviously Sabre has made some mention of their beginnings of negotiating under the GDS renegotiations. Have you been approached, or have you approached your counterparts on this issue at all yet? There are dialogues that are ongoing with all of the suppliers, and I don't think it would be appropriate to characterize those at this point as anything other than preliminary. As you know, Jeff, Sabre has about a 50% share in the U.S., we are somewhere between 25 and 30. So they are at least in the U.S. the market leader on these issues. And I think more than that probably is not appropriate. Final question, car rental pricings, what type, and we would obviously we've spoken to Hertz on this issue in the past, they've had the same, the whole industry has the same problems that you do. You're not facing anything different. The question is the timing of when you can get pricing from both the consumer and the business side to get yourself in equilibrium with the costs that have gone through. I'm certain that interest rates have not helped here. At some point in time in 2006, though, you've got to get back to equilibrium on this because you can't sustain massive price increases without suffering something at some point in time. You're absolutely right, Jeff. You may recall in the call last quarter, we said that we needed another 5 to 6% price increase from where we would be at the end of the fourth quarter to offset the impact of the fleet costs. Additional interest costs probably mean that that means to rise another point. As to the timing of those increases, probably also not appropriate to comment. I would say that the efforts at raising business prices mid-term aren't getting as much traction across the industry as we would have hoped. I think people are selectively doing it across all their accounts, and certainly they are doing it at contract termination. So I would and it is really just speculation that you're going to have to move leisure pricing well before you move business pricing, or risk sort of a share war, which I don't think occurs to anybody's advantage. Finally, finally, finally, you mentioned that acquisitions on the real estate side are going to add about 6% to sides. You mentioned what your franchise sales were, but you did not mention how much franchise sales would be adding to your base in the franchise business. You say it's up 13%, but what will that add to your base in the franchise? Good morning, I'll limit myself to just two. I guess first, I was wondering if you can quantify the organic revenue growth for your order-maker business in the TDS. Specifically, I'm just trying to get a better handle of how those brands did, specifically Orbitz, Gulliver's, both in the gross booking and revenue margin trend. And then second, I guess given your outlook, the outlook we're getting now on home pricing, inventory backlog activities, how do those trends compare of your expectations on an organic basis, particularly in the fourth quarter in '06? So if were to adjust for the mortgage business in January, the new franchise signings and acquisitions that you and Jeff talked about, has the organic outlook for size and pricing changed on a go-forward basis? Let me see if I can take your first question first. The composite rate of growth across all of our domestic businesses for online bookings is 15%. Just given the relative -- the two businesses you're talking about are Orbitz and Cheaptickets. Cheaptickets bookings were up, I think, close to 20%. So Orbitz were probably at about 1 point below the 15% composite that we reported, maybe 13 to 14%. And those, as we measure it, the only organic number would be Cheaptickets because it was the only online platform we owned domestically in the third quarter of last year. But if you look at Orbitz' reported bookings when they were public last year in the third quarter and then compare them to where they are now, they are probably up 13 to 14% I think is the number. Transactions are going much faster, but again, it is mostly because of where we stand in the ramp-up of the merchant hotel business. You know, we are just -- they weren't in it until the middle of last year. So it is somewhat happiness is a low base. The organic, and if I were to take out your new contract signings, the new franchise contracts, the acquisitions, where do you see sides and prices looking on your core business? Well, I think probably NAR or Fannie Mae are better proxies for that. And they are projecting that sides will be slightly down and that price will be slightly up. So if you take it all together, you would say, okay, the pie is going to be basically flat, but we're going to get a bigger piece of the pie through what we consider organic growth which is new franchisees, as well as new NRT acquisitions, as Ron indicated, and therefore, our result should be positive. Hi good morning, could you just talk a little bit more about the Internet travel side? Short of a change in the tight supply for the hotel market, which we actually think could go on for two years and we are not the only one, Smith Travel, others think that. What changes the disintermediation or the secular decline that you guys are talking about that caused some of the shortfall? What strategies are you working on to either reduce your expenses or increase your revenues on that side of the business, so that you just don't have this secular decline to deal with for the next two years and that is the only -- and that basically drives your results for some period of time. I was not on. Steve, let me answer your question. We had a little microphone snafu here. I think as we have said before we actually don't believe that what is going on in the domestic hotel market is secular. We think it really is probably more countercyclical than anything else. You know, the domestic hotel chains dominate the landscape here, and they have the ability to aggregate their own demand. So when they can do that in times of good, strong economic times, they are going to go for it, I think when it gets a little softer than they'll provide more inventory because they are going to have more available rooms and they are going to want the eyeballs that we bring. So I would say that about the domestic market. The international market is a little different. The chains don't dominate the landscape internationally. And as you know, with Gulliver's we control some 25 million room nights a year and 90% of those come from independents who don't have the same ability to aggregate demand. So on a global basis we think that we are net ahead. Now what are we doing in times of stronger economic times when it is soft? The customer service aspect of what we do in online is an important part of it. I think winning the J.D. Power award actually has some very significant business impacts and more than just conference call fluff. That is a real item that people look to. The second thing is that you obviously up your advertising budget and try and drive your brand so that it is the first stop that comes into people's mind. And the other thing, which I think will ultimately differentiate us when we get fully integrated is access to our own inventory, which will continue post spin. We will put commercial agreements in place between all of our companies to be able to maintain that. Steve, I just like to add one thing to what Ron said. You and I have been discussing this for quite a while, and you are probably more right than you're wrong, but we generally take the term secular decline meaning something is going lower each year. I think it is fair to point out for the people on the call what you're really saying is that the rate of growth is slowing. And I think that is an important distinction that we want our investors to understand. Great, thank you. A couple questions. I know that your long-term strategy is to have leverage in the model; it is kind of services business and I think your EBITDA forecasts are higher than your revenue forecasts so over the long-term really didn't see the leverage in the model. I know hurricanes caused some of the lower growth in EBITDA. When do you start seeing leverage in the model again? That's a very good question because it is something that I challenged the team on a monthly and quarterly basis. Unfortunately or fortunately we had lots of benefits for one-time items last year, all which we disclosed, none of which recurred this year which typically a one-time item is all revenue and all profit. Which really obscure the fact that we did have operating leverage and our margins actually got better on an apples to oranges basis. Unfortunately, GAAP does not permit us to disclose that. But let us assure you that the operating leverage in our model is still there. Second question and then a final follow-up, it looks like the GDS margins were down. I know you were outperforming some of your peers in the GDS industry for a while on the margins front. What really is driving that? Can you give us any color on that? Well really they were running a lot of integration costs through that P&L. Once again, GAAP requires us to do that. 100 years ago or maybe five years ago we would have taken a charge, set it up separately and you would have seen the continuation of the strong margin. I think another answer to your first question, which I probably neglected to mention is that we have a mix issue also in that some of our faster growing businesses are lower margin, whether that is rental car, timeshare, I mean timeshare is growing faster than lodging, lodging is a very high margin business as a franchise or timeshare is 25% kind of margin. NRT is a 6% margin business. Real estate franchise group is an 80% margin business. So a lot of it is a mix issue, Justin. Okay, great. And then on the GS is there any specific thing you can point people to as far as integration technology spend, a couple big projects going on? Well it all really relates to the Orbitz, ebookers and Gulliver's acquisition and where you take the headcount out. And for the most part, a big chunk of the headcount that has been taken out has been on the technology side. And that was resident in Galileo or in the GDS, and that is what is impacting it. The other thing over a longer term that is impacting margins is that we used to lease a fair amount of equipment to our subscribers, travel agents. And that is very high margin business. And over time travel agents have replaced our terminals with personal computers. And so and this is really an ongoing trend, this has been going continuing on a downward track since 2002. But every year it ticks down, and this is probably 80+ margin percent business. Last question, Henry, we have a couple people really want to know why you really want to be with the travel business; I think you're going to head that business up after the split. What you're most excited about that and why you picked that one to really be the leader of going forward. Well, I think the New York Times this morning actually summarized it very well. Any of our leaders could run their businesses without any help from me. Sam and Richard do not have any specific public company experience, or in Richard’s case, lots of capital markets experience. In the case of TDS, it is probably our, as you can tell by the amount of questions and by Ron's commentary, it is probably the business which has the biggest upside, including RCI and our Vacation Rental business, but also has the most challenges. And frankly, it is too big a job at the moment for any one human being. So that is where I'm going to spend my time helping Sam with that business. But I do not intend to be there forever. So this is a year or two post spin and then I am quite certain that the existing management will be quite able to fly without me. Thank you. I guess continuing a little bit or following through on some of the comments on the online travel, particularly domestic, could you give us an idea of the marketing efficiency and also the trends in conversions? Mike, you know, it is hard to comment on our marketing efficiency largely because we are in the build phase of our merchant hotel business. And I would be loath to say that the efficiencies we are getting would be mirrored once we are at steady-state kinds of numbers. So I am just reluctant to use a number. The management would tell you, Mike, and I'm sure they have, that we have a greater share of wallet than share of voice. But I don't know that we can on this call give you empirical data that would be statistically valid. As Ron says we're growing up a very low base so the numbers are somewhat skewed favorably; that you probably should not interpolate for five years from now. Conversion is actually up a couple of tenths on Orbitz. Orbitz actually converts I think in the high fours, low fives depending on the time of the year. And it has ticked up as we've added more content. But there hasn't been appreciable gains. Like we saw, frankly, when we converted Cheap Tickets over to the Orbitz platform. The Cheap Tickets experience was very positive. We moved the conversion rates very similar to Orbitz from somewhere that was like 1 or 2%. I think if you check with Expedia they will tell you they also convert about 5%, and that seems to be about the rule of thumb for the industry. And can you talk -- I guess obviously the Holy Grail is to pick that up, which means doing more CRM kind of things. Can you talk a little bit about what you're doing in that connection? Well we like everybody else, yes, you are right, that is one of many things. Obviously content is important, functionality is important, customer satisfaction is critical. We are doing all of that as Ron has mentioned. It is also important to increase your rate of attachment. As you know, that means selling more than one product during that service. We are using the travel link database, which is really our CRM in the sense of knowing where people are going and then e-mailing them and asking them if they need something else that we can book for them through Orbitz or Cheaptickets or both. So we are going in the right direction. And again, I want to repeat for the people on the call these businesses are doing very well. They just not are doing as well. We have a very aggressive forecast based on assumptions which were valid at the time, based on our EBITDA increases through the month of June and July. The trends really reversed themselves based on the second London bombing. And have become exacerbated since then. They are still growing. They are just not growing at -- as Ron said they are growing in the mid 20s, not the mid 30s. Can we switch to real estate? Can you give us at least some idea of the sensitivity to your total real estate business of say one million change, or 100,000 change in existing home transactions? Well, I think it depends on where it comes from. You know, the incremental revenue in the franchise business ought to drop to the bottom line about 90%, Mike. So if you go through the math on sides and average price and figure out what the commission is and then taken an average royalty rate of 5%, that incremental revenue ought to drop through at a rate of about 90% and conversely if it goes down, it is the same relationship, the overhead there is fairly fixed. And on car rental, could you give us the leisure price increase and the commercial price increase number or percentages, and where that -- where those prices are in October? I don't have the October data right in front of me, Mike. Hold on. For the third quarter, Mike, both commercial and leisure were on a year-over-year basis down about 2%. The one offset to that is on the leisure side our length of rental was up about 1 or 2%. So it didn't really have much impact. But again, the critical part in sort of understanding where the business is going, as I said in the call, is sequentially from the second quarter to the third quarter prices were up 6%. And is Enterprise, Enterprise has been reported as not going along with the corporate rate. Is that what is really killing that opportunity? Enterprise is not relevant; they really don't have any corporate business, so it is more PR than it is actuality. The corporate competitors you need to look at are Hertz and National. Our market share with theirs is like 98% of that market. Enterprise is a very small player in the commercial business. We have no further questions in queue at this time. I will turn the conference back to Henry Silverman for any closing or additional comments. I just want to thank you for your patience with us yesterday and today. And we will see you on the next conference call, which will be in 2006. Bye-bye. 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_233831

Good day ladies and gentlemen and welcome to the Fourth Quarter Year-End Conference Call. My name is Michelle and I will be your audio 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 presentation. Operator Instructions. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to host for today’s call, Ms. Bonnie McBride, please proceed ma’am. Thank you. Good afternoon everyone, and thank you for joining us today to discuss Zoran’s fourth quarter and full year 2005 results. And each of you should have received the copy of today’s earnings release. Joining us today from Zoran’s management team are Dr. Levy Gerzberg, President and CEO; Mr. Karl Schneider, Joint Senior Vice President of Finance and Chief Financial Officer; Dr. Isaac Shenberg, Senior Vice President of Business Development. Before we begin I would like to remind you that during the course of this conference call we may make forward-looking statements regarding the market for the company’s product, revenue projections, the outlook for our manufacturing capacities and new product development and certain trends affecting gross margins and operating expenses for future period. I wish to caution you that such statements are just predictions and actual results or events may differ materially. Please refer to the documents that company files from time-to-time with the SEC. These factors contain important factors that could cause the company’s actual results to differ materially from those contained in our forward-looking statements. I would now turn the call over to you Levy, please go ahead. Thank you Bonnie and good afternoon everyone. The fourth quarter will mark the end of a very successful year for Zoran in which we achieved many key objectives. In our Mobile division, revenues from digital cameras grew over 217% annually as we substantially grew our market share. Annualized revenue from DTV grew 75% and we are quickly establishing ourselves as the leader in this market. In Imaging, we maintained a stable steady stream of revenues and profit, introduced multiple key products and secured our position in the growing photo printer market. And in DVD we greatly improved the financial model as a result of our continued success in providing increasingly feature-rich solution for the evolving market while reducing overall systems cost. Throughout 2005, we secured many, many design wins across all product lines from major companies such as Canon, Dell, Epson, HP, Kodak, LG, Olympus, Orion, Pentax, Philips, Ricoh, Samsung, Sharp, Toshiba, Xerox and Xoceco among others. The impact of these achievements is translated into a much stronger company with continual increases in profitability from our well-diversified revenue base. We are looking forward to additional successes in 2006. Before moving on to discussion of the quarter, I wanted to talk about another major event of the run, which we announced just last week. There was illusion for our case against MediaTek. As we announced on January 26, 2006 Zoran will receive an initial cash payment for licensing fees as well as ongoing monthly payment related to royalties. In addition, we expect to resolve a separate litigation against MediaTek and United Microelectronics Corporation within the next 30 days. Now on to an update of our business. In digital cameras we once again achieved record revenue for the quarter securing new design wins with two tier one customers. Their ongoing strength in demand for our COACH solution in top tier manufacturers drove continued design-win activity and we are confident we increase market share. A significant portion of revenue came from our COACH 8 processor with numerous design wins, some of which we go into mass production with top tier manufacturers during the current quarter. We began demonstrating the COACH 9, which offers enhanced image quality and increased performance along with many other new features to customers during the fourth quarter and already have commitments from some key players for future designs. We will be launching these innovative new solutions at the PMA show in February. Pricing in digital camera market continues to decline somewhat as the markets matures. However, as a result of the innovative features and a favorable product mix with our COACH product lines, our ASPs actually increase during the year. In addition, many digital camera makers are experiencing margin pressure and are more interested in OBM solutions and replacing the expensive Captive ICs with more cost effective high performance solution from Zoran. We expect this trend to continue and enable further market share gains in the future. In our multimedia phone market segment, we continue to achieve design-wins in China and Korea. We received initial sample of the APPROACH 5c, a highly innovative multimedia acceleration processor, which offers a wide range of features while maintaining its cost effectiveness. We re-launched this product in the upcoming 3GSM show in February and are very excited about the potential in the high growth multi-feature phone market. Results for the Imaging business came inline with expectation, declining somewhat due to seasonality. The trends in the market however are favorable and we believe this business will grow in 2006. The continued growth of digital photography is driving increasing demands for snapshots photo printers and photo capable all-in-one, with OEMs aggressively pursuing new features such as Bluetooth wireless printing and automatic red eye removal. Our Quatro product line is a fully programmable DSP for image processing making it well suited to accommodate new proprietary features. Also surprising in the images, one and only segment continues to be a key competitive issue, we are pursuing a strategy of increased integration with our latest generation Quatro product with 4050 and with 4200. Our primary focus going forward will be on these new ICs and we expect several new designs based on them including inkjet all-in-one and (indiscernible) printers to reduce shipping over the next several quarters. In the enterprise or office segment market, new products based on our IPS 7 software were introduced during the quarter and we expect to see many more throughout 2006. Our IPS 8 which will be available in the third quarter includes our new interpreter for Microsoft new document format to be included in the next major release of Windows operating system, Vista. In DVD, revenue results were inline with expectation while profitability improved. The improvement was due to a favorable mix including strong sales of our higher margin Vaddis 8 processors in an increasingly wide range of products such as portable home theatre in a box and premium DVD players. Nearly all of our customers has transitioned to the Vaddis 8 with the exception of a few making very high-end products using Vaddis 7. They are likely transitioned during 2006. Early this month, we introduced our latest generation Vaddis 9 processor, which has transit the full range of DVD application and is optimized for the growing portable market. The introduction of this product delivers on our strategy to improve margins in our DVD business by continually introducing innovative new products with lower system cost. Customer’s acceptance is already strong with many getting ready for mass production in the coming months. We expect to transition customers to this new product during the year. Another significant achievement was our introduction of a new generation of our Activa DVD recorder chipset, a solution designed to meet the demands for our customers at affordable price level. The Activa family now includes the high-speed integrated drive electronic interface to enable full personal video recorder functionality. We continue to lead the DVD combo market and see increasing demand in particular for DVD plus audio or SACD as well DVD portable. In addition to top-tier customers we’ve mentioned in the past, we are now shipping all these DVD processors to LG, Philips and Samsung. Our HDMI product continues to be in a very high demand across multiple geographies exceeding our expectation. In DTV, our strategy to address the foreign market including CRTs, flat panel and set top boxes with technology that served high-end, mainstream and high volume end markets is coming to provision. In addition, our advance technology in this space has already positioned us to be a leading supplier to the growing DTV market DCU and in the future. In HDTV, we successfully launched our SupraHDTV processors into production for new TV product from several top-tier OEMs. At CES, company such as Philips and Orion demonstrated mass market ATC compliance CRTs based on a combination of our SupraHD 640 and Cascade 2 ICs. We expect this new compliance market created by the FCC mandate to grow rapidly during 2006 and our overall position with our product offering and customer base to capture large portion of this 25 inch and above market. We are extremely pleased with the market acceptance of our SupraHD 660 IC. This SLC demonstrates the high level of integration required to become a leading supplier in the integrated TV controller and MPEG video recorder market. Our customers are particularly attracted to the quality of the analog video processing and scaling performed by this SupraHD IC. At CES this product was demonstrated in production in SCV television from Sanyo as well as by key manufacturers such as Xoceco. In addition, we are seeing renewed demands for our Generation 9-Elite product as a result of its strength in the emerging market for high definition PVR system for the Japan cable market as well as for the growing digital TV market in Australia. Existing and previous customers are coming to us to address this demand and large cable set top box companies such as Humax and Homecast have already demonstrated new product. Zoran’s Cascade 2 demodulator product line achieved significant growth during the fourth quarter. This IC family is shipped to many of our SupraHD customers as well as into the tunnel network interface module market. Major suppliers including Semco, Sharp and Thomson are now in production. Our HDTV product line exceeded our expectations during the quarter as many of our customers secured new export business for free-to-air set top boxes for markets in the UK, Spain, Germany and other European countries through major regional brand such as Grundig and Goodman. These product line continues to grow market share and revenue for Zoran and is successfully being deployed inside flat panel television supporting the DVB-T standard. Several of our customers are currently designing products to address this market and already two Xoceco and Acer has introduced models to be shipped under well-known brand. The low-end DTV market has two significant growth drivers. First, is the FCC tuner mandate, the next tuner mandate must to know March 1, 2006 when all mid-sized TVs 25 inches and larger manufactures or imported into the US must include ATSC digital TV tuner demodulator and decoder. By March 1, 2007 a 100% of TVs regardless of size and 100% of VCR and video recorders – DVD recorders with a TV tuner must also meet this requirement. The second growth driver is the DTV transition wave, which is nearing Passage. At last report, the House and the Senate have agreed that February 17, 2009 is the last date for TV stations to complete the transition to digital broadcasting. This transition from analog to digital TV should begin on January 1, 2008 as TV stations start returning their analog licenses to their government and licenses for the free spectrum will later be auctioned off generating up from $30 billion. For the industry and Zoran, these are excellent developments since we are already working with several manufacturers to these conservative workers to meet potential demand once the compression starts the program is rolled out in early 2008. In addition, in December, we announced the availability of two new reference designs for DVD recorders with integrated support for digital broadcast standards: one is ATSC compliance for the US; and the other offers DVD for Europe. We believe these factors coupled with continued success across all of our products in DTV business are enabling Zoran to emerge as a leader in the existing and fast-based digital television market. Before turning the call over to Karl, I want to reiterate our enthusiasm for Zoran’s achievements for the quarter and for the year. Our strength across product lines was prominent at CES where over 100 new products were on display. We are now executing on all our key objectives, diversifying our business and revenue stream, increasing profitability, growing market share and taking a leadership position in all our target market. We look forward to updating you on our continued success in the coming quarter. Karl? Thank you Levy, and good afternoon everyone. Revenues for the fourth quarter ended December 31, 2005, were $109.3 million, a 7% decrease from the $117.5 million reported last quarter and $46.1% increase from the $74.8 million in the fourth quarter of 2004. On a GAAP basis, our net loss for this period was $2.1 million or $0.05 per share on 45.2 million common shares compared with net income of $5 million or $0.11 per diluted share on 46.6 million common and equivalent shares for the previous quarter, and a net loss of $30.1 million, or $0.70 per share on 43.2 million common shares for the fourth quarter of 2004. Included in the GAAP net loss for the quarter were charges of $13 million related to the company’s amortization of certain ongoing acquisition related expenses such as the amortization of purchase intangible assets and deferred stock compensation. Excluding these charges are adjusted non-GAAP net income for the fourth quarter was $10.9 million, or $0.23 per diluted share on 47.1 million common and equivalent shares. This compares with non-GAAP net income of $18.1 million or $0.39 per diluted share reported last quarter, and with a non-GAAP net loss of $16.3 million or $0.38 per share, for the fourth quarter of 2004. For the full year of 2005, total revenues increased 4.5% to $395.8 million compared to $378.9 million for 2004. Our GAAP net loss for the year was $27 million or $0.61 per share compared to a net loss of $47.4 million or $1.11 per share for 2004. Non-GAAP net income for 2005 which excludes amortization of acquisition-related purchase intangibles, deferred stock compensation and in-process research and development charges from reported operating expenses was $27.5 million or $0.61 per diluted share, compared with $2.8 million, or $0.06 per diluted share for 2004. Hardware product revenues decreased sequentially by $8.8 million or 8.4% during the fourth quarter to $95.4 million. This decrease was primarily the result of seasonal declines we typically experience in our DVD business. Software royalties, licensing and other revenues increased by $600,000 or 4.5% to $13.9 million during the same period. Revenues by product families for the fourth quarter of 2005 were 34% DVD; 34% mobile; 18% imaging; and 14% DTV. This is clear evidence that our diversification strategy is working when compared to the same period last year which was 50% DVD; 28% imaging; 14% mobile; and 8% DTV. Sales by geographic region during the fourth quarter were 38% China; 26% Japan; 16% Taiwan; 12% US and Europe; and 8% Korea. Overall gross margin for the fourth quarter was 54.5%, this compares with 54.3% last quarter and with 25.8% for the fourth quarter of 2004. Our gross margins remained strong in the fourth quarter as DVD margin excluding any benefit from the release of inventory reserves continue to improve even faster than we had expected. Our DTV margins also showed improvement over the previous quarter as we began shipping our new SupraHD par. Product revenue mix, which included a solid showing of 34% from our mobile product family driven by COACH also contributed significantly to our gross margin results. During the fourth quarter the benefit to our gross margin derived from the release of inventory reserve associated with Vaddis 6 was less than 100 basis points measured strictly on the change and the reserve account. We are no longer benefiting from the sales of previously reserved Vaddis 6 inventory. Research and development spending increased by 2.6% in the fourth quarter of 2005 to $24.1 million from the $23.5 million reported last quarter. Compared with the same quarter of last year, R&D spending increased 15.9% from $20.8 million. This year-over-year increase in R&D spending can be primarily attributed to the acquisition of Oren Semiconductor. R&D spending tends to fluctuate from quarter-to-quarter based on the timing of major engineering related expenses such as takeoffs, which include map set and engineering wafers. Selling, general and administrative expenses increased by approximately 12.4% to $24.5 million in the fourth quarter from the $21.8 million dollars reported last quarter. Compared to the same quarter last year, SG&A expense was up 44.1% to $17 million. SG&A increased during the fourth quarter as we took a precautionary measure and increased our allowance for accounts receivable by $3.5 million to cover slow paying account. This is a non-recurring charge and we believe will be recoverable in future quarters and as our conservative approach to potential risk associated with increasing business in certain regions of the world. Moving over to the balance sheet, cash, cash equivalents and short-term investments increased by $19.2 million to $149.3 million from $130.2 million reported last quarter. Cash generated from operations during the quarter was $17.7 million. Accounts receivable ended the year at $70.2 million, a decrease of $10.5 million from the $80.7 million last quarter with DSOs decreasing to 58 days versus 62 days in the previous quarter. Inventory balances at the end of the quarter increased to $32.6 million from $27.3 million for the previous quarter. Inventory returns for the fourth quarter were approximately six. I will now address the Company’s outlook for the first quarter of 2006. During the Q&A session, you are encouraged to ask any questions that may not be covered during the course of our comment as we do not anticipate having to provide any financial guidance after this call. Before we provide any forward-looking guidance, we want to remind you that any forward-looking statements related to revenue projections, gross margin expectations, and all other comments on the expected financial results for Zoran are just predictions. Actual results may differ materially. Our guidance for the first quarter of 2006 excludes, I repeat, it excludes the benefit and the resulting tax impact from the proceeds to be received pursuant to the agreement entered into with MediaTek in connection with the recent settlement of patent litigation. The following outlook is based only on Zoran’s expected results from core operation. The settlement proceeds will have a positive impact on revenue and other income in the first quarter as well has a possible impact on our tax expense for Taiwan tax that maybe withheld. For the first quarter of 2006, we currently anticipate the revenues will range between $103 and $106 million, or down approximately 3% to 6% from fourth quarter levels, which is a smaller decline than we normally see during this period. Overall gross margin should range between 50% and 51%, excluding any acquisition related cost and option expense under FAS 123(R), which we will adopt in the first quarter. Operating expenses are expected to range between $46 million and $47 million. Acquisition related costs are expected to be approximately $13 million. The GAAP net loss for the quarter is expected to range between $0.18 and $0.15 per share; excluding our acquisition related costs which are not considered part of our core operating expenses and option expense under FAS 123(R). Non-GAAP earnings for the quarter are expected to range between $0.10 and $0.12 per share on approximately 47.5 million shares. With that we’ll open up the call for questions, operator please go ahead. Thank you, sir Operator instructions and our first question, sir, comes from the line of Jason Pflaum of Thomas Weisel Partners, please proceed. Maybe just to start on the outlook there, can you talk generally about where you seeing the better than seasonal strength of it, is it coming mainly from your DTV business or is it a combination of several businesses? That will be helpful, thanks. Yeah, Jason, I think we expect a little bit of strength in the TV business. We expect you know our Imaging business to run in the flattish range of course and then DVD is the one that’s typically down a little bit in the first quarter and then our mobile business we are expecting to be down slightly in the first quarter. Okay, and then as far as the gross margin, given some of the mix consideration of DVD down, DTV up, I guess that one would expect, what is expected gross margins to be a little bit higher if you could just talk about what’s behind some of your gross margin guidance there? Sure, one of those primary guidance, as I mentioned in the prepared remarks, you know, our mobile group had played a fairly significant part of the strong gross margins. We do anticipate that going forward COACH margins will come down. I think we are fairly consistent in that message. We are seeing improvement in DVD margin, and so it’s primarily a product mix issue right now. Hi, congrats again guys on another good quarter. I just got a couple of questions, I guess, the first one is following upon your Karl your digital still camera comments. Looks like with camera about 34%, 35% of fourth quarter sales, its really becoming looks like your biggest business maybe going into 2006 if we are thinking of it the right way, something of it with the right way, you know, usually lot of drivers there maybe I don’t know what’s your comment or what you think organic growth is in that market and maybe comment on what penetration rate is right now for merchant supply versus what you think it might be by the end of the year? Yes, Rick the number of drivers for our growth in this market. First of all our market share is growing, there is no question about it and there are several reasons for it. One, there is a definite transition from the captive solutions to the merchant solution and we started to see it already and as we said we have a number of new first few customers, players in this market using our solution. So, this is one driver, second we have new products that are we believe superior. They are very competitive, very cost effective, many new features and that has the growth of market share, in addition to it the entire market is growing. The estimates are that this market will continue to grow about 10% ’06 over ’05. And another driver in this market many new features, high resolution, consumers are switching, reflecting their cameras, the new cameras and all in all we believe that a percentage of the captive to answer your last question is down to about 40% it used to be this time last year it was probably close to mid 60 or closer to 60%, now it’s 40% captive, 60% merchant and the number of merchant is increasing and we are growing with it. Oh, by the end of this year we believe that the percentage of the captive solutions will be even smaller. We will approach the 30% and we know it will stand, because we are working with some of the main players in the market and we see where they are going. That’s great, and then just a quick follow-up on DVD. It sounds like DVDs its going to be down sequentially like it usually is. Is it down less than normal, I mean are you guys seen any inventory out there from any, you know, any competitors have any inventory in the channel? That’s my last question, thanks. No, we do not have any inventory problems or build-up in the DVD market and channel, as you found, we think that if there will be any decline from this seasonal decline between for many, many years in Q1 then starts to take off again. And we believe that with our new product from the market the Vaddis 8, the Vaddis 9, the Vaddis 7 also, we’ll see a good momentum into the year. Hi guys, obviously it’s a bit difficult for you guys to quantify what kind of benefit you are going to get from the MediaTek settlement. I am wondering if you could, you just help us clean up our books in terms of how much you’ve been charged over the past several quarters in terms of the legal cost? Okay, Brian I’ll do, I’ll do my best to quantify that for you. In 2005, towards the second half, of course our legal cost came down a little bit; the trials were in the first half of the year, so on a cumulative basis during 2004 and 2005 the total legal costs that we paid were somewhere probably approaching $15 million. Okay, and I know this is a, you know, bit of touchy subject, but you went through on the inventory write-off sent and how you had less, I guess than a 100 basis points benefit in the quarter. How much benefit did you see from the written-off inventory in terms of, you took a charge, and then how much did you sell it or what the net delta there? I guess, we have to add it up, I mean basically buying we ended up selling almost all of that inventory but I don’t have the total benefit in front of me, but we ended up selling all that inventory in 2005. Sure, just wanted a clarification and then a couple of questions, the Vaddis 6 inventory now just for clarification that is totally gone, there is no more benefit going forward? Okay, great, and then second, sort of following on Brian’s question about the legal expenses, I mean, seems to me you had some higher legal expenses in ’05 with MediaTek as well as the MediaTek UMC suit expected to settle in 30 days, it would seem me to that legal expenses going forward should come down plus you talked about $3.5 million bad debt expense included in SG&A in the fourth quarter. So, I guess I am surprised at the OpEx number is roughly flattish, its down a little bit but you know still fairly high, I mean, I would probably you would see a bigger decrease in the first quarter. So I am just wondering if you can kind of go through some of the OpEx guidance? Well, first of all, the OpEx guidance, remember last quarter I think we guided about $44 million to $45 million and if you take the $3.5 million that we put away for accounts receivable reserve, we are actually at about $45 million. So yeah, we also expecting that there will be some benefit going forward in legal but it’s not, you know, it’s over yet. I mean we have recovered quite a bit of cost up through, you know, the first quarter as far as getting the settlement done, and if you remember what Levy said in his earlier comments there is still another piece to come. So, that being said, the other thing it will drive up some of the cost in Q1 is primarily related to the number of engineering case outs in the light that are in the quarter. As you may remember, we are actually transitioning to some 90 nanometer technologies and so some of the takeoffs that we are going to start experience are little, that we are going to experience going forward are little more expensive than they have been in the past. So, all in all we were expecting OpEx to be up a little bit. Okay, but CapEx tend to be lumpy and legal expenses once MediaTek UMC is wrapped up may go down, so this maybe… Okay and then just the last clarification on, you’ve mentioned two new tier 1s for the COACH product, both of those tier 1s ramping in the March quarter, is that what you said? Yes, they are in production now and we will start to ship soon, but we are not in a position to disclose the remainder. Good afternoon, and thanks for taking my question. Just on the DVD pricing front, can you give us an update on how pricing is rising? Sure, actually DVD pricing was not too bad in the quarter. We saw an ASP, actually in the quarter, ASPs declined sequentially, actually ASPs on player declined less than 3%, so DVD ASPs are pretty strong. Got it, and can you discuss your design win visibility for DVD recorder chips in 2006 and what type of contribution you take back in May again I am just, whether you think that DVD segment overall can be a growth segment in ’06? Yes, the DVD segment is going to grow, we see a growth this year 2006, both in the player segment, primarily because of our many, many new design wins with the new products that we have of course in the recording, you asked about the DVD-R in particular, actually both DVD-R and in the playback, we have a segment which is the premium type of players and recorders that we are in. Also we see a very nice growth in the portable DVD player market, and we believe that our market share there is increasing rapidly. As far as the recording is concerned, we did show at CES, number of new platforms and we have a number of new designs. Actually the Thomson, Combo DVD-R and hard drive has been receiving many awards for the best quality in this class of recorders, the best quality solution, and are more our first view and second view’s accounts that we have designed in, you will hear about them in the coming month. So we see a nice growth for us in both segments this year. Nice quarter, gentlemen. Can we talk a little bit about your Vaddis 9 processor? Can you refresh me specifically, I want get an idea as to how we look that ramping. Can you comment on design-win activity and product placement for this, is this clear, is this strictly for the portable market or this is applicable for other products as well? Actually the Vaddis 9 is optimized for the player of market in general, in particular very attractive solution for the portable because of some of the features, including low power consumption and HDD drive capabilities, direct drive capability that it has and we designed this product, actually mainly for the low end part of the market, the course of this product is very attractive. It’s very compact integrated device and we believe it will be a very successful product this year, the demand for this product is growing. So, we believe that in the second part of the year this product will probably be the majority, we’ll content the majority of the applications and the models that we are in probably on 60% or above. Okay, okay thanks. Obviously, it’s a very cost effective, competitive type of a product, but is there any pressure to your aggregate ASP line as we transition to the Vaddis 9 product? Well, you know the low end part of the market is always subject to ASP declines, although we’ve seen the platform, you know it’s not going down so rapidly as in the past and we’ve designed this product to address that. So, even if ASP will go down this product will help us maintain a good margin. And we’ll enable our customers to reduce the system cost at the same time, that’s the nice thing about it. And a great job on the quarter. I had a question on your long-term outlook on margin, have they changed given the improvement that you are seeing in DVD? I don’t think long-term it’s changed, Jennifer as I’ve mentioned earlier I think we expect camera margins to continue to be under pressure and those were pretty high in recent quarters and so they will come down. So, maybe if you look, you know, in our long-term slide in our quarter presentation it seems like 46% to 48%. I think we go out long enough, you know, that’s the kind of where it needs to go. I think in the near-term we can see it remain a little bit higher than that. Okay, and then kind of relating to that, can you just talk to your annual ASP declines that you are signing up for 2006 maybe in the various business segments and TV versus and DVD and then camera? We can give you some general ranges, I think as we just stated on DVD, we don’t expect to see ASP’s decline be significant going forward. We are experiencing maybe, you know, 2% to 3% a quarter on DVD player. I think with the new Activa product we are going to actually see ASPs go up because it’s a more integrated part. We expect probably on the camera side to see ASPs come down a little bit, but not tremendously. When you look at our television business, and you look at the mix as we go forward Supra HD versus Gen 9 there is going to be a fairly significant ASP decline because the Gen 9 is the $25 plus part versus the Supra HD, which is less than $20 part and so as we transition to that we are going to see ASP decline there. But, overall even if we take the TV we expect the impact on gross margins to actually improve as we transition to Supra HD its a better margin part. Hi, this is Heidi Poon calling in for Tore. Karl, could you comment on perhaps your multimedia phone product. What’s your expectation for that product in ’06 and what is the margin profile? Well, the expectation for the product line, which we call approach is very positive. It’s all going to be a huge win for us, yes. This is mostly a 2007 business but we see a significant growth this year in these product line. We actually experienced a nice growth during 2005. Again on an absolute basis a new trust is that this will become a major revenue contributor in’07. Yeah, the margin profile on the legacy of COACH products that we have been selling up to this point, the margins are not that great, they are fairly low, more like the DVD products we had a year ago. However, with the new APPROACH 5c which is what’s going to drive the revenues into 2007 and beyond the margin profile is a much improved margin profile back closer to the corporate averages. Yes, as we mentioned in the prepared comments, we see that the Imaging business will grow in 2006 actually in two areas. First of all, in the household area with our new Quatro solution, we have a number of new design-wins and some of them are from first year, our customers and we see it going up. And of course on the enterprise side of the business is softer, we are encouraged about the current business continuing to grow in the new operating Microsoft operating system Vista, which we described a little earlier that we would be compliance to this and it will generate new business for us. So, the imaging business will continue to grow. It shows a very fast growing type of market, it is steady growth and quite profitable. I think you guys have talked about in the past about doubling the DTV business in revenues this year. Can we maybe a assumption that to hit the $100 million revenue mark for the DTV business there has to be a steep increase in DTV revenues sometime in the second half of this year and if that’s the case what would give you confidence at this point about such a revenue ramp in the DTV business in the second half? Have customers with whom you have design-wins have they kind of shared their volume targets for second half of this year? That’s correct, your last question is correct. We have a broad design-win base, existing customers, we are in very close contact with them and we are confident that our business will grow significantly as you said especially in the second half and based on these existing design-wins and also we see happening in the markets with our new product is a very competitive. And, I mean these customers, do they already have the market shares in the DTV space to support their volume forecast or are these guys kind of hoping to increase their market share in the second half? Actually, we have tier I customers with a very good market share today and of course we are focusing on those accounts that are very aggressive, we have been trying to increase on market shares going forward. So we are focusing on both and in this market similarly to other markets that we are in, we see a very fast move from some of the testing solutions. Those companies that make the TV and their own chips or SOC is moving to their merchant solutions like Zoran so we are not talking about totally newcomers into these markets, talking about real-known brand names and strong players. Hi good afternoon, nice quarter guys. Just hoping you could clarify the outlook for the DVD business that you gave. It was kind of my presumption that with the Generation 9, I am sorry, the Vaddis 9 ramp that your blended ASP would come down over the year. So can you give us a sense of what you expect for unit volumes for the whole market as you have in the past. And then in terms of market share, should we expect things to remain equal on the player and then do you pick up some incremental market share on the recorder side? A - Levy Gerzberg ` Actually, we believe that our market share will increase both in the player side and on the recorder side. In terms of overall market size, we were still waiting to get the final data, which we believe that it was somewhere in the range of 125 million to 130 million units and we believe that our market share is somewhere in the range of 27% to 30% and growing. Now as far as the ASP that you mentioned, the fact that we are major player both in the premium DVD players, the feature-rich machines as well as portable enables us to maintain a pretty good ASP. Now, of course in all these market space peak is going down but we do not believe, it will be what we have seen in the last couple of years, it’s not so stable now. No, no, no, no. I said that’s only on the player side, and I actually think that on the recording side as we transition to the Activa, the new integrated part we are going to see ASPs goes up. Okay. And then on the digital television business, can you just give us a sense of the licensing side there, you had some, you know decent revenue in the past quarter too. Is that been growing for you guys? And what we will be expecting in 2006 there? Including our DTV division, it is a pretty stable business; it is a strategic business for us. We do not expect to see a major growth in this as we continue. So for the last several years actually it has been pretty steady. Well, you know, we are trying to diversify the revenue, and trying to balance it out. So I think when its all set and done what we will see in 2006 is we’ll see DTV come up as the percentage, as we are expecting that business as was mentioned earlier to double, one of the callers. We expect, you know, some growth in both the DSC market and we expect a little bit of growth in the Imaging market, so I would think that, you know, DVD would remain somewhere in the low mid-30’s, I think DSC stays somewhere in the low mid 30’s, I think or actually it comes down a little bit, both of them probably come down closer to 30 and I think TV goes up from the teens into the 20s, someplace and in imaging since there is not a huge growth there, we’ll bring up or make up the difference. Okay, and for inventories, the inventories been trending up just a little bit over the past three quarters, can you give us the insight into both lead times and to – what might be caused that inventory increase? Well, I think inventory increase – I don’t think the increase was very significant. I think if you go back in the previous quarter, especially I think we ended Q3 with very low inventory levels. Our turns were really pretty high for a semiconductor company. I think the level we are at today is more reasonable. We do see that capacity is tightening up a little bit, lead times are pushing up, so I wouldn’t be very alarmed about the increase in inventory at this point. Hi guys, a couple of clarifications with regards to the MediaTek, you mentioned briefly that there was going to be a tax impact from Taiwan, should we look at the settlement between ESS and MediaTek as a good proceed for what the Taiwanese are going to take off the top? I don’t know if we can do that. I think there is potentially a withholding tax on some of the money coming back across; there is an exemption applicable for that. It’s a little bit early to speculate on what the exact impact is going to be. Okay and the pending settlement that also involves UMC, without giving us, you know, too well, love that great clarity but whatever you can give us, with regards to the relative side, is this a bigger or smaller more strategic type of settlement, what can you tell us about this pending one versus the one you just closed? Okay, and then last one, would the inventories, you know, obviously not allowed, but just kind of inching up, can you maybe help us out with the composition of those inventories are they waited towards one area versus another and what kind of checks do you guys have in place to prevent the kind of write-off we saw by the year ago? Actually Brian, the inventories are actually fairly balanced across the product family. So, we are watching them very closely, you know, we are hoping that - I think the bigger challenge is going to be, you know, in the least in the coming quarters given what the fabs are saying is giving parts in a timely basis. So, we are not too worried about accumulating inventory to the point where we have to write it off. Also Brian, we did not anticipate the discontinuity that we saw in DVD market towards the end of ’04 were about 40 companies who went out of business in China overnight because the Chinese government basically shut them off and some of them their own inventory was dumped all over the world, part of it illegally. But, we do not see it happening, we are increasing our focus on first year account and we feel quite confident that we have a much better feeling, the feel and visibility in the market than before. Can you talk a little bit more about gross margin, guidance and the mix there? But the guidance, it does imply pretty significant reduction from your current quarter, which is very strong, can you give us a little bit more detail as to how we should be thinking about that kind of going forward now in Q1, but going forward as to whether it should be more along the lines of your guidance along Q1 or is it kind of trend upward depending on mix? Thanks. Well, Adam I think – I think for gross margin going forward, you know, we had a pretty good fourth quarter based on mix again I think it is indicated by the mobile results which the COACH chip has a very strong gross margin today, we believe that does trend down on a quarterly basis going forward. We expect that DVD will make a comeback and become a more prevalent in the mix we expect that to grow. We don’t believe of course the DVD margins are not going to be up at the 50% level. So, as those come back, we expect that to impact margin and as, you know, as TV becomes stronger in the mix, we will see that the TV impact our margins and the TV margins are still probably closer to the mid 40 kind of a range versus the mid 50 kind of range where COACH is sitting today. Hi, can you give us an idea of I may have missed this, what’s your tax rate likely to be in’06? From a pretty conservative point of view not including any tax that might come as a result of this MediaTek settlement, we expect the tax rate to be no higher than 20% and now that it in all probability it would be lower than. Hi, thanks for taking this, just a clarification on the inventory and gross margin issue. You said you had a 100 basis point gain in the quarter from the Vaddis 6, was that meant to be the Vaddis 6 or any kind of inventory were out in the quarter? Thanks. No, I think what I said is the benefit in the quarter was less than a 100 basis points that didn’t even make it to a 100-basis points and that was strictly the change in the reserve account we are associated with Vaddis 6. And so the number is rather small and the total change in the reserve account was not much larger than that. And by the way, that reserve account changes every quarter, it’s only the quarters when it gets large like it was when we were dealing with Vaddis 6 inventory that it becomes the something that you guys see. Hi guys, with the Vaddis 9 out, do you see a chance that the MediaTek, and Sunplus will have some kind of a matching product coming out in the next two to three quarters that may force you to affect prices on Vaddis 9 instead of using the cost advantage to improve your margins? Well, this possibility is always there in our market, but based on what we see right now nobody is on the market with a product like this, of course they may always introduce a product like this and we always built into our model some price decline because of competitive pressure or otherwise, so it’s always possible, but we have not seen it so far, did see or at least for this class of a product in terms of integration and features. And Karl, if I could clarify something about the settlement with MediaTek, you are not including that in your guidance for the first quarter but then you will start to get the cash payments within this quarter, correct? And how will you guys be creating that? Will you include the royalty payments within the pro forma, and then exclude the one-time payment from the pro forma? Well, that’s remains to be same; I guess what I can tell you is it’s based on how that looks now, the forward-looking royalty payments, the quarterly payments we are going to be getting will be in the revenue line. It will not be pro forma out. The upfront payments will come and be on the other income line, as most likely where those will land and I don’t intend to pro forma them, but you will be able to see them on that line. Ladies and Gentlemen, this thus concludes the question and answer portion of today’s conference call. I would like to turn the presentation back over to Mr. Gerzberg for closing remarks. Thank you very much everyone for joining us, and once again we are very pleased with our results for the fourth quarter in the year. And we believe that we are well positioned in each of our core markets for solid growth in 2006. We will be presenting at the following investor conferences in the upcoming months; The Thomas Weisel Technology Conference on February 7th in San Francisco; The CIBC Israeli Technology Conference on February 27th in New York; The Wedbush Morgan Conference on March 2nd in New York; The Montgomery Technology Conference on March 15th in Santa Monica; and CIBC Annual Technology Conference on March 16th in Vail, Colorado. We hope to see you there, thank you very much and goodbye. Ladies and Gentlemen thanks for your participation in today’s conference call. This does concludes the presentation and you may now disconnect, have a great day.

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Here’s the entire text of the prepared remarks from AutoZone’s (ticker: AZO) fiscal 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. At this time all participants are in a listen-only mode. After the presentation we will conduct a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Before Mr. Rhodes begins, the Company has requested that you listen to the following statement, regarding forward-looking statements. Certain statements contained in this presentation are forward-looking statements. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, and similar expressions. These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties including without limitation competition, product demand, the economy, the ability to hire and retain qualified employees, consumer debt levels, inflation, weather, raw material costs of our suppliers, gasoline prices, war and the prospect of war including terrorist activity, availability of consumer transportation, construction delays, access it to available and feasible financing, and our ability to continue to negotiate pay-on-scan and other arrangements with our vendors. Forward-looking statements are not guarantees of future performance and actual results, developments, and business decisions may differ from those contemplated by such forward-looking statements and such events could materially and adversely affect our business. Forward-looking statements speak as of only the date made. Except as required by applicable law we undertake to obligation to update publicly any forward-looking statements whether a result of new information, future events, or otherwise. Actual results may materially differ from anticipated results. Please refer to the risk factor section of the Form 10-K for the fiscal year ended August 27, 2005 for more information related to these risks. In addition to the financial statements presented in accordance with Generally Accepted Accounting Principles, AutoZone has provided metrics in this presentation are not calculated in accordance with GAAP. For a reconciliation of these metrics, please see AutoZone's press release at the Investor Relations section at www.autozoneinc.com. This is the conference call to discuss AutoZone's first quarter financial results. Bill Rhodes, the Company's President and CEO, will be making a short presentation on the highlights of the quarter. The conference will end promptly at 10:00 a.m. central time, 11:00 a.m. eastern time. Mr. Rhodes, you may now begin. Good morning. And thank you for joining us today for AutoZone's fiscal 2006 first quarter conference call. With me today is Brian Campbell, Vice president of Investor Relations and tax. I hope you've had an opportunity to read our press release and learn about the first quarter's results. If not, the press release, along with slides complementing our comments today, are available on our website, www.autozoneinc.com. Please click on quarterly earnings conference calls to see them. Now, let's go into the results. I am pleased to share with you the Company's fiscal 2006 first quarter results. During the quarter, we completed the rollout of many initiatives designed to improve our customer's shopping experience. While the full benefit from these initiatives was not immediate, we are pleased with our progress to date. This resulted in improved sales trends, but lower operating profit and operating margins. We remain focused on managing our financial metrics, while appropriately building a stronger platform for future profitable earnings growth. I am extremely proud of our AutoZoners and their efforts, through three hurricanes, and all their aftermath, our AutoZoners performed with a renewed sense of effort and pride, that permeated throughout the organization. For the 12-week quarter, we reported sales of 1.338 billion, an increase of 4% from last year's first quarter. Same store sales, or sales for stores open greater than one year, were up 1% for the quarter. Gross profit as a percentage of sales for the quarter was up 72 basis points, while operating expenses as a percentage of sales increased by 220 basis points. This resulted in an operating margin of 15.3%, down 148 basis points from last year's quarter. Operating profit decreased 5.1% versus the prior year. During the quarter, we experienced additional expenses associated with the hurricanes and the introduction of FAS 123-R share-based payments. Excluding these operating, excluding these items, operating profit decreased 2.1%. Net income for the quarter was 114 million, and diluted earnings per share decreased 2% to $1.48 from $1.52 in the year ago quarter. Excluding this year's expenses related to the hurricanes and option expense recognition, net income was down 3.3%, while earnings per share were up 1.2%. Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 23.2%. We continued to ensure every incremental dollar invested in the business generates returns that significantly exceed our cost of capital. We have not and will not deviate from our efforts to optimize shareholder value, over the long term. We continue to be physically prudent with our investments while optimizing our earnings per share. Now, I would like to talk about DIY sales. Total domestic retail sales were up 4% for the quarter. During this quarter, we continued to focus on driving sales and profits over the long term. Our customer research and sales results over the past two quarters continued to reaffirm that, what we have always known. Our customers are looking for us to provide them with trustworthy advice. Our customers have told us to focus on the basics which are incorporated within our AutoZone pledge. Based on our pledge, we introduced several customer service initiatives. I would like to take a moment and address their successes. First, I stress that we were working to improve the customer shopping experience by optimizing both the number of off-shelf merchandise placements, and sales floor product placements. This included reducing the number of displays to improve customer flow and placing product on our shelves that are compelling and easily obtained based on the job the customer is planning to do. The results of this initiative have been extremely positive. Our customer feedback has told us our stores are easier to shop, additionally our AutoZoners have a renewed sense of pride in their stores. Throughout this quarter, we have reset the sales floor in approximately 2,250 of our stores. We have provided dedicated resources specifically for this one-time effort. Besides improving the customer shopping experience, the resets will reduce the costs associated with planogram changes in the future. We will finish up in the second quarter, and then it is back to business as usual during our busiest selling seasons, the spring and summer. Second, we have continued to refine and improve our guided initiative that we introduced in February. This initiative is designed to provide our customers with the broadest offering of parts and accessories to meet their needs. Simply said, it allows us to say yes to our customers. We have significantly improved our ability to provide the right parts for our customers. Our customers are saying they like what they've seen. Just one example of these enhancements was the rollout of our performance catalog. We can now offer an additional 79,000-plus SKUs to accessorize vehicles that were not available just last quarter. Third, I talked about reducing the amount of fringe items or nonautomotive items in our stores. By and large, the goal of this initiative was to reaffirm to our heavy DIY customers that we are a company focused on providing the parts and products they need to maintain and accessorize their vehicles. While we carry nonautomotive items, we have to also make sure that we're stocking the right inventory for our core automotive customer. Our current inventory in stores reflects this initiative and we'll continue this evolution throughout fiscal 2006. While the removal of certain nonautomotive inventory has had some negative impact on sales, it was only minimal. We're focusing on what we do best. Selling automotive parts and accessories and providing trustworthy advice. Fourth, I discussed a renewed emphasis on training, including a specific emphasis on our culture. During the quarter, we held what we called WITTDTJR meetings what it takes to do the job right for all AutoZoners, the meetings focus on our cultural practices to ensure customer satisfaction, focusing on things like Drop/Stop 30/30 where we greet the customer within 30 feet or 30 seconds of entering the store and WITTDTJR, providing our customers, with the parts, products, tools, and advice they need to do the job right. I'm pleased with the traction we have gained on continuing to build on our very rich culture. Our efforts will be never-ending. Fifth, I mentioned we would be building cohesive messages throughout our stores focused on specific jobs, like helping customers perform routine maintenance to improve their gas mileage. This theme as well, has not and will not change. We continue to believe if we take care of our customers with the advice and service to help them improve the lives of their vehicles and maximize their mileage, we will be well positioned. Additionally, we continued with a renewed focus on our Duralast add campaign. We're continuing to build the Duralast brand and you can only get it at AutoZone. Our new loyalty card program was created to recognize and reward our very best customers. Again, we want to be the only auto parts retailers our customers shop. We are excited by the results to date, and by the potential for this program. As those of you who know us well understand, we test everything before rolling it nationally, and this program was no different. The results this past quarter ran consistent with the results of our previous two tests, the program has driven increases in both ticket and traffic, but it continues to be too early in the test life cycle to declare victory. The first test expired in November. But we have decided to offer it again for six more months. Lastly, I talked about expanding the hours of operation at many of our stores, this test has modestly increased our sales, while requiring an investment in store labor. But it ensures that we are available for our customers when they need us. This initiative was born of the belief that we must be the most convenient choice our customers have when shopping for automotive parts and accessories. As I said last quarter, we're listening to our customers, and our 50,000 AutoZoners. We are focusing intensely on the basics, simply put, excellent customer service and superior execution. With the recent trend in gas prices, I thought it was important to address the point of higher gas prices and the impact they're having on our business. We do continue to see the correlation of gas prices to our same store sales. When prices neared $3 a gallon, for regular unleaded, this was not good for our customers, or our business. However, we continue to feel that we can do things to generate sales through internally generated programs and initiatives that can offset much of the negative impact on our customer's loss in disposable income, and it goes without saying, we're encouraged by gas prices coming down more recently. During periods of high gas prices, we expect our customers to only be able to temporarily defer maintenance, and ultimately to adjust their spending to take care of deferred maintenance. During the first quarter, we estimate that weather had a modest positive impact on our sales due to warm weather across much of the country. We believe the warmer weather, the warmer fall weather helped to offset some of the challenges caused by higher gas price, and the hurricane-related damage. Regarding miles driven, we saw September slightly down versus last year, however that is not surprising considering the higher prices of fuel. We also reviewed preliminary October numbers showing a continued slight decrease. Preliminary November numbers are showing improvement over the previous year. Let me remind everyone of the two statistics we've always felt correlate most closely to our business performance. Miles driven, and the number of seven-year-old and older vehicles on the road. Both have continued to trend in the industry's favor. We don't like to spend considerable time focusing on the impact of gas prices or weather because neither is controllable by us and weather impacts will normalize over time. We do monitor these situations to ensure we are providing our customers with the advice and products they need to service their vehicles. We believe over the long term, that if we execute our game plan, we can overcome any effects of gas prices or weather. Regarding pricing across the industry, we have not seen any material change in the competitive landscape. While we have seen some cost increases driven by higher commodity prices, overall, consumer price inflation in Q1 was in the low single digit range. Finally, we've been updating all of you over the last several quarters on our inventory levels per store, and what we're doing to ensure we've got the right parts available for our customers. Our inventories finished at $495,000 per store, versus $507,000 per store in last year's quarter. This represents only a slight decrease from last quarter. We are determined to invest in one of the most important drivers to both attracting and retaining our customers, parts coverage, but we are also focused on making sure we don't have the wrong merchandise in the wrong stores. Optimizing inventory levels in this business is one of the keys to success. We continue to leverage our hub stores and project guidance to ensure we have the parts and products our customers need while optimizing our returns. We will continue to focus on having the right merchandise available by individual store to satisfy our customers. Let me update you on some of our efforts to drive sales. We continued our strategy of offering good, better, best selection for many product categories. This involves introducing our own brands. Our customers have embraced these brands and today, we believe that Duralast and Duralast Gold products are among the strongest in reputation as well as sales volume in the automotive after-market due to their quality and overall value. We continue to take advantage of trends by introducing new automotive products to optimize sales and profits, but these new products are focused on our core categories of merchandise. Just some examples of this include our expanded wiper blade line, replacement hose lines, and additional coverage in ride control. We will continue to be relentless on innovation. Over the course of 2006, we will be launching a new selling tool in our stores. That tool is called Z-Net. Z-Net is a new and significantly improved version of our parts lookup system. It continues to leverage our unique and robust proprietary parts catalog while allowing us to leverage some of the recent advances in technology. This system will ensure the same fast service to our customers, but will also leverage product graphics and detailed repair information to allow us to provide our customers with greater levels of trustworthy advice. This system is nearing completion and will be piloted this quarter and rolled out to the chain in the second half of this fiscal year. Finally, we announced this quarter will be renewing our sponsorship with PPC racing, Kenny Wallace and the number 22 car in the Busch series of NASCAR. This has been our first-ever sponsorship of a NASCAR team and we are pleased with the excitement it has generated in both our customers and our AutoZoners. As for results, it is too early to tell. This initiative, as any other, will be monitored to determine its effect on our business. However, it is one example of how we are trying new innovations to reach our customers and it is clearly focused on our core customers. For the trailing four quarters, sales per square foot were $248. This statistic continues to set the pace for the rest of the industry. Our new stores are on track to achieve at least a 15% IRR, and we continue to see an opportunity to open thousands of additional stores in the United States. We opened 33 new stores in the quarter for a total of 3,612 domestic stores. Unfortunately, we still have 13 locations closed in the Louisiana, Mississippi, and Texas markets, due to hurricane damage. Growth in square footage continues to be on pace to run in the mid single digit range for the year. We also relocated three stores this past quarter and we continue to see opportunities to expand this initiative in the future. Now let's move to commercial sales. For the quarter, total commercial sales were down 2% from last year's quarter. We now have the commercial program in 2,103 stores supported by 123 hub stores. We have been very focused over the last three quarters on refining our commercial programs to run profitably, and this quarter showed improvement. Last quarter, I spent time updating everyone on our PDA device rollout. This tool is allowing us to make technology a core competency in our commercial business, similar to the DIY business. We're now tracking transactions from their inception to completion, and we're understanding where some of our biggest potential for profitable sales growth exists. We're acting on this information today. During the quarter, we launched new tests related to our commercial business. These tests are focused on leveraging our strengths, and responding to customer feedback. While these tests are small, and relatively new, we are pleased with our learnings to date. Our model continues to be differentiated by unique high quality brands, our ability to service our customers efficiently, and effectively, and finally our national footprint overlay for many chain customers. Our customer research continues to tell us the most compelling reason we can give a professional customer to use us is delivery reliability. Simply said, get me the parts I need when you said you would get them to me. The hub stores continue to provide us with fast replenishment of critical merchandise to support both our commercial and DIY businesses. While our commercial business has clearly not performed up to our internal expectations over the last several quarters, we believe we have a winning game plan and a team in place to execute that plan. We will be consistent with our initiatives in this business. We will build it right for the long term. Many people have asked me over the last quarter, if this is a much harder situation than previously thought. I believe there is no reason whatsoever this business should not be a contributor and a strong one at that to our same store sales results over the long term. If we execute on our objectives, we will succeed sooner rather than later. This business continues to be a strong profit generator for us, and provides outstanding returns on invested capital. With only about 1.5% of the commercial sector's business, we still have significant opportunity to gain market share in this business. We can and will grow this business over the long term. But we will ensure we do it profitably, to drive shareholder value. Briefly talk about Mexico. Our Mexico stores continue to perform well. We opened three stores during the quarter, which now gives us 84 stores in Mexico, compared with 3,612 in the U.S. Our ongoing commitment remains to prudently and profitably grow the Mexico business. Lastly, let me say that while we had been disappointed with our sales over the past several quarters, I am encouraged by what we accomplished this past quarter. I'm excited about what I'm hearing from our AutoZoners, and our customers. I am confident we are on the right track to produce continued superior returns for our shareholders. Now, I will turn it over to Brian Campbell to take us through the remainder of the income statement, cash flows, share repurchases, and the balance sheet. Brian? Thank you, Bill. Regarding gross profits, gross margin for the quarter was 49.0% of sales, up from 48.3% of sales in the previous year's quarter. We continue to be successful in partnering with our vendors to offer the right products at the right prices to our customers. This effort includes supply chain initiatives, tailoring merchandise mix, the continued implementation of our good, better, best product lines all allowing us to price our products appropriately and give our customers great value choices. Additionally I would be remiss if I didn't point out our fuel cost increased over last year's quarter. This alone represented a 6 basis point decrease to gross margin in Q1. We believe there continues to be some margin expansion opportunity, albeit a slower pace than the previous couple of years. We believe we continue to have opportunities in working with our vendors to lower costs and provide the best selection of merchandise for our customers at the right prices. Our initiatives do more, our initiatives to do more direct importing of merchandise from foreign suppliers, has begun to gain some traction. Up to this point, AutoZone has bought virtually all its goods from U.S. vendors that may or may not be buying from foreign sources. We are increasing our efforts to reduce our costs by going straight to the manufacturer where appropriate. This initiative was launched last year and it will take some time to build. As we discussed last quarter, we expect to begin seeing the benefits during this fiscal 2006. SG&A for the quarter was 33.6% of sales. Up 220 basis points from last year. The increase was due to several events and specific actions. A $2.8 million charge or 21 basis points related to charges incurred due to damage in Louisiana, Mississippi, and Texas, from the different hurricanes. The new $3.7 million charge or 28 basis points related to adoption of the FASB 123-R share-based payments program. We purposely spent more dollars as well on our stores to address our customers' needs. This initiative involved expanded hours of operation, ensuring clean, well merchandised stores. Some investments we are making now don't have a current quarter payback but they are necessary we ensure we provide an excellent experience for our customers to deepen the relationship with them. Some of these expenses will be ongoing, but others will not. For example, we spent a substantial amount this quarter resetting our stores. Removing excess fixtures and resetting sales floor planograms. Occupancy costs were up materially versus last year as well as reported in our press release, depreciation and rent charges were up. In fact, a combined 49 basis points as a percentage of sales versus last year. This was driven by our continued investment in new stores, our own versus lead store mix, higher property tax costs, and maintenance on our existing stores. Let me stress here we will continue to relentlessly manage our costs and we have implemented many projects that have allowed us to lower costs over time, and pass the savings on to our customers, and shareholders. We invested in these initiatives because we believe they will help build profitable sales for the future. We are validating these expenditures through extensive testing and monitoring. The majority of the spending in the quarter is variable and we are controlling these expenditures. We will spend appropriately for the long run. As we said last quarter, we expect these investments to take approximately 6 to 9 months from the end of last quarter to gain traction and we continue to hear, to adhere to that time line. While we are encouraged by our early wins, we will have to execute for the remainder of the year to validate our strategy. Again, I would like to recognize the entire AutoZone organization for their continued efforts to efficiently manage our resources. Cost control will be a continued focus for us. EBIT for the quarter was $205 million. Down 5.1% over last year. Excluding this year's hurricane-related charges and the adoption of FASB 123-R, EBIT for the quarter was down 2.1% versus last year. Interest expense for the quarter was $23.7 million, compared with $21.8 million a year ago. Debt outstanding at the end of the quarter was $1.790 billion, or approximately $35 million less than last year. The increase in interest expense reflects both the ongoing effort to term out the Company's debt on a long term basis as well as the year-over-year increase in short term rates. Our debt levels were maintained in line with our guide of 2.1 times our trailing 12 month EBITDAR. We have purposely managed our capital structure relative to our cash flow in order to maintain our credit ratings at investment grade while optimizing our cost of capital. For the quarter, our tax rate was 37.0%, equal to last year. Net income for the quarter was $114 million, down 6.7% over the prior year. Earnings per share for the quarter of 1.48 were down 2%, on 77.2 million diluted shares. But again, this year's hurricane and share-based option expensing excluding those items, earnings per share were up 1.2%. Regarding the cash flow and balance sheet, in the first quarter, we generated $128 million of operating cash flow, and repurchased $9.8 million of AutoZone stock as part of our stock repurchase program. We will continue to repurchase stock as long as it accretive to earnings and consistent with our 2.1 times adjusted debt to EBITDAR liquidity target. For the first quarter of this year, we reported yet another industry leading ROIC of 23.2%. Looking at the balance sheet, inventory per store on the balance sheet which excludes pay-on scan inventory was $455,000, versus Q1 of last year, of $464,000. Accounts payable as a percent of gross inventory finished the quarter at 90.1%, slightly below 91.5% last year. We fully expect to improve on this ratio by the end of this fiscal year. This quarter, we reached a total of $149 million of inventory on payment scan which in accordance with GAAP is not reflected on our balance sheet. As we have stated previously, pay-on scan is about aligning the interest of vendors and AutoZone and is one of the programs we used to achieve our financial goals. Total working capital was $156 million, versus last year's quarter balance of $118 million. We will continue to focus on minimizing working capital, as this reflects our ongoing focus on increasing cash flow. Net fixed assets were up 8% versus last year, capital expenditures for the quarter totaled 58 million, and reflect the additional expenditures required to open 36 new stores in this quarter, maintenance on existing stores, and work on development of new stores for upcoming quarters. Depreciation expense, it totaled $31 million for the quarter. As of November 19, 2005, AutoZone continues to be one of the few players in our industry to have an investment grade debt rating. Our senior unsecured debt rating for Standard & Poor's is BBB+ and we have a commercial paper rating of A2. Moody's investor service has assigned us a senior unsecured credit rating of Baa2 and a commercial paper rating of P2. We continue to be comfortable with our long term debt ratings and leverage ratios. Now, I will turn it back over to Bill. Thank you, Brian. Let me take a moment and comment on the hurricane-related events of this past quarter. Our first priority after the storms passed, was to focus on locating our AutoZoners, ensuring they were safe and helping them with their personal recovery efforts. As a result of these storms, over 160 of our AutoZoners lost their homes. We provided extensive support to our AutoZoners from continuing their pay, for those AutoZoners unable to work in the weeks immediately following the storm. To allowing any AutoZoner to work at any AutoZone store across the country. We had over 180 AutoZoners working in other stores all across the country. We also utilized the AutoZoner assistance fund to provide immediate financial assistance to our AutoZoners in need. In total we had over 125 stores that were impacted in some form by the storms. Sadly, 13 stores remain closed due to the damage suffered. While we experienced some financial impact from the storms, I cannot tell you how proud I am of all of our AutoZoners for their extensive efforts to get back to some semblance of normalcy after these awful storms passed. I would also like to address an announcement we made a few weeks ago, regarding our distribution facility in Lafayette, Louisiana. We announced to our AutoZoners in that facility that we would be closing it in January. This event will affect the lives of approximately 300 AutoZoners. However, we have and will continue to work with each and every AutoZoner and have offered each of them the opportunity to relocate to our distribution center in Terrell, Texas. The decision to close this facility was appropriate from a cost perspective. We will be transitioning most of the stores previously serviced by Lafayette to the new Terrell DC and we will be able to absorb that increased volume without disruption. I would personally like to thank our AutoZoners in Lafayette for their great service to our stores over the past 14 years. Now, as I said on last quarter's call, that we were disappointed with our sales performance. This quarter, we experienced some improvements in our trends. We have launched many new initiatives that we believe over the long term will improve our performance. Many of our initiatives are focused on the basics of our business which we believe are the most compelling to our customers. Our business is simple. Treat our customers right, inspire, motivate, and give our AutoZoners the tools they need to succeed, and execute flawlessly. The most powerful tool we have is our unique AutoZone culture. Customer service is our key point of differentiation. And AutoZoners across the Company are committed to providing that service to every customer. Let me say we must continue to make AutoZone the best place to shop, as well as a great place to work for our AutoZoners. It's simple. It is about treating people with respect, and in return, results will follow. As I noted earlier, we are making investments now that we expect will deliver improved results over the long term. Some of those investments will not have an immediate payback but we know they are the right things to do for the long term in this business. How do we know? We know because as always, they've been tested. We have an incredible organization, and a very, very proud culture. We are pleased with our AutoZoners renewed commitment to our culture, that they exhibited this past quarter. We remain optimistic about the future, as we will focus on continuing to educate our customers on doing those simple things that while preventative, can mean great savings down the road. Also, as more and more of our kind of vehicles are on the road every day, we continue to be very bullish about our future. We believe our business is acyclical. We are simply in a stage in our life cycle where we have to rededicate our organization to focus on the founding principles that brought us wonderful successes and will guide us into the future. We have all the tools we need to grow profitably for the future. We have the best management team in the industry. We continue to demonstrate industry-leading financial metrics. Being a disciplined company, we have proven our abilities to manage costs appropriately, and invest in incremental initiatives that exceed our stated 15% after tax IRR hurdle rate. We are focused on operating this company to profitably grow sales, efficiently deploy capital, and optimize long-term shareholder value while maintaining the highest levels of ethics. I thank you today for letting us share with you our company's past accomplishments and touching on our exciting new initiatives. I'll look forward to keeping you abreast of our results well into the future. Now, I'd like to open up the call for 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_233833

Good afternoon my name is Jean and I will be your conference facilitator. At this time, I would like to welcome everyone to the Akamai Fourth Quarter 2005 Earnings Conference Call. All lines are placed on mute to prevent any background noise. After these prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press "*" then "1" on your telephone keypad. If you would like to withdraw your question press "*" then "2" on your telephone keypad. Thank you . Ms. Smith, you may begin your conference. Great, thank you, good afternoon and thank you for joining Akamai Investor Conference Call to discuss our fourth quarter and year end 2005 financial results. Speaking today would be Paul Sagan, Akamai’s President and CEO and JD Sherman, Akamai’s Chief Financial Officer-Elect, Bob Cobuzzi, our retiring CFO will also be available during the question and answer portion. This call will discuss information about Akamai’s future expectations, plans and prospects that constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including but not limited to unexpected networks and service interruptions across loss of revenues, increased expenses or diversion of recourses, selling and increase our revenue, retain our significant customer or key product expenses consistent with revenues. Inability to realize the benefits of our net operating loss carry forward, inability to effectively integrate the Speedera Networks into our existing business or realize expected benefits for the acquisitions to lay into developing or failure to develop new service offerings and functionalities and its developed lack of marketing acceptance of such service offerings and functionality. And the other factors that are discussed in our annual report on Form 10K, our quarterly report on Form 10Q and other documents periodically filed with the SEC. In addition, any forward looking statements represents our estimates only after today, it should no be relied on its representing our estimates as of any subsequent date. Well, we now like to update forward-looking statements at some point in the future, we specifically disclaim any obligations to do so, even if our estimates change and therefore you should not rely on any forward-looking statements as representing our estimates as of any date subsequent to today. During this call, we will be referring to some non-GAAP financial measures, as we believe, it will helpful in understanding of our financial results and operations. These non-GAAP measures are not prepared in accordance to Generally Accepted Accounting Principles under the news and publications portion of the Investor Relations section of our website, we redefine these non-GAAP terms and reconcile our non-GAAP financials with the most directly comparable GAAP financial measures. Now let me turn the call over to Paul. Motley Fool's Rule Breakers tells you how. As we speak — new industries are being born. Old industries are dying. New millionaires are being made... Here's a special group of Fools — called Motley Fool Rule Breakers — who are dedicated to identifying small, sound, well-managed companies with unique products that are poised to dominate a mass market. Companies like: A dot-com survivor and content delivery heavyweight — Akamai recommended 17 months ago, up 301.52% Thank you Sandy, and thank you all for joining us today. The fourth quarter was another record quarter for Akamai, capping of the full year terrific financial results, as we grew revenue in excess of 30% for the second year in a row. Our results for the fourth quarter include revenue of $82.7 million, a 9% increase over the third quarter and a 44% increase over the fourth quarter of 2004. Normalize net income was $26.2 million or $0.16 per diluted share, a 19% quarter-over-quarter improvement and then 80% increase over the fourth quarter of last year. For the full year, we grew revenue fully 35% year-over-year to $283.1 million and generated normalize net income of $79.5 million or $0.52 per diluted share, at an 87% increase over our 2004 results. In the fourth quarter, we added 80 net new customers bringing our total customer account to year end, to a record 1910 revenue customers. Now let us return to the financial review in detail. Let me welcome JD Sherman, our incoming CFO. As we announced in last call, Robert Cobuzzi is retiring from Akamai in March. JD Sherman joined us from IBM in November and is transitioning into the top financial positions at Akamai. So please welcome JD as he walks us through our fourth quarter and full year 2005 results. After that, I will be back to share some of my thoughts about the opportunities that we are excited about in the year end. Thanks Paul, first let me say, I am real good to be here and I couldn’t have asked for better quarter from my first Akamai earnings call. As Paul, just highlighted, we had a great fourth quarter, ending the Company’s strongest year ever. Fourth quarter revenue came in $82.7 million significantly higher than our forecast driven primarily by two factors. First, we experienced seasonal bursting from online retailing customers above anything that we have seen before even a year ago consistent with the strong online retail season that’s been widely reported in the news. Second, the explosion of online media continues to gain momentum and provided even greater benefit than we had anticipated in the fourth quarter. We estimate that seasonal bursting from e commerce customers added roughly $2 million to our fourth quarter top line result. Full year revenue of $283.1 million increased 35% over 2004 revenue of $210 million. During the fourth quarter, International sales represented 21% of total revenue, up from 20% in the third quarter and 20% in the same period of last year. For the full year, revenue from international account also increased to 21% of total revenue. Resellers accounted for 24% of our total revenue in the fourth quarter and for the full year. Once again, no customer accounted for 10% or more of our revenue in the fourth quarter or for the full year of 2005. As Paul mentioned, we added 80 net new customers in the quarter making it the third quarter in the row very strong net new customer addition. The acquisition of Speedera combined with the investments we have made in sales and marketing, early in the year help us to grow our recurring customer base by 46% year-over-year. Average revenue per customer or ARPU jumped to $14600 per month during the fourth quarter, up 4% from our prior quarter. We estimate that, about half of this increase was due to the seasonally strong usage from our online Our GAAP gross profit margin was 81% for the quarter, a slight improvement over the prior quarter. On a full year basis, our GAAP gross margin was 80% up from 78% in 2004. GAAP operating expenses for the quarter was $45.5 million, up from $41.6 million in the prior quarter. These GAAP numbers include amortization of intangible assets related to the Speedera acquisition and stock compensation charges. Excluding these non-cash charges, our cash operating expenses for the quarter were $40.7 million, up from $37.1 million in the prior quarter. For the full year, our cash operating expenses totaled $141.5 million. Adjusted EBITDA for the quarter was $30.6 million, up over 10% from the prior quarter. Our adjusted EBITDA margin was 37% consistent with the third quarter and up five points from the same period of last year. For the full year of 2005, our adjusted EBITDA margin was 36%, up three points from the full year of 2004. $7.5 million in the third quarter. Our total depreciation and amortization charges for the quarter include $4.8 million of network related depreciation, $900,000 of G&A depreciation and $2.3 million of amortization of intangible asserts. For the full year, depreciation and amortization was $24.2 million. Net Interest turn positive for the quarter, generating $1.3 million of net interest income as we invested the proceeds of our equity offerings. GAAP net income for the quarter was $25.8 million or $0.15 of earnings per diluted share. Non-cash items in GAAP net income include $2.3 million from amortization of intangible assets, $1.6 million from equity related compensation and $3.5 million benefit from the fourth quarter of impact from the release of valuation allowance. Excluding these non-cash items, our normalize net income for the quarter was $22.6 million, up 19% over the last quarter and 80% over 2004. We earned $0.16 per diluted shares on a normalize basis, that’s on a fourth quarter diluted share count of 170.3 million shares which includes two months worth of the impact from our November equity offerings. For the full year, our GAAP net income was $328 million, which included $258.8 million full year benefit from the release of our evaluation reserves. Normalized net income for the year totaled $79.5 million or $0.52 of earnings per diluted share, that’s an $0.87 increase over the last year. Diluted shares for the full year was 156.9 million shares and we ended the year with $152.9 million shares up then. Now, let me review some balance sheet items. We ended the year with $314 million of cash and cash equivalents and marketable securities, that’s up significantly from the end of Q3. Most of this increase is due to the cash from our equity offer - equity offering which close in early November. As many of you will recall, we sold 12 million shares of common stock and raised approximately $200 million. In addition, we generated $27.7 million of cash from operations during the quarter or 33% of fourth quarter revenue, that’s up from $19.5 million during the third quarter and up significantly from $15.6 million of cash from operations that we generated in the fourth quarter of last year. For the full year, we generated $82.8 million of cash from operations, up from $51.2 million in 2004. Capital expenditure for the fourth quarter were $8.1 million, down from the third quarter. For the full year, CapEx totaled $36.2 million or 13% of annual revenue, consistent with our guidance. Days sales outstanding for the quarter were 53 days, up slightly from the prior quarter, due to the revenue related to the heavy seasonal bursting revenue that we expected to collect this quarter. Overall, we are very pleased with the strength of our financial position, we have a strong balance sheet, a positive net cash position and we are generating positive cash flow each quarter, all the while improving our profitability. We look for to building on the success of 2005 by improving our performance in the coming year. As you recall, Paul and Bob provided you some of our early stock on 2006 during the October call. At that time, we expected revenue growth of at least 25% and normalize net income growth at least 40%. With the fourth quarter results now behind us, and greater visibility into the year, we had increased our expectations for 2006 performance and we would now like to increase our guidance for both revenue and earnings. For revenue, we now expect to grow top line by 27% to 30%, year-over-year, which translates into an atleast $360 million in 2006. For the full year we expect normalize earnings per diluted share to be at least $0.70, that would translate into EPS growth of least 35% year-over-year and normalize net income growth of over 50% year-over-year. Underlining this guidance, we expect that our overall normalized net income as a percentage of revenue will continue to expand. Network or cost depreciation will be higher this year due to our increase CapEx investment in 2005. And as a result, depreciation and amortization expense, as a percentage of revenue will increase by a couple of points in 2006. But we expect the productivity improvement in our other operating expense line will more than offset that’s increased. By the end of 2006, we expect our adjusted EBITDA margin to be in the range of 40%. Near term for the first quarter of this year, we are expecting revenue in the range of $84 million to $87 million. Adjusting for the impact of the seasonal bursting in the fourth quarter, the mid point of this range, which represents growth of about 5% quarter-over-quarter. And we are expecting normalized earnings per diluted share of $0.16 in the first quarter. Remember in Q1, we will have the impact of the full quarter of the newly exit shares from our recent equity offering and our annual resale of payroll taxes, which increases our labor cost across all operating departments. Finally with respect to our EPS guidance, let me remind you that our normalize earnings has few adjustments from GAAP including adjustments for the amortization of intangible assets, equity compensation and the non-cash portion of our book packed charges. Also as a reminder, this is the first year that our GAAP results will include of book tax rate of approximately 40% and equity compensation charges consistent with that of FAS 123R. We expect equity compensation charges would be around $0.20 on a full year pre tax basis. This compares to that of $0.17 in 2005 have we reported on the same basis. For the full year, we expect capital expenditure to remain roughly consistent with 2005 level, as a percentage of annual revenue. Similar to last year, we expect the larger portion of our networks investment to occur early in the year as we planned to take advantage of volume purchase opportunities and continued to optimize our networks. As I mentioned earlier, it was an exciting quarter to join Akamai, we are extremely pleased with our fourth quarter and full year 2005 results in virtually every areas of business. These results have given us the confidence and momentum to raise revenue in earnings guidance for 2006, which we expect to be another record year for Akamai. Now, let me turn the call back over to Paul. Thanks, as you just heard, 2005 was a great year, as we look back, there is a lot to celebrate. We achieved the number of significant accomplishments that improved the financial strength of the company and positioned us well for future growth. Among the highlights, we launched our Web-Application Acceleration service at mid year, opening an important new market opportunities. We closed the accretive acquisition of Speedera in June, adding over 300 customers. We bought back the remainder of our 5.5% debt in September producing our overall long term debt, to only $200 million of 1% convertible notes. And then we raised approximately $200 million in equity in early November, bringing our balance sheet to a net-cash position for the first time since early 2001. And last but not least, we grew revenue, customer count and normalized net incomes sequentially each quarter, making 2005 the most successful year in Akamai history. This success was a result of very hard work. Many long days and sometimes nights by the folks who work around the world for Akamai, and I want to thank them. Their efforts have benefited you, our shareholders immensely. Now, as you look forward to 2006, we are excited about the momentum we see across the number of our verticals especially the media and entertainment, online commerce and technology fronts. And we expected to continue traction from our application acceleration service offerings, which is still in the early stages of the market development. We are particularly excited about the rising demand for online distribution of digital media. We have all witnessed the success of online music sales to consumers and now we are beginning to see content providers migrate their video offerings online as well. Akamai benefits from this growth of online media distribution because content providers value the higher quality consumer experience over the Internet that we enable. As our enterprise customers recognize the success of the Internet as a distribution channel with media depends on the consumers experience. As we have more and more content providers to deliver rich media online, we will continue to target the premium content that drives profitable business models for our enterprise customers. Often, advertising support us for subscription based content. We believe our network architecture uniquely qualifies us to most defectively enable the high quality of distribution of media over the Internet. And several recent customers wins that help to validate our strategy. In the fourth quarter, we started to working with Clear Channel, to deliver more than 400 radio stations to 8 million unique online listeners. Overtime, we planned to help Clear Channel bring all their 1200 radio stations online. We are also helping Stars with their new movie download service called Bango. With Bango subscribes had access to over 1000 featured films. STARS chose Akamai because they need a solution that will help them deliver high quality to large volumes of subscribers. If ever you have been asking about one of our multi-profiled customers in this category, Apple Computers, were we provide worldwide support for iTunes. Did you know, Apple is one of our longest standing relationships, I am pleased to tell you that we recently signed a new multiyear contract extension with Apple. And look forward to continuing to support ground breaking online efforts. Now as, JD mentioned, part of fourth quarter success was due the higher than expected bursting activity from our online commerce customers. With an estimated $2 million seasonal revenue boost from online shopping activity, e-commerce clearly remains the big driver of our business. But, we don’t expect, as much revenue in the first quarter from commerce customers in the long term outlook in this category, which appears very strong. According a to recent Forester report, e-commerce will take a 13% share of total retail sales by 2010, up from single digit today. We expect to continue to benefit from this trend because online merchants recognize that better performance translates into higher sales. As we move into 2006, we believe further expansion of our content delivery business would drive the majority of our growth. At the same time, early response to our new web application acceleration offering is very encouraging. It indicates that, the customers understand the need for improved web based application performance, a deed that we believe will grow as more companies migrate even more business applications online. Since we began offering the new performance service, we have closed business with several dozen customers. Importantly about two-thirds of the contracts are with new accounts. And we are really pleased that the application performance services are bringing us into a new market that is manufacturer. And we won’t be providing that in each quarter on the number of application acceleration service offerings we sell, who wanted to give you a six month update on our progress. We believe strongly over the next several years, more and more applications will move to the internet, in our expertise in using network latency would be more critical than ever as business look to improve the performance of their apps. In addition, we believe Akamai is uniquely positioned to offer a best of breed solution. Our service runs on our vast global network of servers at the edge of the Internet, away from the enterprises and enterprises origin infrastructure. And that offers not a point solution, it’s a global services scales that users needed around world providing better performance, greater reliability and higher security all at a lower total cost and without upfront capital expenditures. Finally, before we wrap up, let me take a moment to thank our retiring CFO Robert Cobuzzi, for all of his efforts to help us build Akamai into the successful company it is today. From the time Bob joined Akamai, over three years ago, we have more than doubled our revenue, turned cash flow positive, become profitable and just capacity of our normalized net income by over 85%. We have been very fortunate to have Robert and JD over the lap with the company for the past few months to ensure a smooth transition for employees and investors. So, thank you Bob, you have helped Akamai achieve phenomenal results and positioned us well to exceed those results as we move into 2006. Now, JD Sherman, Robert Cobuzzi and I will be happy to take your questions. Couple of things on the ARPU average revenue per user seems to have volunteered, should we expect at that pipe are now on Q1 given the e-commerce drops off a little. But you feel that Q4 or I guess, Q3 with the bottom for that, kind of addition to it also seems like you continue to grow at a nice rate of 80 plus. It is definitely the right level to think of going forward here and generally speaking, a lot of talks from web companies that they are increasing their investments in a more interactive sites, can you give us a sense what you are hearing from customers in terms of increased balance retirements, that they, when they redesign these sites. Thank you. Sure, nobody want the first two together, because we don’t provide guidance on ARPU or customer additions, we’ve often said that ARPU could move sideways to down quarter-over-quarter depending on customers adds and seasonal traffic. We are certainly pleased with the results in Q4, we are pleased with another strong quarter of customers add. But increasingly, we are going to focus on the quality of customers and up selling within those corporate opportunity , so we don’t try to manage that or focus on it in too much detail, or try to provide guidance for you on it. And in terms of, what we are seeing from new customers, clearly people are trying to richen up their site, they understand that we remain competitive whether they are media sites or commerce site, or what have you. They have to compete to get audience and get business, have a rich site and often includes rich media interactivity audio and video and all that can drive usage of our services, I think, that is the activity that we saw on lot of ’05 and certainly expect that trend will continue in ’06. And It’s really being enabled by what I call “the virtue in the past�?, it is primetime in broadband, really the proliferation in broadband connectivity to the home, in enough homes that at any one time, a that site can find it’s niche audience to build the business on and that certainly is driving some of the expansion that we seen in our business. Great, following a quick on model clarification, if pro forma net income of about 26.15, so that by share count $0.15 or $15.4, am I missing something? You are missing adding back the interest for 1% offering, when you did a diluted share count for the 1% convertibles. Good, thanks. First question, you mentioned, media in general, I think you mentioned video in particular, is this video now becoming a material portion of the revenue and how much of that contributes, you expect that today? Well, we don’t break out segments that way. We certainly seeing more and more video, we have certainly always done video, we have been in streaming business for a long time. But I think that, the fundamental scenes that we are seeing is pay modules that allow people to monetize video, we have talked about will some of these examples before, usually baseball is a great example with a pay model certainly, now iTunes is a great example with the pay model for video. And I think, that is encouraging content providers and produces as if you will to put up video offerings, because they now believe that they can make money on it, it is not just a little bit of marketing on which they make an investment and hope it somehow gets returned in another way. Thanks, could you guys comment on sharing it all, and obviously good net ad numbers, what supposed to be the direction on churn? We didn’t comment in the text that churn still under 5% in the quarter and it was up a little bit quarter-over-quarter, lot of it was driven by some of the Speedera customers who are coming to the end of their contract and for you know, either they are small customers that we don’t want to renew or with acceptable, the policies we have, we have not renew those. So, churn picked up a bit for that but it is still under 5%. Is there, are we getting through those Speedera customers or we should we start to see that go down and another of saying that is also, the express Speedera customers, do you think, they are still in the 3% of less range? I think so, our goal is to migrate all of the customers within a year, that will take us into Q2, of ’06 and so there is some more of that to go through again, very small customers so we don’t think make them keep long term or people whose businesses let us say don’t need our acceptable use policy for doing business with Akamai that ph to be a little bit but I think, the, if you will sort of the core term is pretty close to our target and staying, they are all under control. Last question if could, you are above, I think, little bit above 10% CapEx in terms of 8% of revenues in '05 and what you kind of thought it guides us 10% long term it sounds like a bit above again for next year. What are your thoughts on that long term and where is the CapEx going last year? I think, it will stay probably close to where it was as a percentage of revenue in ’06, as compared to '05, we are just seeing such explosion of usage on the internet, the growth of video, to growth of traffic in a lot of interesting geographies outside the US. So, we are going to continue to make the appropriate investments in news service and in our network, ofcourse, some portion of our software development and capitalize as well as not just for hardware and the network. And we think that’s prudent right now and even that 12%, it’s a very small percentage of revenue compared to the typical service provider model. Hi Good Afternoon and a very good quarter, I have to ask Paul, is for you, about the impact Speedera pricing, something that, you have talked about in the guidance right now. Can you comment on, what that might do to, if it passes through the annual prices and therefore increase cost of goods? Well you are referring to that the debate that something of the ISPs are having about trying to charge premium pricings for the delivery certain kinds of content. I don’t think, that will impact us directly, I frankly think that it is pretty bad idea because I think, it can overtime slow down overall broadband adoption by customers, which wouldn’t be good for the Internet. In general, as you may have noticed, there were hearings literally today on Capitol Hill about it, this is got the attention of both congress and the regulators, I think, they used it these efforts by some of the ISPs as very impact anti-consumer, so there is some possible that they will weigh and block it’s development and certainly being opposed by many content sites because they are concerned it could advantage one over another and clearly change the landscape of choice for the consumer. But I don’t expect that it will have really any impact in our business or effect our cost of goods sold because of the hesitative way that we work with about 1000 networks today that deliver content, brings them incremental benefit. Okay, can you talk a little more broadly about online media, can you give us any senses of what you think the market is there for you, any sites or a kind of penetration rate. Just give us some qualitative information about, what iTunes and some of the other video and audio services are doing for you? Well, you know I don’t break out specific customers and won’t give you , can’t really give you specifics on any account, that’s their propriety information and as a provider to so many of these sites, we really respect obviously their business confidentiality. But I can tell you that, we are getting seeing more discussions of delivering rich media content, some times that is video and some times that is music and some time that’s just as much richer website than ever before in the years that we have been working and we work with virtually every premier website certainly in this country and many other internationally as well. And they are all moving towards figuring out how to do richer media, which we think as an opportunity because there is the need for performance and quality goes up because if you got a live stream you can’t have latency in the middle and we will really excel to solving that problem for our customers. In terms of giving you a total market size I think the industry analyst Foresters and Gartners and others firms like that are probably much better placed to with their estimates, our view though is that as more people do it, it opens up more opportunity for us and allows us to grow our business. We think that some of the growth we saw in ‘05 and one of the reasons that today’s we are so bullish about our opportunities in ‘06. Okay and then last question specifically on Apple you mentioned that you just renegotiated a multiyear contract can you tell us how long that is and then we all have been napping, you know we come up something that is very small permissible price for Apple and even that it seems like there should be a 10% customer because they release periodically how many videos or how many songs are downloaded so, can you just tell whatever you are able to about your relationship with Apple. Well I’m afraid I’ll disappoint you. We have a great relationship there we are doing more today than we have ever done with them and we are really proud to support their efforts, they have succeeded and executed magnificently over the last few years we been honored to be part of that to be serve iTunes as well as their websites and their software delivery but I am going to respect the confidentiality of our relationship with them and any day that they want a release it is up to them. The relationship is as solid as ever and we are very pleased with all of the terms and we think that we deliver a lot of value and get paid for our service for it. I think that any 10% customer, it is our policy to release the names and so if we did we let you know who that was. One question for Paul and one question for JD if I may. Paul I think a couple of pupils kind of touched on this a little bit earlier but customer ads 80 this quarter 94 last quarter obviously a marked increase of where it had been in 2004, 2005 what do you think is surprising the new customer ads. Is this web application acceleration service, or is it like just the more rich media, can you kind of point to what key average that are or is it increased productivity of sales force? And then one for JD if I can. Yeah. I’ll answer the first and you can ask JD the second question. I think it’s the combination of the investments we made in our market facing organizations as well as such general acceleration of demand in the market across a number of verticals where we are well established and well know and I think we really worked to establish ourselves, content delivery networking, application performance are really well recognized. So I think that as besides think about, expanding the use of internet, going to business critical functions, using Akamai I think is an accepted part of the way they work, I think we have had great execution but the sales organization led by Bob Hughes to really train people well, go after great prospects and demonstrate the value to our customers. If you think I’m going to caution you and not have people focus on the net customer ads every quarter we try to sell the new business but we also try to find great customers reciprocate up selling and I think we have a long way to forth penetrate accounts. This one is a trade off of resources every quarter I’m going differ over time to Bob and his staff to think about where should we focus every quarter and sometimes it’s going for more new logos and sometimes it’s going to be for mining the accounts that we are in because we are in, 1900 premier places today. Well I think in most of them the opportunity to sell more so that it will drive same store sales up and we are just trying to balance that over the long term to grow the business. So far you know everything has been working really well for us and I’m optimistic that it’s going to continue and we’ll be able to balance doing both increasing in current accounts as well selling new but quarter-to-quarter it’s not a number that we sort of focus on too much and try to target a specific result. Well, technology sales in the last two years I don’t think you can describe anything as well hanging through after Y2k and the web bubble people a little bit skeptical about spending technology money in other ways. We think it is pretty skeptical and that’s what we face when we go into new accounts because it is a great testament to our organization and our product offers that we have been so successful in the last two years. But we are seeing that more and more companies are understanding the use of the web and more and more business who maybe didn’t of the web as critical from a public facing marketing or media point of view are adopting it for the way people deal with their business as an extra net quarter for example. They maybe dealing with a small number of users but it’s always a login secure site if business processes and that’s where web application acceleration has gotten us into those accounts where we hadn’t been in. And into categories like manufacturing, chemical manufactures for example. One example of a company that signed up never probably would have bothered with our CDM server not because it didn’t work well but it just wasn’t a priority for them to have their dot com site work better, they didn’t really care that much about users and had a lot of other priorities for their IT efforts. But they are very concerned about their extra net quarter working over the web and we solved their problems for themselves. Certainly the innovation we worked on, the investments we made in R&D over the last two years, they have started to pay off by opening up some new avenues and I think that’s helped accelerate our growth and hopefully we’ll do the same over the next several years. Great then for JD, in terms of operating expenses they have been ramping pretty, you know $4 million a quarter and last quarter before this year. Just wondering where you think that’s going to go and what’s pace of hiring on this chopped out. Yes. I think we, if you look at last year we continued to expand our overall margins and that’s really where we going to focus this story and I believe we can continue to expand through productivity our operating margins at the bottom line. It’s not unusual if you look at 4th quarters in past we see a bit of spike up in the sales and marketing expense. We had a very good quarter in terms of revenue, in addition to that we had a good quarter in terms of new logos and signings that you saw and that drives a lot of commissions expenses. So we did see a bit of a spike up there, but as I said before I think in 2006 we continue to see our operating margins improve as revenues grows faster than we make investments in sales and marketing and R & D. You asked about headcount and here we’ll give you a little bit of our thoughts about that as well as we built into the model for this year. We ended 2005 with close to 800 employees and probably by the time we end 2006 will be a 10% to 15% higher. Hi how are you, good afternoon. Let me follow up Henry’s question a little bit in the sales and marketing line, is there anything else in there maybe other than commissions and accelerators that’s driving that slightly greater rate that maybe we expected. No we had we great quarter drove some additional commissions and accelerators but there is nothing that beyond that was unexpected in anyway. Okay great. And Paul can you talk for a minute about the contrast between your opening remarks and the need for sites to drive more interactive content more heavy pages if you will. And some of the speculation that’s been out there about Google and moving into your space and effectively commoditising your business and those two don’t necessarily agree and wanted to get your thoughts. Sure I will. I certainly stand by what I said before and believe that we are going to see increasing demands for our services and high value placed on it by our customers. We don’t view Google as a competitive in the market place, they are great company we are very focused on the consumer and the advertising business. They have a lot of technology demand on their side to keep their business going and I don’t think they are interested in competing in our space at all. Great and with that the last question is can you talk about in the acceleration space who if anybody you are running into? No we are not well, what we see mostly in this market which is already taken some form in the last couple of years and some estimates that $1 billion is already spent broadly on application performance. What we see mostly is that people have tried to solve this with a hardware solution. With a point solution that’s deploying a client as in a data center and it certainly provides some benefits, it provides some benefit in the data center but it does not solve the fundamental problems that the network layer provides or creates. And our services is a comprehensive global service provides benefits that no other solutions really solves and that differentiates our service model from the hardware. Of course think it’s why even as a new entrant in the market about the last six months we met with I think considerable success and that’s because the customers already identified if there is a problem and they figure out what they might do about it we have a credibility as an expert in internet performance and when we show them how apply some of old technology and some new engineering to solve this problem they are having, they are willing to sign up. Just a quick financial house keeping. Could you guys actually give us the actually interest add back against your 16 digit number. And while you are scrambling around for that from a higher level perspective, comment a lot on my distribution and media and the driver. Can you give us a feel in terms of your core business how much revenue momentum is coming from mature customers just growing in their business organically ie the Apples of the world versus you guys signing new initiatives in the space. If you have to kind of quantify what percentage of the growth in that space is coming from, established players, will be curious just trying to feel what the market is growing organically at. Okay just as quickly I’ll turning over to Paul to answer your broader question but it’s $700 and $10000 thousand a quarter or $2.8 million a year of interest income of the 1% convertibles. And then I think I just back at the enveloping but I think probably about 50-50 new customer business driving growth and if you will same store sale. So it’s probably half driven by it’s existing customers continuing to grow their businesses online and half overtime are bringing on new customers, intuitively my guess is that will switch because new customers represent a smaller and smaller portion of whole customer base grown large. And there will probably more of that overtime will be if you will think for sales growth but we really haven’t modeled that too precisely. And if you look at the same store sales portion of that can you give us some commentary in terms of as contracts are renewing what you seeing in terms of pricing. What we really seen for the last several years, there is always price pressure in technology. But we do two things, one we drive growth in those accounts so they just using most of those volumes often makes up it and we sell them our more advanced services that’s has always been our effort for the last 7 years, is to add value in the platform and sell people increased functionality, web application acceleration is just one example but we really have portfolio of things that we offer our customers and in their online efforts to become more and more mission critical, they are more concerned with reliability, security, protection from denial service attacks, global load balancing, reporting and real time message of what’s going with their traffic and those are all things that we offer to add value that go beyond the traditional bandwidth pricing. So it continues to be something we focus on because it’s the nature of building a technology product or solution but I think our on going efforts in innovation and engineering keep us ahead of that. Okay and then switching gears on three more questions for you. Can you just comment on the profitability both in revenue verses and the core revenue. Okay, second question can you just give us a feel for where web application acceleration ARPU coming in is it below kind of the average, above. I assume it’s a little bit smaller deal size initially. You know I’m not going to give you specific number but we are very encouraged by the value that our customer is seeing and therefore their willingness to pay for it. It’s really sold a day solution, it’s not sold as a data delivery model. So it’s really a solution sold as value based on what the customer’s business problem is and the scale of that so we’ve been able to really tradition that very successfully in the market if the customers are both seeing value for it and comparing it to much more expensive potential solutions such as building up a network of global data centers. Then last question for you. Can you just update us in terms of the on going relationship with Microsoft and where that stands? They are also one of our longest standing customers we have a very strong relationships with Microsoft. They haven’t been a 10% customer in while so we don’t breakout their number but we continue to have a very good relationship with them on a number of fronts. Hi guys. A couple of questions like everything has been answered so I’ll be very pleased on the web app accelerator can you give us any context in terms of a broad goal a year or two out in terms where you would like to see it as percentage of revenues in general and then secondly in correlation with the CapEx questions Speedera brought you some infrastructure, services and number of other things the CapEx does that assume the ability to use this Speedera servers particularly once people are mapped over. Thanks. Sure, the Speedera migration plan is moving along the path that we have outlined before so we certainly expect after we finished the migration we recovered some infrastructure and to be able to reuse some of that investment it’s not massive but we certainly will reuse some everything we can that’s worth salvaging there. And in terms of web applications acceleration, I certainly have put down some markers if you went for the sales in the marketing although this is internal goals but as long as the all aspects of the business grow I am not concerned about what percentage web application acceleration grows to as a piece of the overall. I was wondering if you can focus on a couple of big picture topics. We hear a lot of talk and there has been some questions about Google and possibility of commoditisation of the business etc. Can you talk to how Moore Law impacts you on the far side ie your CapEx what you spend in 2006. You should be getting more storage, better memory, better performance in the server than what you bought previously and how does that figure into the whole equation in terms of maintaining gross margin and then number two given Speedera at the time of acquisition was the price aggressor and one can argue with the largest direct competitor, who would you take right now as your competitor that you see the most in the market place in the course see the embers? Well let me answer those in reverse order. We actually covered the Speedera competition at some length in the past but I have to review it again so if you look at the customers and revenue they brought over I think what people were clearly described about was that their ARPU was very healthy and then by and large they got a very strong enterprise customer base as well and so the pricing difference was not what people had necessarily thought they would see at the time which was one of the reasons when we did our dudiligence we were so pleased with the acquisition and that turned out to be really one of the highlights of last year leading into this year. What we see in terms of competition is really what we seen consistently the main competitor remains do-it-yourself so they think why should I outsource this problem, I’ve got a big infrastructure, big budget and an army of people why can’t I just keep figuring out how to run my network problems for my network my staff has been solving the problems on my own. So Our biggest challenge is to showing people how we can make their online efforts more reliable, more scalable and more secure, and then I think you really help me answer the first question, Morse law certainly helped us, the server we buy today is far more powerful, and far less expensive, for that power than the one we bought six or seven years ago when we started to build out the network, some of those 300 servers are still out there, running just fine, and many of the new servers that we have deployed, you know really put the, the performance of the old ones to shame and so that benefits us, it allows us to manage our physical footprint, very efficiently and frankly the need to demand of increasing traffic we’ve seen grow over the last two years in many way is driven the broadband content of our customers. One last follow up, I mean you raised the good point, if your competition today, I agree with you, is in-house do-yourself-guys, are you having an easy, would you characterize it as easier self today, than it was a year ago or two years ago when you walk into a potential new customer and present your value propositions? I think there is greater understanding today of our value propositions, but as I said earlier nobody throws money around, today in technology purchases, you have to prove the return on investment, it is your offer, you have prove the performance and fortunately we have I think a great reputation, in the market, a great brand so people understand that we are reliable and that we have a reputation for doing what we say we will do and trying not to throw our promise, but I think it is wishful thinking for anyone, to believe that we are going to get to a stage, you know people just call you up and throw money at you, for technology purchase, customers believe that choice, they want to make sure, they are not completely lost in any one solution, that is in there, and it wasn’t lot of fun, but we have been very successful at partnering well, showing the value and obviously winning the confident of many many leading brands, and our goal is to continue to do that. Operator I think we gave time for two more quick questions, before we wrap up. Hi Paul, Hi Judy, just a couple of quick ones, one is, is the Microsoft One Care, is going to be part of the Microsoft project, can you comment on that or not? Okay, and then can I ask you just, another question is, was the Superbowl traffic this year, a lot bigger than what you saw last year this time? You know, We didn’t, I didn’t do that kind of comparison, we obviously carried the majority of the Superbowl advertisers, you may have seen our online index, that tracks usage and those are some interesting stuff and other odds, including some great PR for Akamai in a number of newspaper and online reports, but we didn’t do a aggregate comparison year over year. My guess is, in the entirety it got more broadband use, but we haven’t looked at that. Okay. Thanks, JD, real quick, Op margins, you know, you are getting, where do you think if you had a much higher revenue run rate, what are peak Op margins, what can they get to, or we talking 40% plus or where do you think those numbers could go, if we are running at $400 million in revenue etc., We haven’t talked about, kind of peek out, very far in the future but as I said in my comments, we do see the margins getting in the 40% range, by the end, the EBITDA margins by the end of 2006. So I think this business, has shown that it has a scalability in terms of improving margins over the last couple of years, I think we still have the capability to continue to expand those margins, I am not going to project beyond that, in terms of where we will end up. But we clearly are going to, the other two will drive some productivity. And real quick on the CapEx number that you gave, how much would you say is kind of CapEx percentage storage build out, I know you got, spending a lot of money incrementally to deal with something in the digital media versus traditional servers, are bigger mix going on there on the same side versus the traditional servers side? We haven’t really broken out, I am sure where you have drawn that conclusion about how we spend the CapEx by title of hardware, and we are not going to break out, those numbers to do, I think frankly that is proprietary information and doesn’t help us to put that into the market place. Hi. I am guessing that the companies that have a lot of content delivery business to do, know about you and me, you know about them, and many of them already are our customers, on the other hand, you mentioned that in the half accelerated business, 2/3rds of the signups were customers new to AKAMAI, my guess would be that there are lot more in this, it is more of a Greenfield opportunity for you, and there are probably a lot of extra nets out there, who may be spruced up a little bit, just of sort of broad framework, is there an opportunity that could equal your current business, a few years down the road, or have you, how do you look upon them? Well, I look on it, as a great opportunity, we think It could develop into a large market for service provider like AKAMAI, our guess is that, because it is such a large opportunity you will see lots of different solutions in the market, you will see other service providers trying to put solutions into the market that certainly have the appliance players who can consolidate a month under the big hardware companies pushing very hard into the market, that is going to great for us, because it is going to really raise awareness and then we really believe that we are going to be unique, because we are one of the few companies able to offer a service and then on top of it, we really are the only one who can give you a whole portfolio that shows the content deliveries and does app acceleration and finally can actually be distributed completely vitalizing you data center, so we think we are very well positioned, I don’t want to speculate on whether it is you know, as big or bigger than our current business, the business continues to grow then, I will be happy, from just to both chase each other in growth and we’ll continue to have more happy results. At this point we are just focused and will have our head down on the business in trying to meet our objectives for this year and continue to innovate and have things that our customer want to add to the order form if you will in years to come. So why don’t we stop there, thank you all for joining us. Look forward to reporting back in another quarter. We are all thankful for your support in ’05 and look forward to reporting back to you again in ’06. Bye Bye. Motley Fool's Rule Breakers tells you how. As we speak — new industries are being born. Old industries are dying. New millionaires are being made... Here's a special group of Fools — called Motley Fool Rule Breakers — who are dedicated to identifying small, sound, well-managed companies with unique products that are poised to dominate a mass market. Companies like: A dot-com survivor and content delivery heavyweight — Akamai recommended 17 months ago, up 301.52%

EarningCall_233834

Here’s the entire text of the prepared remarks from Microsoft’s (ticker: MSFT) fiscal Q1 2006 conference call. The Q&A is in a separate article. 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. Charles Di Bona, Sanford Bernstein, Analyst Heather Bellini, UBS Warburg, Analyst Rick Sherlund, Goldman Sachs, Analyst Mary Meeker, Morgan Stanley, Analyst Steve Mahedy, Banc of America Securities, Analyst Drew Brosseau, SG Cowen, Analyst Chris Kwak, SIG, Analyst Laura Lederman, William Blair, Analyst Tom Berquist, Citigroup, Analyst Thank you. Good afternoon, everyone, and thank you for joining us today. This afternoon, I am joined by Chris Liddell, Senior Vice President and Chief Financial Officer; Scott Di Valerio, Corporate Vice President, Finance and Administration and Chief Accounting Officer; and John Seethoff, Deputy General Counsel. Today's call will start with Chris providing some key takeaways for the first quarter of fiscal year 2006 and an overview of expectations for the rest of the fiscal year. Scott will then provide detail around our first quarter results, and then turn it back to Chris for a more detailed discussion of our guidance for the second quarter and full fiscal year. After that, we will take your questions. We filed our 10-Q today in conjunction with our earnings release. Therefore, you have available the earnings release, MD&A, financial statements and footnotes. We have also posted our quarterly financial summary slide deck, which is intended to follow the flow of our prepared remarks in order to assist you. The slide deck offers highlights from the quarter, outlines our guidance and provides a reconciliation of differences between GAAP and non-GAAP financial measures that we will talk about today. Slide numbers are posted on the bottom right of each slide, and we may refer to certain slides throughout the presentation for your convenience. You can find the earnings release, the 10-Q and the quarterly financial summary slide deck on the investor relations website at www.microsoft.com/msft. WisdomTree believes they have found a better way to index: Weighting stocks by their contribution to the Dividend Stream. Our belief in the benefits of fundamentally weighted indexing led us to create a new family of stock indexes that define the dividend-paying segments of the U.S. and international markets. The WisdomTree LargeCap Dividend Fund seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the WisdomTree LargeCap Dividend Index, a fundamentally weighted index that measures the performance of the large-capitalization segment of the U.S. dividend-paying market. Learn about the top components in the WisdomTree LargeCap Index and see the results of backtesting for the index. Contact WisdomTree for more info. Thanks Colleen and good afternoon everyone. It's good to have you joining us on today's call. I'm going to begin by highlighting the key points from last quarter's performance and taking a look at the rest of the fiscal year '06. First, we had a good quarter and a good start to the year, with strong execution and results that were in line with the guidance that we gave you in July. Second, we enjoyed healthy demand in our core platform software businesses including strong OEM volumes for Client and continued outstanding demand, resulting in another quarter of double-digit revenue growth from our Server and Tools group. We saw impressive results for SQL server, which grew more than 15% in the quarter before its next-generation launch, and we're delighted that the value proposition for SQL continues to result in such strong product demand. Third, even with the continued investments we are making to launch our new product cycle and acquire technology and talent; we grew operating income faster than revenue for the quarter. Fourth, we're excited about the number of activities and announcements during the first quarter that demonstrate our business momentum. For example, our product groups were busy, and we made several important product announcements. We launched Beta 1 Windows Vista this quarter, and had an excellent and well-attended Professional Developers Conference where we released a community technology preview of Windows Vista and unveiled some of the compelling innovation that will come with Office 12. We released System Center Data Protection Manager 2006, which is targeted to customers who want additional data protection. From business organization standpoint, we were pleased to announce during the quarter the realignment of the Company under three newly formed divisions, in order to drive greater agility in the execution of our software and services strategy. We are also very happy to welcome Kevin Turner on board as our new COO. We also completed three acquisitions during the quarter. Required Teleo for its innovative VoIP technology. Front bridge was acquired to expand our messaging and collaboration offerings to include fully managed services on multiple e-mail platforms. And we also acquired Alacris, a global provider of certificate management and identity assurance software products. Lastly, we had great momentum during the quarter on our stock repurchase plan. We have repurchased over $11 billion of Microsoft stock on a cumulative basis, just five quarters into our announced plan. So we're off to a good start to fiscal 2006. Let me make a few key points about how the rest of the fiscal year is shaping up. First, we continue to see fiscal year 2006 as an excellent year, kicking off our next product cycle. We expect double-digit revenue growth for the year, driven by our core platform software businesses and by H&E, with the launch of Xbox 360. Second, we continue to invest in the businesses. As a reminder, in fiscal 2006, we will be making investments to launch Xbox 360, SQL Server 2005 and Visual Studio 2005. We will also be investing ahead of the launch of Windows Vista, Office 12 and Exchange 12, planned for the second half of calendar 2006. And as we indicated in our financial analysts meeting, we continue to focus on both software and services and will make appropriate investments to deliver new services to our customers. With that, I would like to turn the call over to Scott for more details on the quarter, and then I will come back later and provide you with more details on the rest of the fiscal year. Thanks, Chris. Good afternoon, everyone. As Chris mentioned, fiscal 2006 is off to a good start for Microsoft. During the quarter, we achieved revenue growth of 6%, which was in line with our expectations entering the quarter. We grew operating income faster than revenue while continuing to make investments necessary to deliver on our strong product pipeline. We delivered strong earnings growth, with earnings per share at the high end of our guidance, excluding settlement charges. And lastly, we returned over 90% of our cash flow from operations to shareholders in the form of stock repurchases and dividends. In order to get a clear picture of our quarterly performance, I will highlight topline financial business and momentum points, followed by revenue performance for each of the business units. Then, I will wrap up with an overview of operating performance, as well as the balance sheet and cash flow information. All growth comparisons I mentioned relate to the comparable quarters of last year unless otherwise specified. Total revenue for the quarter was in line with our guidance and over $9.7 billion, representing topline growth of 6%. Operating income was $4 billion, including a settlement charge of $361 million related to RealNetworks. Earnings per share was $0.29, including $0.02 of settlement charges. Strength in SQL licensing as well as PC and server hardware shipments resulted in Server and Tools growth of 13% and Client growth of 7%, driving our overall revenue growth for the quarter. Add in a good quarter by Information Worker, and our three largest businesses grew revenue by a combined 8%, representing over 600 million in absolute revenue growth. We were also pleased with the strong results posted by Microsoft Business Solutions and Mobile and Embedded Devices. The IT spending environment was largely in line with our expectations, a clear highlight being continued strength in PC and server hardware market growth. Demand was generally healthy across all customer segments, and from a retail perspective, emerging markets were noticeably stronger than mature markets. Our estimate of PC growth during the quarter of 15% to 17% was actually quite a bit stronger than we have expected. A very strong back-to-school sales season resulted in consumer PC shipment growth outpacing business shipments for the second consecutive quarter. From a form factor perspective, growth in notebook PC shipments continues to outpace desktops, while PC unit demand was broad-based regionally, with double-digit growth rates in all geographies except for Japan. Emerging market growth rates continue to significantly outpace mature markets. Our mix of product billings for the quarter was consistent year-over-year, with roughly 35% from OEMs, 25% from multiyear licensing agreements, 15% from license-only sales and the balance from our other businesses. We had good results overall from a licensing perspective, with the strongest growth in enterprise agreements, where our renewal experience remains within our historical range of 66% to 75%, with no significant changes in the rate of discounting. Open L-only product billings were also strong. New select and open annuity agreement growth remains healthy, and renewal rates are in line with historical trends. Our unearned revenue balance ended the quarter where we had expected, at $8.8 billion. This represents a $361 million seasonal sequential decrease from Q4, but a 13% increase from the prior year. The multiyear licensing component of unearned revenue decreased by $237 million sequentially, which is consistent with expected billing seasonality for the business. Other unearned revenue decreased $102 million, driven primarily by decreases in services. Our contracted not billed balance at the end of September was up sequentially and now exceeds $8.5 billion. As mentioned earlier, we had a strong new and renewal enterprise agreement billings during the quarter. The value of the second and third year of those agreements is included in the contracted not billed balance, and exceeded the amount of re-occurring billings from contracts signed in prior periods which flowed to the balance sheet. Before I get into revenue details for each business group, I would like to point out the revenue uplift from foreign exchange rates was about $90 million for the quarter or 1 percentage point of our 6 percentage point revenue growth. Now, let's move onto a discussion of revenue by business segment. Client revenue grew 7% on the strength of PC unit growth of 15% to 17%. Since roughly 80% of Client sales are earned through the OEM channel, it is important to capture the market unit growth. Our OEM license units growth of 18% is a good indicator that we were successful. The OEM license growth of 18% translated into client OEM revenue growth of 13%, primarily due to the combined impact of two factors, both of which negatively impacted our OEM pricing mix first, the shift in channel mix toward larger OEMs with volume pricing and second, the relative strength of the consumer segment in the PC market. Consistent with the shift in channel mix, we saw a change in the sales mix of our premium edition operating systems license to OEMs. While OEM premium mix was flat year-over-year at 50%, a larger percentage of premium edition sales were made to consumers purchasing Windows Media Center, which carries a lower-priced premium relative to Windows professional. All in all, we are very pleased to see significant market traction and growth for the Windows Media Center. During the quarter, commercial and retail licensing of Windows operating systems declined by 19%, as customers choose to upgrade their PC operating systems through the OEM channel when they replace their PCs versus the purchase of a volume licensing agreement. I should also remind you that we had a relatively strong retail sales in the first quarter last year, in conjunction with the release of Windows XP SP2, which negatively impacted the year-over-year growth comparisons. Server and Tools continued to deliver double-digit revenue growth for the Company. Revenue for the quarter was $2.5 billion, a 13% increase over the prior year. Robust growth in the database market segment and share gains in the enterprise resulted in SQL Server revenue growth of over 15%. This is an impressive result in front of the SQL Server 2005 launch next month. Strong server hardware shipments drove double-digit revenue growth for Windows Server, as well. And our Enterprise Services business also continued to show solid progress, with revenue growth of 18%. Information Worker revenue was at the high end of our expectations, growing 4% to $2.7 billion. Customer demand for Office 2003 remained healthy, with revenue growth during the quarter driven particularly, by particularly strong back-to-school sales in the retail channel. We also saw continued growth in category application sales, which exceeded our expectations for the quarter. MBS revenue was $181 million, up 16% from the prior year on strong performance in ERP and CRM software revenue, partially offset by expected declines in services revenue. On the strength of 21% license revenue growth, software revenue was up 18%, faster than the overall business applications market segment in the quarter. Also during the quarter, we announced Microsoft Dynamics, the new brand for our ERP and CRM solutions. MSN revenue grew 1% during the quarter, driven by growth in advertising revenue of 20%, offset by a decline in narrowband access revenue of 30%, as we expected. We were pleased with the growth on our display advertising revenue, which is largely in line with market growth for this category. However, our search advertising revenue has not been as strong as we would like. We are continuing to work on our Ad Center, our end-to-end advertising platform. And this quarter we launched our paid search solution in France and Singapore, as well as testing the technology in the United States. We expect this work to result in improvements over time in our search advertising revenue. MSN continues to be focused on innovating and bringing rich and compelling Internet experiences to our customers. We continue to work on search algorithmic, desktop and local. We are innovating our communication assets in Hotmail, Messenger and Spaces. We are pleased with the growth in our overall user base, and believe this is a testament to the breadth and depth of our offerings. Mobile and Embedded Device revenue for the quarter grew by over 50% on broad strength across the Windows Mobile and Windows Embedded product lines, as we continue to capitalize on the growing market demand for connected devices. Windows Mobile licenses for phone-enabled pocket PCs and smart phones grew in excess of 130% from the prior year. Leading indicators for our Windows Mobile 5.0 product are very positive, with recent device announcements such as the Q from Motorola, the Windows mobile-based Treo from Palm and the PPC-6700 from Sprint PCS. Windows Embedded product growth of 57% was driven by increasing use of Windows CE in a wide range of cost-sensitive devices and broader worldwide channel product support. We'd expected Home and Entertainment revenue to decline this quarter in front of the Xbox 360 launch. However, it was little softer than expected, primarily due to delays in third-party title launches, as well as slightly lower than expected console sales. Our primary focus remains on the successful launch of the Xbox 360 on November 22nd in North America, December 2nd in Europe and December 12th in Japan. This is the first worldwide console launch in industry history. Also as part of our strategy for success in Japan, we announced that over 40 elite Japanese game publishers will join the top publishers from around the world in supporting the Xbox 360. We also continue to see strong progress and momentum in our Microsoft TV business. We've hit several important milestones, including the commercial launch in September of Verizon's FiOS TV service, the release of version 1.0 of Microsoft TV IPTV Edition software and the commercial availability of the first set-top boxes and system-on-chip silicon design supporting Microsoft TV IPTV Edition. Now, for the rest of the income statement and balance sheet. While revenue increased 6%, cost of revenue decreased about 11%. This decrease was mainly due to lower Xbox console volumes and product costs, as well as reduction in headcount expenses, including stock-based compensation expense. The remainder of operating expenses increased about $330 million or 9% excluding settlement charges. As we discussed last quarter and at the financial analysts meeting, we will continue to invest aggressively in our businesses to satisfy customers and to compete and win in the marketplace. Investment this quarter was focused on the following areas strong levels of hiring and investment in R&D, focused on new product development, examples of which include Windows Vista, Office 12, Longhorn Server, Exchange 12, MSN Ad Center and Communication Services and our upcoming Dynamics product releases. Global advertising focused on primarily on our Client and Information Worker businesses, as well as overall corporate branding, and increased hiring for field sales and marketing positions in support of future revenue growth, specifically in our enterprise and small and medium business sales forces, as well as our Information Worker specialists. Even with these investments and excluding settlement charges, we grew operating income faster than revenue for the quarter and achieved an operating income margin of 45%. We firmly believe that today's investment in product R&D and sales and marketing continues to lay the foundation for future revenue and profit growth. Investment income and other totaled $506 million, including $26 million in net gains on investments and $86 million in net gains on derivatives, primarily related to gains on equity derivatives and commodity derivatives. Our effective tax rate for the quarter was 31%, lower than expected and less than prior year, due primarily to an increase in earnings taxed at lower rates and foreign jurisdictions. Now, for a brief summary of the cash-flow statement and balance sheet. We generated over $4.3 billion in cash from operations, up 8% from the prior year, and returned about $4 billion of that cash to shareholders in the form of stock re-purchases and dividends. Reflecting our continued optimism about our future growth prospects, we re-purchased more than 110 million shares for just over $3 billion during the quarter, which contributed to a 1% decline in our diluted shares outstanding to 10.8 billion shares. Cash and equivalents and short-term investments were sequentially, up sequentially from the fourth quarter and now exceed $40 billion. So, in summary, 6% revenue growth for the quarter, representing over $550 million in incremental revenue versus the prior year, continued investment to fuel revenue and profit growth in the future, operating income growth in excess of revenue growth, earnings per share at the high end of our expectations when you exclude settlement charges, the development of key products and related launches are on track and strong execution against our stock buyback plans overall, a good start to fiscal 2006. With that, let me turn it back to Chris, who will provide you with our expectations for the second quarter and for the rest of the fiscal year Chris. Thanks, Scott. I'm going to spend my remaining time on the call giving you a view of what we see coming in the second quarter, as well as for the full fiscal year. Before we get into specific guidance, let me outline some of our key assumptions around the economy and general demand in the industry. The overall IT spending environment continues to look healthy from our perspective, and we feel good about our ability to participate in the opportunities created in the marketplace. Our estimate of unit growth in the PC market for the second quarter is 10% to 12%. As a result of higher-than-expected growth in the first quarter, we are raising our full fiscal year estimate to 9% to 11%. Our expectations for growth in the total server hardware market remain unchanged, at 11% to 13% for the full fiscal year. From a foreign exchange standpoint, we are assuming the FX rates will not have a major impact on a year-over-year growth. But now, for some detailed guidance. For the full year, we're reiterating the guidance that we gave you in July, as we continue to expect revenue to come in between $43.7 and $44.5 billion, representing growth of 10% to 12%. Again, this is driven in large part by our core platform software businesses, as well as H&E with the launch of Xbox 360. For the second quarter, we expect revenue of $11.9 to $12 billion, representing growth of 10% to 11%. Before I give you revenue guidance for each business, I want to let you know that fiscal year 2005 business group revenue amounts have been re-stated to certain internal re-organizations. The stated percentage growth in the guidance reflects revised amounts for the last fiscal year. You can find those numbers on slide 27 of the appendix to the slide deck that accompanies this earnings release, as well as on our investor relations website. So, revenue by business group is as follows. For Client, we expect revenue growth to be 6% to 7% for the full fiscal year and 8% to 9% for the second quarter. We expect OEM units to grow roughly in line with the market, and we're forecasting a small decline in the commercial and retail licensing portion of the business. As we approach the Windows Vista launch, we think the customers will see a more compelling value proposition from our multiyear licenses, which should help the commercial business for Client. Also helping are the new benefits and enhancements to our software assurance offering that will be implemented in the second half of the year, including Windows Vista Enterprise Edition and Windows Fundamentals for Legacy PCs. In Server and Tools, we're expecting revenue growth of 11% to 13% for the full fiscal year and 9% to 10% for the second quarter. The guidance contemplates a slight slowdown in SQL sales early in the second quarter, just before launch, when we expect this product to be well-received and to drive additional growth in the second half of the year. We're seeing strength in this business and expect it to remain strong throughout the year. Information Worker revenue should grow 5% to 6% for the full fiscal year and 6% to 7% for the second quarter. Although it's relatively late in the Office 2003 lifecycle, we are continuing to see strong demand for the product in the marketplace. We are also projecting accelerated growth in our category products in this business. We began this quarter making some investments in additional field sales headcount and expect them to pay off later this year. For Microsoft Business Solutions, we expect revenue growth to be 11% to 13% for the full fiscal year and for the second quarter. We're looking forward to the launch of Dynamics GP 9.0 in the second quarter, Dynamics CRM 3.0 and Dynamics AX 4.0 later this fiscal year. For MSN, we're expecting revenue to be flat or to grow up to 2% for the full fiscal year and to be flat for the second quarter. Keep in mind that the overall growth rate for this business is muted by the expected decrease in revenue for narrowband Internet access, as subscribers move to broadband. Overall, MSN's advertising revenue should grow 15% to 20% for the full fiscal year, driven by display advertising, which remains healthy and in line with industry growth rates. Search advertising growth is tempered by lower-than-expected search monetization. We are pleased to have begun testing our own paid search solution in the United States after a successful launch in France and Singapore. Mobile and Embedded Devices should grow to approximately $330 million for the year and to just under $90 million for the second quarter. The Mobile device market remains strong, and we believe we are making the right investments to grow this business in that market. There are a number of exciting announcements this quarter regarding the inclusion of Windows Mobile 5.0 software in devices such as the Motorola Q and the Windows Mobile-based Treo from Palm. These devices should hit the market in the early part of calendar year 2006. With the launch of Xbox 360 in November, Home and Entertainment revenue is expected to grow in excess of 50% for the year, consistent with prior guidance, and between 26% and 32% for the second quarter. This clearly tremendous momentum behind the platform with growing customer demand, strong third-party publisher's port with over 200 games currently in development and positive reviews from industry press and analysts. We're poised for a very successful worldwide launch. When assessing our H&E guidance for both the second quarter and the year, it's important to keep in mind the following with respect to the Xbox business. First, we're taking a different approach to launching the Xbox 360 than has been traditionally followed in the industry. Whereas others have shipped significant volumes for launch and then re-supplied many weeks or months later, our process is to continually supply the channel on a regular basis. We believe this is the better approach because it provides predictability to retailers and consumers around product availability. Second, consumer demand for the Xbox 360 will exceed supply at launch, as you would expect for a great product with strong pent-up demand. Nevertheless, we are on track to our manufacturing plans, with enough volume to support a worldwide launch, and we expect to meet demand sometime in the second half of our fiscal year. As a result, our forecast is to ship between 4.5 and 5.5 million Xbox 360 consoles in fiscal 2006. We will be sharing more information on projected 360 console shipments as we get closer to launch. Lastly, in comparing to the second quarter of the prior year, remember that we launched the extremely successful first-party title Halo 2, which generated over $300 million in revenue in the quarter. We are also reiterating the operating income guidance that we gave you in July and expect operating income to be between $17.9 and $18.4 billion. Excluding the settlement charge with RealNetworks, operating income should be between $18.3 and $18.8 billion, representing growth of 10% to 13%. For the quarter, we expect operating income to be between $4.6 billion and $4.7 billion, representing a 1% to 3% decline. The year-over-year decline in operating income from Q2 is really driven by three primary factors. First, Xbox 360 console margins at launch will be subsidized. We expect to be gross margin neutral over the life of the console, and as customers buy more games, our profitability picture will improve. We have significant launch costs in Q2 for 360, SQL Server 2005 and Visual Studio 2005. This will drive expenses up year-over-year. And lastly, we are making a concerted effort to even out our spending on a more balanced basis throughout the year. As you will notice, this leads to a strong performance in the second half of the fiscal year. With diluted earnings per share, we are tightening the range that we gave you in July by raising the low end of that by $0.01. The range is $1.26 to $1.30 for the full fiscal year, which includes the RealNetworks settlement charge of $0.02. We expect earnings per share of $0.32 or $0.33 for the second quarter and expect to have an effective tax rate of 31% for the year. On the balance sheet, we're still expecting unearned revenue just to follow normal seasonal patterns and to finish the year up 8% to 10%. Our overall outlook on the contract but not billed balance is unchanged from the guidance we gave you last quarter. So, in closing, I would like to take the opportunity to put more context around the bigger picture of how we intend to drive shareholder value. It starts with revenue growth through our innovation. As we've said in the past, and as I would like to reiterate today, as we execute successfully on our product pipeline and the opportunities we have in front of us, we expect accelerated revenue growth beyond fiscal year '06. We are also announcing today an accelerated plan to complete our $30 billion stock repurchase plan by no later than December 2006. This means that we plan to buy back the remaining 19 billion of stock over the next five quarters. This acceleration, combined with our buyback activity over the last few quarters, and the ability we have to continue to reduce diluted shares outstanding well into the future, shows our confidence in the business and adds up to a great opportunity for Microsoft to deliver earnings per share growth over the next few years. When combined with our recurring dividend yield, we believe this forms the basis for shareholder return for Microsoft shareholders. With those comments, I would like to hand the call back to Colleen so we can take some of your questions. Thanks Chris let's now proceed the questions. We want to accommodate questions from as many people as possible, so please avoid multipart questions and limit yourself to just one question. Operator, will you please repeat your instructions thank you. WisdomTree believes they have found a better way to index: Weighting stocks by their contribution to the Dividend Stream. 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EarningCall_233835

Thank you and welcome to the Genzyme year end 2005 earnings conference call. I would like to remind everybody that the earnings released on this call are available on the investor page of our website at genzyme.com. Today we will discuss Genzyme’s business outlook on the call. Forward looking statements include 2006 guidance, expectations for Myazyme, progress of several clinical trials and drivers of our future growth. These statements are subject to number or risks and uncertainties and actual results may differ materially. Please refer to our September 10Q on file with the SEC for more information. If during the call we use any non-GAAP financial measure, you will find on our website at Genzyme.com a reconciliation to the most directly comparable GAAP financial measure. I’d like to take the opportunity to remind everyone that our first quarter 2006 earnings conference call will take place on April 19th at 11am eastern time. You may access the live web case on our website and there is also additional information for the dial in on our web site. Lastly, please limit yourself to one question per turn during the question and answer interval in order to allow others to participate. Thank you everyone for participating today. Of course, 2005 seems a long time ago at this time. We are still very, very pleased indeed to report a very strong, very robust year. Actually a year with a tremendous of activities. We integrated three transactions during the year, ILEX was closed late in 2004 and in 2005 we began the oncology field as a result of that transaction. We integrated the scan marketing and sales organization of which we took over in January and learned during the year how to deal with that very, very interesting new field. In July, we acquired Bone Care and as a result we also acquired a product called Hectorol, which materially changes the whole franchise that we have built around Renagel. We also dedicated 2 new very significant sized manufacturing operations in Europe. One in Belgium a salt culture facility for monocal antibodies that’s now also being expanded for fusion capacity for proteins like Cerazyme and Myazyme. In Waterford, Ireland we dedicated a new facility for biological products that I think will enhance our future ability to produce the products that we have in the pipeline and the products that we currently have in production. We also increased the capacity of Alston, here in Boston, by 50%. And started to operate the plant at a much larger scale late in the year. But most materially, during the year we started a number of late stage billable trials. And, we find ourselves during 2006 with what is probably the largest number of programs in this late stage. And this is extremely gratifying because that will further enable us to grow into the future. Of course 2005 also had a very strong financial performance. We came in for the year at $2.28 on a non-GAAP basis, which is a few pennies, three pennies above the high end of the range that we had guided you to. And that, of course, is despite all the efforts that I spoke about in terms of integrating these new operations; that’s extremely gratifying by itself. 2006 is a year that has tremendous promise now. Because, we have now the experience of the new operations that we put into place last year that clearly diversify the company in a very material sense. As an example, Cerazyme during 2006 represented about 30% of revenue, so we are clearly growing our way beyond that dependency on one single product. But we also, during this year, have a very important introduction of yet another product right in the middle of our . Myazyme, which we’ve spoken about now for many years and I have spoken about as the product that I’m personally extremely excited about, now is in the very late stage of regulatory review. We did get a positive recommendation for a broad label in Europe, recently. We hope that will get confirmed by the commission in the 2nd quarter so that we can launch a product during that quarter. Of course, we will be dependent somewhat on the pricing decision by the different markets in Europe in the rollout, but it is a very, very important development right in an area where we have such an historical commitment and such historical success. We also have … we would expect on the FDA for Myazyme a response by the 28th of April. It’s very difficult to comment precisely on what the label will be in the United States. At this time, we are operating with the FDA on all the new data that we are collecting. In the field throughout the world over 200 patients are currently on treatment. We will have to wait until that date to precisely know what is going to be the final label in the United States. We have started late last year a very significant additional trial in Myazyme on late stage patients, that’s now almost fully-accrued; it will be fully-accrued this quarter. So whatever happens, we are going to get a very solid experience with Myazyme in late stage patients during the year. The outcome of that trial will be the early part of next year. We will make further investments this year to get the other late stage trials completed or started. The most material one that I would point to now that we have passed the point with Myazyme which really was a big focus of myself, I’m enormously interested in two things that are happening that really could be quite transforming in the fields that they’re in. one of the them is Tolevamar for C. Difficile Colitis. C. Difficile Colitis is increasingly a very troubled problem in those with diarrhea that is increasingly becoming a very big healthcare hazard in hospitals. One talks about antibiotics being part of the cause for this development. It’s not clear what is really the cause for this increase in C. Difficile Colitis throughout the world. But with Tolevamar and non-antibiotic or non-absorbed polymer, also similar to Renagel, we hope to have a very significant clinical solution for a very significant clinical problem. The degree of the problem is quite remarkable. In Québec, 100 patients in the last 18 months died of this condition just at one hospital. 400 patients died in New Jersey over the last year. This particular problem is becoming increasingly more difficult to control. So this is very, very exciting. It puts us into the hospital field more directly. We are looking at that in an infrastructural sense. We clearly want to make sure that we have the ability to reach these hospitals directly through our own organization in as efficient a way as possible. We are also preparing ourselves for manufacturing of this program so that we can roll it our quite quickly, as we would expect it to be of tremendous interest to take this product on. The accruals in the clinical trials are going very rapid, actually more rapid than we had expected. This is a very expensive trial. There are actually two trials, each of over 500 patients. They’re done in Europe, the US and Canada and Australia. So we don’t think we will have results of these trials this year, but will go into the early part of next year. And that I think will be quite a pivotal moment for the company to bring it to market, if we are successful. And it’s a very important care product. The other one that I have an enormous excitement about but much work needs to be done, is Campath for MS. We showed during the year very, very exciting first on velux rate against and 75% treatment. During this year, 2006, the third quarter timeframe, we will see two year results of this trial and we will then start to get a real good sense for the affect of this therapy on progression. This is a treatment that is completely different from currently available treatments in this space. It is still very, very troubled disease situation despite the fact that there are now more products available for this area. We did see some severe adverse events in the trial, the phase 2 trial. We did file recently with the FDA program to make sure that we manage the risk associated with this very active product so that patients safely can use the therapy. Very, very exciting indeed and it clearly will change the whole space around MS. And the most exciting thing is that we have currently a set of products in a very diversified set of markets, in the market worldwide, that have an incredible amount of space left. The only mature product here is Cerazyme which has been very solid, is clearly the standard of care and is in no particular danger to change its position, at least not in the near term. But all the other products are still in a very strong growth phase. So that we, even in the press release that you saw today and earlier analyst meetings, have been able to say that based on the current pipeline of products that are in the business, in the market, and Myazyme together, when we project out five years, we will see business that will exceed $500 billion in that timeframe. And of course when you do that, you provide tremendous leverage, allowing us to make very significant investments during this timeframe in the UB search and programs that we have ongoing and those that we can take on. So for next year for this current year, then we’re expecting a continuation of good growth on the topline revenues between $3.1 and $3.3 billion. And we’re also expecting very growth on the EPS line on a non-GAAP basis of $2.65 to $2.75 per share. Myazyme will be a participant in that toward the end of the year but still quite modestly. We would expect by then to be really much more important contributor in 2007. So an active year is ahead of us. Very, very exciting year. We are in an investment phase at the current time with all the clinical trials ongoing and with the Myazyme launch preparations in the spring, and the start of both the new manufacturing operations. We would expect very strong performance during the year and by the end of the year with some of the outcome of the late stage clinical trials becoming clear or maybe already being known, giving us a picture to further expand our diversified business model. So at this time, let me ask Mike Wyzga, our Chief Financial Officer to make some comments on the financial detail then we’ll go to Q&A and we have pretty much all divisions represented in this room so we can respond to all of your questions in quite direct detail. Thank you Henri. As Henri discussed in summary, 2005 does seem like a long time ago. But 2005 was a very strong year for Genzyme yet again. Our financial performance was primarily due to our product diversification. And you’re also seeing a good deal of leverage in our operations. Full year revenue increased in 2005 to $2.7 billion and that represents a 24% year over year increase. Q4 revenue increased to $729 million as most product lines continued to contribute to the topline as well as the bottom line. That revenue growth in our manufacturing leverage really drove the quarter and the full year bottom line. Our cash generation remains strong for both the quarter and the year. As you can see from our attached earnings per share cross walk, our GAAP earnings we $107 million or $.39 per share on a fully diluted basis. The GAAP earnings include two categories of events and I’ll walk through those if I could the first is acquisition related expenses of about $15 million. This is for write-off of expiring Colar inventory and the turnover of expected value of Hectorol acquisition. These expenses impacted our cost of goods sold line. We also incurred inprocess R&D write off of approximately $7 million. And this is associated with the acquisition of intellectual property from Avergen during the fourth quarter. As most of you are aware and I think Henri mentioned, during the year we dramatically increased the productivity in the production capacity and that was fairly dramatic. In the fourth quarter we had some low level contamination and some scale up issues that lead to some unsuccessful Cerezyme production runs. The result was a write-off of approximately $17 million. These events have been fully investigated and we’ve put in improved systems and procedures to correct these issues going forward. Product supply to the patient was unaffected, I should mention to you. On non-GAAP net income excluding the impact of these items in immunization was $163 million or $.60 per diluted share on a basis of 276 million shares outstanding. Our Q4 EPS includes the impact of the 9.7 million shares associated with our contingent convertible debt. For the full year on non-GAAP income, again net of one time items in amortization, was $603 million of $2.28 per diluted share. Now I should point out that the full year EPS equals the additive impact of each of the four quarters. Also you’ll have to keep in mind that the 9.7 million shares for the contingent convert impacts the last quarter or the fourth quarter only. It doesn’t affect Q1, Q2 or Q3. With that as an overview, let me summarize some of the key business drives in 2005 and then turn our attention to the specific guidance for 2006. As I mentioned, we had a 24% year to year revenue increase. This revenue increase is really driven by 2 factors, acquisitionally related growth and base business increases. Of the 24 percentage point increase on a year to year basis, six percentage points came from the acquisition of Syndics marketing reps in the United States, as well as Hectorol from Bone Care international, which was acquired in July of last year. The majority of the revenue increase really was directly related to the diversity of our continued growth of our base product set. Renagel increased to $110 million in the fourth quarter and $417 for the year. This increase of 15% on the year to year basis was due to increased market penetration on a worldwide basis. Fabrazyme increased and $305 for the full year. That represents a 46% year on year increase. That’s reflective of new patient accruals and continued market expansion, again worldwide. Now in the 4th quarter, we also recognized about $9 million associated with milestone payments under the RDP58 license agreement. This revenue was captured in the transplant area. Gross margin in the 4th quarter and for the full year, again excluding the impact of any of the write-offs, increased 4 percentage points on a year on year basis to 78%. This increase was due to the purchase of the Synovisc marketing rights in the United States as well as increased margins associated with volumes of Renagel. With our operating expense, our Q4 R&D expense before the impact of BIN46 and IP R&D was $133 million or 18% of revenue. This quarter’s R&D expense reflects the impact of a milestone payment that we made to DIEX of approximately $3 million. This is due to the initiation of the phase 3 trial. For the year, our R&D expenses were $480 million. Increase over prior year predominantly the incorporation of the ILEX pipeline, the acquisition of Bone Care as well as the ramp up as Henri mentioned of Tevelomar and late onset Myozam trials toward the end of 2005. SG&A expenses, again before the impact of BIN46 and one timers was $207 million for the quarter and $787 million for the full year. Again, this represents the incremental expenses associated with the bone Care product line and expenses resulting from the acquisition of Synovisc marketing rights here in the US. Our share count increased by about 37 million shares over last year. There’s a number of factors in this share count increase. The first is the ILEX acquisition. The second is the increases associated with the employee option exercise in stock purchases during the course of the year. We also had more in the money options as the stock price rose pretty rapidly in the 4th quarter. As I mentioned earlier, the share count increased by 9.7 million shares, associated with the contingent convertible debt in the 4th quarter. Cash from operation and proceeds in the 4th quarter was about $250 million. A little under $200 million generated from operations exclusively. For the year, our cash generated from operational proceeds was about $1 billion. We used predominantly all this cash for Bone Care acquisition, the Synovisc marketing rights in the US and we did do some debt repayment and we also used it for capital expenditures. Our capital expenditures in the fourth quarter were $57 million and $190 million for the year. You probably noticed we’ve revised our 2006 guidance format slightly to focus on the key product and product growth areas. We’ll continue to provide the same level of detail that we’ve always provided historically for any of our retrospective numbers. With that said, we expect our worldwide revenue to increase approximately to $3.1-$3.3 billion during 2006. This represents an increase of about $500 million over 2005. The largest components of the topline are Renagel, which continues to be one of the key elements of our revenue growth. With Décor and the impact of Part D, we’re expecting the increase in the topline range to come in between $495-$505 million. We expect Cerezyme to show more modest single digit growth in 2006, increasing to a range of $970-$980 million. This still represents an increase of about $40-$50 million in the course of the year. Diagnostics products and diagnostic service revenue is expected to increase to approximately $365-$370 million. The key drive in this area is increasing testing volume and that’s predominantly focused on prenatal as well as in the oncology area. SG&A will also remain relatively flat at about 29% of revenue. The SG&A expenses will be somewhat impacted by the costs associated with the launch activities of Almyozen and the increase Synovisc sales effort during 2006. R&D spending is expected to increase to about $560 million in 2006 and as Henri mentioned, we have a number of programs entering the late stage trials, particularly in the 1st half of the year, so those will be costly. Our weighted average shares outstanding excluding the impact of the contingent convert is expected to come in at about 275 million shares outstanding. The amortization estimate is expected to come in somewhere around $.46 per share. The impact of the contingent convert is expected to come in approximately $.06 per share. And the impact of the stock option expense is expected to be approximately $.35 per share, due to the full adoption of FAZ-B123R. Now with the investment in the launch of Myazyme and the acceleration of some of the pivotal trials in the first half of the year, we expect our second half will reflect a more rapid EPS growth. Before I turn it over to Henri, I’d like to remind you that you can find the line item detail for both revenue and expense, attached to the press release or on our web site. Now with that, let me open it up to questions and turn it back to Henri. At this time I would like to remind everyone, if you would like to ask a question, please press * and the number 1 on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Thank you for taking my question. Just wanted to gain a little bit more insight on the underlying assumptions for the Renagel revenue guidance. Maybe if you could provide a little more contribution is from Part D, Décor data and what if any benefit does having Hectorol provide? It’s a very good question of course they both are beneficial. John if you can give them some comments on that. John Butler here, the President of the Renal Division. It’s very difficult to split out what’s having the effect. If you look, we saw January prescriptions from IMS this morning. They were very positive. Our highest total prescription number ever. Our highest new prescription numbers since towards the end of 2001 from a growth perspective. So we’re really confident that a lot of that growth is having to do with Part D, since Décor is not yet published. But when you look at the revenue growth, what we attribute to each piece is harder to break out. But in total, we think we have 2 extremely valuable drivers that will allow us to reaccelerate the growth of Renagel in ’06. Right. Certainly part of the strategic rationale for purchasing Bone Care was to add Hectorol to our bag in the US. Now we’re able to talk to dialysis chains and physicians about overall bone and mineral metabolism management. Not just about phosphate control. So you’re bringing more than one solution. It’s also allowed us to increase our sales organization so that we’re getting better penetration down our customer call list and seeing the most important customers more frequently. So between the three, that’s clearly going to allow us to achieve the guidance. No, no, no. the Hectorol IV is sold directly to the dialysis chains whereas Renagel is sold…now both are sold through wholesalers from us, but Renagel as an oral product is written by the physician and filled at the retail pharmacy. So you’re not purchasing at the same call point. But when you’re talking to a physician who makes the prescription decision, you’re talking about total management of PTH, phosphorous and calcium and you have the answers to both. So you’re really getting kind of more than a double bang for your buck when you have a rep sitting in front of a physician. Thank you. A couple of years ago you bought back the tracking stocks and one of them was your oncology division’s, or former oncology division before Ilex. Can you discuss what’s happened to the technology of that division since its reacquisition or consolidation with the parent? Yeah, that’s kind of a generalist question, not specifically related to the purpose of this call but we may be able to make a few comments in that regards. The president of the oncology division, Mark Bamforth is here. The strategy following the consolidation of the tracking stocks was to accelerate or expand the oncology business into the commercial space and we were able to accomplish that with the ILEX acquisition and the addition to the portfolio of both Campath and Clolar. And parallel with that the strategy was to continue to invest in our internal R&D and many of the programs that were part of that portfolio continue to this day both in terms of focusing on anti-angiogenesis and antibody approaches to that, the development of antibodies to transforming growth factor beta, which is the program that we expect to move into the clinic during the first half of 2006. And, the small molecule program directed toward hepatacellular carcinoma, which is in phase 1-2 trial. So a continued investment in that portfolio. We also had a significant effort around vaccine, which we have de-emphasized as we’ve moved forward with oncology. Good morning. A question about Synovisc and potential competition, there was a study just published of another product, Uflexa compared to Synovisc and I wonder if you think that publication is going to have any impact on the potential of Synovisc? The Uflexa study is a non-inferiority study versus Synovisc and shows non-inferiority at three months of efficacy and says nothing at 6 months, which is our claim. There are other studies around Uflexa that show less efficacy in subsequent months. So we are watchful and always watch the competition, but not overly concerned. Uflexa also requires refrigeration which, from a doctor’s ease of use perspective is a big barrier to use. So we aren’t overly concerned but we’re watching it carefully. John, I don’t know if we can pinpoint it precisely. These reviews always take a little time. They have been submitted. Dr. Suki is working with the Journal now and the process is ongoing. Again, it’s under the journal’s control at this point in time. I have a question about Renamed and the Renabio replacement therapy. You announced elaboration with Renamed last year in September. In November, the company announced really positive phase 2 results, really impressive results with acute renal failure. I have a couple of questions on this. What is the opportunity for this product for Genzyme and what catalysts do you expect to provide further insight into the progression of this program? Yeah, we’ll ask John to give more details to it, but this is typical kind of program that we love. This is a very unusual program that deals with mortality. And it tries to create a step function for patients who currently die. And the phase 2A results were encouraging and currently we are starting the enrollment of phase 2B. Phase 2B really will tell us whether we have something here. We expect the results of that to be done by the end of the year and that then moves us into phase 3, a solid phase 3. So the program still has some ways to go but it is extremely exciting because indeed it does provide a way for patients to survive acute renal failure. It will be a tremendous contribution and the nature of the product is the kind of unusual nature of the product is we have had within the Genzyme picture for quite a while. So having said that, John, anything to add? I have to say I’m very excited. It’s what we’re all about. To figure out a way to really make a tremendous clinical difference. The 2A was not a blinded trial and so the 2B will be a blinded trial. And when you deal with something as important as mortality, you have to be absolutely sure that you stand on strong ground. So we decided with renavent that the 2B was highly appropriate and the 2B we’ll say, we have a very manageable risk going into the phase 3. But I’m with you too; I look at 2A and say the glass is half full and therefore we invest in 2B to make sure that we are there and we have something that can be labeled and can be standardized, which of course phase 3 really allows you to confirm. This is exciting stuff. I had a question on a comment that you made John about thinking that part D has already had a positive impact on Renagel usage. If that’s what you guys are thinking, kind of where did you come up with that? And then just secondly, so if we’re thinking about maybe 17-ish percent year over year growth, if somebody could remind me about the pricing history for Renagel in ’05 relative to ’04. Sure. Bill, again we just got January prescriptions this morning so it certainly is early to know what kind of an impact part D is having but. New prescription growth is kind of a key metric there and we saw 11.5% growth vs. December, which was a strong month for us. And again, we haven’t had that month on month growth since October of 2001. So, you know, it’s very early but it’s a good leading indicator I think that this is happening. And that this is what we expected. We expect that it will come in a gradual fashion but to see that in January was helpful. We were somewhat concerned that with the issues around starting up the program that some patients might get lost, particularly the dual eligibles moving over. Where the government has guaranteed that patients shouldn’t walk out of a pharmacy without a prescription filled. We think that’s been very, very helpful. Again our formulary position is excellent. We look at the dual eligibles in our top 20 states. 85% formulary access. We’re very pleased with that. So, the first indicator that we’ve had this monthly data is consistent with the weekly scrips we’ve been seeing for the last 5-6 weeks of this year. So all those point to positive momentum. Right. So in ’05, in February we did a 4.5% price increase and then at the end of the year, we did a 9.5% price increase. Good morning. Thanks for taking my question. Henri my question is actually for you, you have on this call and you have in the past expressed a lot of enthusiasm about Myazyme. Could you provide a little bit more detail on which patients you think will use Myazyme in its first year or two after launch and what plans you have or what strategy you’ll use ultimately to get the adult onset patients onto the drug and how important they are to its ultimate success. Thank you. We believe that the ultimate success of Myazyme, the ultimately clinical usefulness of Myazyme patients. Of course it will, it is absolute total therapy, given the clinical trial that we did announce mid last year about the classical infantile patients who normally die by about 12 months of life. And in our trial, all patients were alive at 12 months. But, clearly, all patients that also relates to patients that start to slowly deteriorate over time, we expect will be helped by having Myazyme available to them. But to answer this question from both a clinical perspective and global marketing perspective more directly, let me ask Dr. David Meeker who is the President of the division to talk about it a little more. Thanks Henri. I’ll echo what you said. The infantile population today we are seeking to serve that patient population completely. It’s quite clear from the data that we have the earlier you can intervene with this group, the better they do. And, we’re committed to trying to make that possible. I think the late onset population; this is not so different from the other diseases that we’ve launched. If you think about Gauché, there are … the Gauché population of course has a range of severities. Not all patients that have the genetic defect will be symptomatic and require therapy. And I think we’ll learn with the base population is that again there’s a range of severity and that over time people become symptomatic. So to Henri’s point, we would believe today that at the earliest sign of weakness you are certainly eligible for therapy. There will be as there has been with the other diseases, discussion around that as thought leaders begin to get more experience. But, this is a life threatening disease and it’s no different for the adults than it is for the infants other than the course; the timeframe over which that happens. But they do progress to wheelchairs and to ventilators. We’ll work closely with the thought leaders on the data that will continue to drive this and we’ll also, in terms of increasing awareness – which is a fundamental problem for all of these diseases, and we’ve developed quite a bit of experience with that and we’ll be working actively on that side of the problem. Maybe to amplify that, the questions around the blood technology and our ability to facilitate diagnosis is up and running and available at several sites around the world and will be available within Genzyme genetics at the time of launch and we believe that will further facilitate that whole process. I have a question for you as it relates to the risk management program for Campath and MS. What have you guys done so far there? Any further thoughts on the phase 3 design as it relates to ITP? Thank you. We filed the plan with both the FDA and the EMEA at the end of January. The expectation is that it will go through in normal review process, with some reviewing comments back from the agency. And our hope is that we will come off from the clinical hold or partial clinical hold and be able to resume dosing sometime either late this quarter or early in the 2nd quarter. In parallel with that, we are planning to move forward with a phase 3 study. That of course has a number of design elements to it and we are spending a fair amount of time with our internal and external experts, developing that protocol that will be coordinated with additional meetings with the regulatory authorities. And our hope is again to initiate the phase 3 in the 2nd half of this year. Thanks. A two part question. Can you give some detail in terms of where you stand with working on …I think you mentioned before in the last couple of conference calls Hectorol had some inventory to be worked through. Where do things stand with working through that inventory? And can you give us some indication as to whether that inventory came, essentially out of the acquisition within distributors or with the physician offices? Sure Henri. Yeah, Chris. The inventory was in, was at the wholesaler as well as at the dialysis facilities, the dialysis clinics, not so much at physicians’ offices. It is generally used at the clinical level. We have worked that inventory down. We have put IMAs in place with virtually all; certainly the vast majority are top wholesalers. More than 85%, at this point probably more than 90% are covered by an IMA, which keeps them within a 3-4 week range at the wholesaler, at the distributor level, which we think will ensure service levels don’t slip. And when you look at Renagel, we put similar ranges in all of our IMAs in 2002 and we’ve been able to manage those inventory levels within a half week, three quarters of week consistently. So we think that we’ve put an effective control in place there. Sure. We’ve…look at the package that was sent to the FDA. We’ve determined that we do need to do a clinical trial for Hectorol in Europe. We’re planning that protocol now. We did expect that we would need to do that when we did the acquisition. But we were hoping we could put together the US package. But we’re designing that protocol. We think it will be relatively easy, a relatively easy study. Once that’s done we can give more feedback on that. Thank a lot. Two quick questions. Number one, will Myazyme ultimately grow margin structure for the company and why or why not? Any detail you’re able to provide to help us out since we’re now forced with the challenge of modeling that product. And number two, the $5 billion in revenue that Henry threw out, I think he said it’s five years out. We’re looking at a slide that says it was in ’09. Can you clarify $5 billion in ’09 or 2010? Thank very much. 2010 is the answer. That was the number, the timing also that we indicated earlier at the JP Morgan meeting. And in terms of the margins, it’s a bit early to make very long comments about this because we won’t price this product or discuss price around this product until we know the final labels. We’ve always done that in that fashion. I did say that before on a call of this nature and I would repeat that here. So the, clearly in the early stages o a new product it is pretty expensive, but we are very confident that we have the capacity, we have the efficiency to produce a product that will not impact the average margins of the company in a negative way by the time that we are, that this program is really running it will be sometime during 2007. Clearly, 2006 is an implementation year and that’s a more expensive year from every point of view and that’s just the investment that we need to make. But, for 2006, we have given the corporate margin knowing that Myazyme is coming and we’re expecting that to be 78%, approximately the same level as it was last year. Of course, revenues from Myazyme will be very modest during this year and will become more important during the coming years. During the coming years we don’t expect it to negatively influence the margins of the corporation. Thanks very much. Very quickly, could you remind us of the timelines for Cervelomar chloride and separately if I can, elaborate on the new product initiatives for Syndics and comment if you can on pricing? Cervelomar Carbonate development is ongoing. We have bio equivalents trial which is the basis for our regulatory filling for our current label, basically that it takes on the same label as Cervelomar Hydrochloride that’s a trial that’s fully enrolled, was fully enrolled at the end of the year and is ongoing now. We’ve started a trial in chronic kidney disease patients not yet on dialysis that has begun accruing patients. We’ve also started a trial for powder formulation as well, with Cervelomar Carbonate to expand the brand further. And, our expectation is that we’ll be filing toward the end of the year and approval a year later. Yes. The first question I believe was about the Synvisc pipeline. We have three significant clinical trials ongoing. The first is to expand the label for Syndics in the US to include the hip and if all goes well, with the results of that trial we would hope to launch that first half of next year. The hip is not as large as the knee, but still a very, very substantial piece of the osteoarthritis market, both in the US and globally. The second two trials are for second generation products; both aimed to reduce the number of injections used in the product – we hope to one – although we’re testing some other alternatives to that. And again, Syndics 2, which uses and avian formulation, Avian HA, if successful we would launch in Europe the first half of ’07 and in the US back half of ’07. Hilastin, which is the second of those new programs uses fermented HA, bacterially reduced HA. And again, if successful would be launched the first half of ’08 in Europe and the back half of ’08 in the US. Those are the… Thank you I just want to clarify on Cervelomar Carbonate, the filling toward the end of the year, is that both for CKD or is that for dialysis only? Hi thank you. A lot of my questions have been answered and the one remaining I know you can’t answer directly. But, maybe you can qualitatively about your acquisition strategy going forward. I should know we have done transactions in the past. We did three transactions as I mentioned and then smaller transactions last year. And we’ve done them really over the last 20 years in a way that’s absorbable. The company is, this whole field, is characterized by numerous smaller companies, smaller programs. And of course we now have infrastructure on a global basis, both manufacturing and marketing and sales and regulatory that makes us a very attractive company to consider. We’re not a big pharma company. We are a company that has a certain reputation that allows us to be successful in the highly specific market situations. We are prepared to engage in innovative programs like the combination of the diagnostic component with the therapeutic component is something that we believe over the next 1o years will be a very important new field. And so we’ve made over the year a number of acquisitions and transactions that allowed us to build up a very significant program within the US with over 1,500 in terms of genetic diagnostics. We expect to continue to build there and do smaller transactions that will continue to build our portfolio that we can offer through that organization. So those are the kinds of things we will continue to do. The field is, I think, as exciting in this sense as it has ever been. And the realization that what it takes to bring products successfully to market and with sustainable results, the difficulty to do that, is also more broadly recognized. So, a company that can offer a way to achieve that, for a smaller company it is an attractive company. And we’re spending a material amount of effort to understand what the opportunities are on the outside. My question for you, just to make another comment if you would about the current state in the US of testing newborns for genetic disease and where that may be headed? Thank you. It’s not just the US, but a global area the way that we think about it. Specifically, we are working, have been working for now quite a number of years on newborn screening for Lysosomal storage diseases. And we really needed to go there because of the seriousness of the disease, where we need to get patients on treatment within the first six months of life, as early as possible. So we were working on these technologies. We have a number of beta sites around the world trying out technologies we’ve introduced. We get very good reactions on the therapeutic that have been available for these diseases and are becoming available like for the disease in the future. It is a process that will take a little while to do, because of this…it’s a small political process often. It isn’t a pure medical process to introduce newborn screening. We think that the nature of the diseases that we treat now in Lysosomal storage disease are not too dissimilar from the nature of the diseases for which currently these kinds of tests are available. And if I were to make a prediction, I would think over the next 2, 3, 4 years, we’ll see some real change in this regard. But let me ask David Meeker who is more directly involved to make a comment as well. David? The only thing I would add is that it is, as Henri Said, both political and scientific and we’re working closely the political side of the equation. I think the scientific side is driven by what you do with that information. So if you have a newborn screen where the diagnosis of a patient will allow you to act immediately, of course that’s going to drive this process much more than one where there’s the luxury of waiting several years to make the diagnosis, in terms of the ultimate outcome. So, with the LST world, Pompei clearly and PS1 also I think all the MPS disease where earlier diagnosis is going to be important and there are some diseases outside the LST world. So we’re very much in this and we’re going to contribute constructively within the LST but also across some of these other diseases. Mara, do you want to make a comment? Mara Aspinall is the president of Genzyme genetics, as well and her organization will play a big role into the implementation. I think the only thing that I would add is that for all the diseases Dave mentioned and others, early diagnosis is critical not only to the quality of life but also to reducing the overall cost of care for those individual patients. So from an overall healthcare system, while there’s some additional cost in this initial screening, indeed we believe it will be cost effective on an individual basis but also a systemic basis. I have one question actually, the experience that you’ve had with Fabrazyme, for example. Are you able to quantify in any way whether you’re picking up diagnoses earlier in the year 2006 than in ’02, ’03 by age? Fabra is a different disease in that it presents later, but…one quick data point that might be useful. We did a market survey in the US and the average age of diagnosis was 29 years old. And that speaks again to the problem of many of these diseases where the symptoms are there much earlier, but the awareness level of the doctor is low. And the diagnosis is delayed. In that survey, the average age of diagnosis was 29 and those patients had seen on average 9 physicians before diagnosis was made. So to your point, I don’t have good data to confirm that we’re doing better than that, but I’m quite sure we’re doing better than that and there’s still a ways to go. Thanks for taking my question. I’d like to go back to your comment the thought that you had about spending and revenue for 2010 for your currently marketed products and you suggested that allowing you to spend more. Do you foresee that spending in any particular area, is it renal products, cancer or any direction in particular that you see yourself focusing on in the coming years? It’s a great question. I just have to think over the next 5 years where we see our R&D investments. in Oncology as we are making significant investments in the 2nd generation of Syndics, 3rd generation, going to a different level of convenience for patients. We really think those are very exciting and relatively predictable opportunity. We’re making material investments that will last a number of years in acute renal failure. If the 2d trial is successful. And quite a number of trials that are now in phase 1-2 that if they work out, these will amount to significant investments. The range from Parkinson’s disease to diabetes type 2, diabetes type 1. But those are early trials and who knows if they work. If they do work, we’ll have the very difficult task to try to prioritize all the things. The problem is that we have an embarrassment of riches that we find ourselves in, in terms of late phase trials. It is extremely exciting but we need to prioritize and make sure that we can afford and analyze the financials in a way that everybody understands and that meets everybody’s expectations. I would not say that there’s one specific area that we’re putting most of our increased R&D expenditures. It’s really across the board. A follow up. Will most of your spending be on internal programs rather than growing through large acquisitions? Is that your current thinking? Large acquisitions we’ve really never done. We’ve done smaller acquisitions. Like the ones we mentioned for last year. I think it will be very similar in the future as it has been in the past. We will have a mix of things that we see as opportunities come from the outside come to use and we’ll carry through what we have ourselves. Once again I would like to remind everyone, if you wish to ask a question please press * and the number 1 on your telephone keypad. We do have a follow-up question from Ian Somaya Can you reconcile the SG&A guidance that Mike provided? 29% of sales and the of $95 million. Your revenue range is $3.2 billion. I’m just wondering … the number turns out to be higher than $930 or $940. I’m just wondering which number we should use. Base it off of the product revenues or should we just stick with the numbers you provided on the guidance sheet? Thank you everybody for participating. We look forward to reporting on the products and our programs for 2006. Until then we will close this call.

EarningCall_233836

Here’s the entire text of the prepared remarks from Amazon’s (ticker: AMZN) 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. Tim Stone, Vice President of Investor Relations Tom Szkutak, Senior Vice President and CFO Jeff Bezos, President, CEO and Chairman Analysts: Doug Anmuth, Lehman Brothers, Analyst Jeetil Patel, Deutsche Bank, Analyst Brian Pitz, Morgan Stanley, Analyst Anthony Noto, Goldman Sachs, Analyst Justin Post, Merrill Lynch, Analyst Imran Khan, JPMorgan, Analyst Safa Rashtchy, Piper Jaffray, Analyst Bob Peck, Bear Stearns, Analyst Scott Devitt, Legg Mason, Analyst Mark Rowen, Prudential, Analyst Mark Mahaney, Citigroup, Analyst Heath Terry, Credit Suisse First Boston, Analyst [Operator]: Good day, everyone, and welcome to the Amazon.com Third Quarter 2005 Financial Results Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Stone. Please go ahead, sir. [Tim Stone, Vice President of Investor Relations] Hello, and welcome to our Q3 '05 financial results conference call. Joining us today is Tom Szkutak, our CFO. Jeff Bezos, our Founder and CEO, and Tom will both be available for Q&A. The following discussion or responses to your questions reflect management's views as of today, October 25, 2005 only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our 2004 annual report on Form 10-K. As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. During this call, I will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on IR website, you'll find additional disclosures regarding these non-GAAP measures, including reconciliation to these measures of comparable GAAP measures. Rydex Funds flagship product, the Rydex S&P Equal Weight ETF tracks the S&P Equal Weight Index, which includes the same stocks as the S&P 500. Unlike the S&P 500, which is capitalization-weighted, the S&P Equal Weight Index is equal-weighted. Each of the 500 stocks is represented equally, instead of by the size of its market capitalization, eliminating the bias toward large-cap companies. Learn more about sector composition, largest holdings and performance here. Rydex Investments continues to drive change in the financial industry by introducing investment products and services that challenge conventional thinking, empower investors and provide essential new options for uncertain market conditions. Rydex manages $14 billion in assets via more than 60 mutual funds and exchange traded products. Thanks, Tim. This was another successful quarter for Amazon.com. I'll start with comments on our financial results. The financial measure we're working to maximize over the long term is free cash flow per share. Trailing 12 months free cash flow grew 13% to $475 million. As announced in August 2005, we settled a patent lawsuit on terms including a previously unanticipated payment of $40 million in Q3 2005. Q3 2005 trailing 12 months free cash flow would have grown 22% to $515 million excluding this payment. Free cash flow is operating cash flow minus capital expenditures. Free cash excludes stock-based compensation and includes cash taxes paid, which is well below our booked tax provision due to our NOLs. The combination of common stock and stock-based awards outstanding was 438 million shares, compared with 434 million, up 1%. Stock-based awards outstanding were 24 million or 5.8% of shares outstanding, down from 27 million or 6.5% of shares outstanding. We strive to efficiently manage share count to create more cash flow per share and long-term value for owners. Return on invested capital was 34%. We now have $248 million of deferred tax assets, up from $12 million a year ago. For comparison, excluding tax assets and this $40 million legal settlement, ROIC would have been 44% flat with Q3 of 2004. Revenue grew 27% to $1.86 billion or 28% excluding the $7 million unfavorable impact from year-over-year changes in foreign exchange rates. This was the first time in over three years that we have been negatively impacted by foreign exchange rates. We will continue to talk about our results with and without the impact of FX, as we have done since Q2 of 2002. Q3 2005 worldwide revenue benefited by approximately 260 basis points of year-over-year growth from Harry Potter 6 tales plus pre-order attachments. Excluding Harry Potter 6 plus attachments and changes in foreign exchange rates, revenue growth accelerated to 25% in Q3, up from 24% on a comparable basis in Q2 of 2005. Worldwide unit growth was 28%. Third-party units, representing Marketplace and Merchandise units sold by Amazon sites, were 30% of total units, up from 28%. Third-party units as a percentage of total units were 17% just three years ago. Active customer accounts, representing customers who ordered in the past year, surpassed 52 million, up 19%. Media increased 20% to $1.3 billion. Electronics and other General Merchandise or EGM, increased 43% to $491 million, representing 26% of worldwide sales, up from 24%. And for the first time on a trailing 12 month basis, our sales were over $8 billion, 45% of which came from our International segment, and worldwide EGM sales surpassed $2.1 billion. Gross profit grew 30% to $463 million in Q3, and gross margin increased 62 basis points to 24.9%, primarily due to increased third-party sales and a $29 million increase in other revenue, partially offset by a greater shipping loss, driven by free shipping in Amazon Prime, our lower product prices including customer savings on Harry Potter 6 and the continued mix shift to International and EGM. Although gross margins increased this quarter, I would like to take the opportunity to reiterate that we're focused on profit dollars, not percentage margins. Now, I will discuss operating expenses excluding stock-based compensation expense under FAS 123(R), which we early adopted in Q1 this year. Fulfillment, marketing, technology and content and G&A combined were $342 million or 18.4% of sales, up 59 basis points. Fulfillment was $166 million or 8.9% of sales, down 32 basis points. We have expanded our fulfillment capacity in 2005 through efficiency gains, as well as increases in leased warehouse space. We plan to continue expanding our worldwide fulfillment capacity in order to accommodate greater selection and meet anticipated shipment volumes from ourselves as well as third parties for whom we provide the fulfillment. We expect absolute amount spent in fulfillment and fulfillment-related cost of sales to increase over time. In Q3, we opened fulfillment centers in Pennsylvania, Texas and Scotland and our new fulfillment centers in Kentucky and Japan will open to serve customers in Q4. Marketing was $42 million or 2.3% of sales, roughly flat as a percentage of sales year-over-year. Technology and content was $108 million or 5.8% of sales, up 136 basis points. We intend to continue hiring computer scientists and software engineers to invest in further innovation of customers, and we expect annual technology and content costs devoted to our sole platforms: Search, Web Services, Digital and other initiatives to increase in absolute dollars throughout 2005. G&A was $26 million or 1.4% of sales, down 36 basis points. In Q3 2005, we recorded a $12 million credit for actual and expected reimbursement by an insurer of certain legal costs previously incurred by us. Excluding this credit, G&A would have been $38 million or 2.1% of sales, up 28 basis points. Now, I will talk about our segment results. Consistent with prior periods, we don't allocate stock-based compensation or other operating expenses to our segments. In the North American segment, revenue grew 28% to $1.04 billion, the fastest rate of growth in over four years. Media revenue grew 21% to $684 million, including sales of Harry Potter 6 in Q3. In EGM, revenue grew 33% to $304 million, representing 29% of North America revenues, up from 28%. Gross profit grew 31% to $292 million, and gross margin increased 71 basis points to 28.1%, largely due to a $29 million increase in high-margin other revenues and an increase in third-party sales, partially offset by Amazon Prime, our price reductions across product categories, product mix shift and free shipping. North America segment operating income increased $9 million to $66 million, and operating margin declined 64 basis points to 6.4%. A significant majority of our technology and content costs are incurred in the US, with most of them allocated to our North America segment. In the International segment, revenue grew 26% to $817 million. Revenue growth was 28%, adjusting for the $9 million year-over-year unfavorable impact from foreign exchange rates during the quarter. Media revenue grew 19% to $629 million. In EGM, revenue grew 62% to $187 million, representing 23% of International revenues, up from 18%. Gross profit grew 29% to $171 million, while gross margin increased 47 basis points to 20.9%, primarily from an increase in third-party sales, partially offset by increased free shipping, product price reductions and product mix shift. International segment operating income increased $17 million or 46% to $55 million, and operating margin increased 88 basis points to 6.7%. The combination of operating income in our North America and International segments is our consolidated segment operating income or CSOI. Our segment information financial statement in our press release reconciles CSOI to GAAP operating income. CSOI grew 28% to $121 million. Excluding the $12 million insurance reimbursement, consolidated segment operating income would have been $109 million or 5.9% operating margin. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income decreased 32% to $55 million. Excluding the negative impact of the $40 million legal settlement, operating income would have increased 17% to $95 million or 5.1% operating margin. Our provision for income taxes increased $18 million to $21 million in Q3, or a 42% rate for the quarter, which includes the year-to-date adjustment benefit of $4 million to reflect our current estimate of our annual effective tax rate of 50%. Our effective tax rate remains higher than the 35% statutory rate, primarily due to taxable income associated with the Q1 '05 transfer of certain operating assets from US to international locations. We expect these asset transfers to result in tax expense for financial reporting above the 35% statutory rate throughout 2005 and beneficially impact our effective tax rate over time. On a cash basis, since we have NOLs, these asset transfers will not have a significant effect on cash taxes paid in 2005. We expect cash taxes paid to be approximately $25 million in 2005, compared with $4 million in 2004. Cash taxes paid were $11 million Year-to-date. GAAP net income was $30 million or $0.07 per diluted share, compared with $54 million and $0.13 per diluted share. The $24 million decline in GAAP net income is primarily due to the $18 million increase in income taxes and $20 million after-tax impact of the litigation settlement. Excluding the legal settlement, net income would have been $50 million or $0.12 per diluted share. Turning to the balance sheet, cash and marketable securities increased $234 million to $1.4 billion. Since Q3 '04, we repurchased $265 million of our convertible debt. Inventory increased 28% to $456 million, and turns decreased 11% to 14.8, as we expanded the breadth of our product category selection in our fulfillment centers and took advantage of buying opportunities from vendors. Inventory turns have been approximately 15 each quarter this year. We will continue to increase our mix of direct buying in existing and new product categories, enabling us to offer even lower prices to customers. Our investment in fixed assets, which includes net capitalized software development costs, increased 42% from a year ago to $322 million. Our capital expenditures were $76 million for Q3 and $149 million year to date. $57 million of year-to-date CapEx was software development costs. Our growth continues to be fueled by our relentless focus on the primary inputs of customer experience: convenience, selection and price. Some recent examples of our progress include Amazon Prime. We continue to be pleased with the initial Amazon Prime results and have seen increased purchases by Amazon Prime customers across more categories, especially heavy purchases in electronics, tools, kitchen and health and personal care. For $79 a year, Amazon Prime members get all-you-can-eat free express shipping. Customers continue to join Amazon Prime, and we anticipate even higher enrollment rates as we get closer to the holidays. Amazon's Search Inside the Book program continues to expand rapidly. At this point, one out of every two books Amazon sells in the US are fully searchable. Working directly with publishers, Amazon has made it possible to search the complete interior text of hundreds of thousands of books. In addition to searching, customers can look at full interior pages that match their search criteria. Based on the success of the program in the US, we have now launched Search Inside the Book in the UK, Germany, France and Canada. A9.com, a subsidiary of Amazon.com, launched A9.com Maps, a new service that shows users an interactive map and over 35 million corresponding street level images in a single interface in 24 cities. Developers continue to adopt our Web Services tools. Over 135,000 have registered to date, upgraded in 60% year-over-year. One example of the flexibility and utility of Web Services is that customers can now exchange coins and bills at Coinstar centers with no transaction fee for a gift certificate instantly redeemable at Amazon.com. Coinstar implemented this using Amazon Web Services APIs. Third-party sellers remain a key part of our selection expansion. And worldwide active seller accounts, merchants with an order from a customer during the preceding 12 months, for the first time exceeded 1 million, up 29% year-over-year. Some pricing highlights include the average customer discount across books, music and video products purchased on Amazon.com increased approximately 375 basis points year-over-year. The average customer discount for electronics purchased on Amazon.com increased over 100 basis points year-over-year. Customers so far this year have saved over $300 million on shipping through our worldwide free shipping offers in Amazon Prime. And starting today, customers shopping Amazon.co.uk now qualify for free shipping on orders over 15 pounds, down from the prior threshold of 19 pounds. I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we have seen to date and what we believe today to be appropriately conservative assumptions. However, there is a high level of uncertainty surrounding fluctuation in the euro, pound, yen, Canadian dollar and yuan exchange rates, as well as the global economy and consumer spending and the impact on both of world events. While we are cautiously optimistic, it is not possible to accurately predict demand, and therefore our actual results could differ materially from our guidance. Let me also remind everyone that we mark our euro-denominated debt to market at the end of each quarter, which results in a gain or loss for any movements in the euro between reporting dates. We also have exposure to the euro related to our interest expense on this euro-denominated debt. We incur a foreign currency gain or loss corresponding with intercompany balances denominated in foreign currencies, which are to be repaid among subsidiaries. Depending on the amount and timing, an unfavorable resolution of outstanding legal matters could materially affect our business, results of operations, financial position or cash flows in a particular period. Our effective tax rate in 2005 and beyond are subject to a significant variation based on changes in our corporate structure, timing differences, current tax laws and estimates such as estimate revisions resulting from changes in foreign exchange rates and our stock price. Our guidance assumes that we don't record any additional intangible assets or any further revisions to stock-based compensation or our restructuring-related estimates, and that foreign exchange rates remain approximately where they have been recently. For Q4, we expect net sales of between $2.86 billion and $3.16 billion, or growth of between 13 and 24%. This guidance anticipates an over $100 million negative impact from foreign exchange due to the dollar's continued strengthening. GAAP operating income to be between 135 and 210 million, or be between a 17% decline and 29% growth. This includes stock-based compensation and amortization of intangible assets of approximately $30 million, up from $20 million based on our prior stock-based compensation accounting method. We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $165 million and $240 million, or between a 7% decline and 35% growth. For calendar year 2005, we expect net sales of between $8.373 billion and $8.673 billion, or growth of between 21 and 25%. GAAP operating income to be between $403 million and $378 million, or between a 9% decline and 8% growth. This includes $144 million for stock-based compensation, amortization of intangible assets and the $40 million legal settlement. In 2004, stock-based compensation and amortization of intangible assets was $59 million under our prior stock-based compensation accounting method. We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $547 million and $622 million, or growth of between 12% and 27%. We expect 2005 free cash flow to grow year-over-year, and we expect capital expenditures including capitalized software development costs of approximately $200 million. As a reminder, we will be giving 2006 expectations when we report our Q4 results. Our financial focus is on long-term growth and free cash flow per share. We are confident that if we continue to improve the customer experience, including increase in selection and lowering prices, and execute efficiently our value propositions as well as our free cash flow will further expand. Thanks, Tom. Let's move onto the Q&A portion of the call with Jeff and Tom. Operator, will you please remind our listeners how to ask a question? Rydex Funds flagship product, the Rydex S&P Equal Weight ETF tracks the S&P Equal Weight Index, which includes the same stocks as the S&P 500. Unlike the S&P 500, which is capitalization-weighted, the S&P Equal Weight Index is equal-weighted. Each of the 500 stocks is represented equally, instead of by the size of its market capitalization, eliminating the bias toward large-cap companies. Learn more about sector composition, largest holdings and performance here. Rydex Investments continues to drive change in the financial industry by introducing investment products and services that challenge conventional thinking, empower investors and provide essential new options for uncertain market conditions. Rydex manages $14 billion in assets via more than 60 mutual funds and exchange traded products.

EarningCall_233837

Here’s the entire text of the Q&A from Shanda Interactive’s (ticker: SNDA) 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. Thank you. The floor is now open for questions. If you do have a question at this time, please press “*” “1” on your touchtone phone. Once again, to queue up for a question, it is “*” key followed by the number “1” on your touchtone phone at this time. Please note that while asking your question, we ask that you lift your handset to provide optimum sound quality. Our first question is coming from Safa Rashtchy of Piper Jaffray. Hi, good morning. I wanted to see if you could elaborate a little bit on the operating cost this quarter? Shujun, you mentioned that it had to do mostly with headcount and I might have missed some of your comments as to what was requiring such a big headcount increase and were there other marketing expenses, and was this a one-time expense that you incurred this quarter, or should we assume this level of operating expense in the coming quarters? And I had a quick follow-up. Thank you. Let me just quickly translate that Shujun just reiterated that it is a big increase in terms of operating costs for us from second quarter to third quarter, really in the following areas. First of all on the sales and marketing activities, those are related to the new game launch as well as the EZ product launch and on top of that we have done some marketing and promotional donation events, etcetera to really improve the overall perception of online game market and for social cause. And secondly, the human related cost is also in the area of new games development, as well as in new initiatives. And lastly, is the salary and wage increase to make Shanda more competitive in this market, to be able to attract and maintain a stable talent pool and that would result in future growth. And lastly, is that there is a one-time legal fee that is about RMB 8 million, which we probably wouldn’t see it recurring on a regular basis. So overall, the expenses are higher but as a percentage of our total revenues as the new game revenue, as well as EZ series part of the revenues continue to increase, should not that be quite as high. And, Tianqiao will have some input as well. Tianqiao would just like to add a few points. First of all, as Shujun talked about the number of changes, I would just like to quickly comment why and why we’re doing this. For the past four quarters, Shanda had double-digit quarter-over-quarter growth very consistently and either both from objectively also subjectively we need to continue to invest into our foundation so that we can generate future growth. This quarter there were really two areas that we have invested heavily and that should generate longer-term sustainable growth. First of all is on the wage and salary related compensation. We have raised on average our employee salary by 20%. This had made Shanda a lot more competitive in this very dynamic market in terms of keeping our talents. And secondly, is in the marketing expenses and activities a lot of that is surrounded to Shanda’s brand, as well as the overall online game industry to create a very positive macro environment for this online game industry’s overall growth and as long as the industry grows we, as one of the industry leaders, will certainly benefit from that. And overall I think the main thing, main thinking behind this period of time is that we need to continue to build into our foundation to really be able to compete in the future market and generate sustainable growth in the future, so please keep that in mind as we go on. Okay, thank you. If I may, as a quick follow-up and you may have covered this, I missed the early part of the call, if so, I can take it offline. You indicated that Mir II, obviously, is a mature game and is declining. It still constitutes a significant part of your revenue. Given that even though you have the other games pulling and you will have some pipeline, how should you look at the sequential growth in Q4 and beyond? When do you think the effects of declining user base from Mir II would be offset by your new games? The first point is that Mir II has been in the market for four years and its inherent life cycle to this date we have already expected this will happen. The decline would be within our expectation and we have already started to prepare for this more than two years ago. As you recall, more than two years ago Mir II essentially accounted for 100% of our total revenue and as we disclosed in our Prospectus, IPO Prospectus, that will be a major risk to Shanda. But since two years ago we have added on various other types of games, including our in-house developed games, as well as casual gaming, so we have very successfully diversified our revenue stream into from different types of games and various source and I think looking at third quarter we think that the declines effect from Mir II has been largely offset by the increase from other games, so we have done quite well on that regard. I talked about the past, let me comment on the future. Overall the online gaming markets in China has been around for more than four years ago, since we first launched Mir II and looking at the current game titles in the market that are around three, four years old, all of them seem to have reached the peak or started to decline already. To prepare for that we already have built a very strong game pipeline with the games from Dungeons & Dragons, for example, and also from Actoz, as well as casual games that we’re developing in-house. So going forward we do not expect any particular single game to contribute to the majority of our total revenue, whereas we see revenue streams coming from a more diversified portfolio and Shanda truly becomes a platform operator. I think the fact that Shanda has reduced dependency on a single game is a sign of Shanda maturing as a platform company. Again, I think our core competence is in operating a overall interactive entertainment content platform and that shows in our EZ strategy, as I talked about earlier. I remember last time on the conference call Safa also asked me, when do we expect the home strategy to contribute to revenue. Well, I can clearly tell you that in fourth quarter this year we expect that to be EZ strategy product will already start to contribute and I think going forward this will also help to offset the decline from Mir II. Hi. Good morning. Two questions. First, if we take out the cost related to EZ series, what should be the estimated operating margin and operating profits from pure online game business and plus the other revenue. And second question is, can you give us some indication about the production costs of say an EZ center, EZ Pod and EZ Mini? Thank you. If we take out the expenses related to EZ products in terms of development and investment on the platform side, as well as sales and marketing expenses and also the one-time large legal expense, I believe our operating margin should be pretty much in line with last quarters. The centerpiece or the integral part of the overall EZ strategy and EZ product is essentially the EZ Center software solution, which as you know software doesn’t have a lot of cost, so that will not really affect our margin. However, initially as we kick off this market we will take on the products as well, for example, the EZ Pod, as well as EZ Station. As I mentioned earlier, we expect that the total cost incurred, as well as capital tied to the EZ strategy to be less than US$20 million. Just one follow-up question, so if the case like I’m selling EZ Pod at 458 RMB, do you mean that say, this is taken care into the production cost into consideration that, that pricing still can help you to make some that margin on the product? Thank you. The pricing, for example, for EZ Pod at 458 is essentially, well as you know, EZ Pod is the EZ series and software plus a remote control. So the value proposition is really in the EZ Center software solution and, as you know, the software margins are in what kind of range you already having idea. So I would say that it would not have too much of an impact on Shanda’s overall margin and we’re certainly making money on that. Hi. Good morning. Most of my heavier questions were already asked by Safa and Wallace. I want to ask on some of the more detailed smaller level questions. You mentioned your ARPU increased. I’m kind of curious how much of that was impacted by the mix in the monthly card sales versus time block sales? I mean was it impacted by the fatigue system? Shujun’s answer to the ARPU question is that first of all overall it really is a result of the increased loyalty of our users to Shanda’s platform as to the various service and operating and also activities that we create for them. And secondly is that because our direct online sales where the end users pay by credit card or debit card has increased significantly during this quarter to more than 17% of our total sales. So that has directly resulted in a higher ARPU from the games. Tianqiao commented also that earlier Safa asked about why we are incurring so much cost and I mentioned that it’s because we’re building into the foundation and you can show that, you can see that the results of direct online payment increase is because of our work in Shanda’s integrating back end processing as well as all the user interface, the work that we have done in the past, and we believe that this foundation will help us in the future as we rollout the home strategy, and then in terms of making payment easy for end users et cetera. Okay got you. Your, now is the fall in your Mir II users concentrated in any one or two month period for the quarter or and are we still seeing a decline continuing to this quarter, like a heavy decline or is it starting to flatten out on the thick line side? I think as Jun talked about earlier its really the decline in Mir II is really a result of four years accumulated life cycle issues and we do see that it will continue to have gradual decline. However, Shanda’s operational expertise and experience we will continue to use that to try to reduce that decline or to slow down that impact. And for all these reasons that you know for the past few years we really have not been able to expand Mir II by using expansion packs or upgrades. The result that you see of Mir II is purely because of our expertise in terms of providing service and offering the online game community. So we will continue to rely on that to further prolong Mir II’s life cycle. Okay and my last question very quickly, you mentioned Turbines, D&D game and the three Actoz game is coming in 2006. Is there any one or group of games that you are putting more emphasis on? Are you putting more emphasis or bigger expectations in terms of a bigger hand from D&D or the Actoz games? And that’s my last question. Well, as you know, that D&D has been in development for quite sometime and it’s the highly anticipated high quality game, so we certainly have a lot of expectations for that. And Actoz has supplied many quality games to Chinese market in the past, so the three games coming from Actoz also looks very attractive to us. So, I think currently, you know, we have good expectations for all of them. Hi. Good morning. I noticed in the full release you mentioned that, are you confirmed that you have extended the Mir II and the BNB licenses for three years. Is there any change to the license fee structure being in the high 20 percents? For both Mir II and BNB extension, there is some slight change in the royalty structure. However, the change is not very significant and it shouldn’t impact us that much. Okay. And then, my other question was you mentioned that you increased salaries by 20% during the quarter. Did that happen at early in the quarter or did it happen later in the quarter and we have a full flow through in the fourth quarter? Right. Good morning. Could you give us some idea of what’s the ACU trend for the MMORPG games and also for the casual games in the last few months, especially going from September to October? I think in terms of ACU on the MMORPG side we already discussed that, you know, Mir II has entered the later stages of its lifecycle so the effect of that will be reflected in the ACU trend. On the casual game side it’s been fairly stable. Okay a question for Shujun, you mentioned that you have a newer tax rate for the year 2005, so which means in the fourth quarter we should basically say no income tax? After we gather as we said, the account incentives in this quarter, our next quarter the tax rate should be, the income tax should be around 9.3% of our total revenue. That will last for several quarters. Okay thank you. The other question, for the EZ Center or EZ Pod right now, how is the market demand? Do you see get any tractions or initial tractions? Related to the EZ Pod EZ Center I would say that the market traction has already been quite significant. Overall, Shanda’s transition is very well known among the industry players. For example, Intel’s unlike and as far as the hardware manufacturers and also content providers. So, you know, a lot of people do pay attention to this initiative and the market reacts to that as well. And in terms of marketing we will, of course, continue to commit marketing expenses and marketing resources to that. I also like to add that the partnership with Intel that we have signed earlier is essentially a co-marketing and promotion partnership where the two of us will jointly rollout at least half a million EZ Pod or EZ Center units over the next year. And what’s more important is that once users install either the EZ Pod or EZ Center onto their PC, then they are very likely to become loyal Shanda users, they will contribute to recurring revenue streams. In addition to Intel’s distribution Shanda will also have direct sales through our existing extensive distribution platform, so I am very confident of the prospect of EZ Pod EZ Center products and we’ll certainly share good news with the markets as soon as we have them. Shujun also added that the sales revenue from either the product or the hardware as a one-time revenue. However, the users that you locking onto your platform will generate recurring revenue streams in the future. And in the past we have explained that, it’s been very difficult to keep track of registered users for online games because they can easily register multiple accounts and they can switch in and out very quickly. However, once they become a platform user through the EZ product, then we can keep track of the registered or paying user account and we can model the future growth a lot easier. We are still discussing on the pricing strategy and the pricing for a la carte service versus a bundled monthly package. But we should expect that to be a lot higher than a typical online gamers monthly card contribution, which would be about 35RMB. It’s already ten past ten, so I think we will conclude this conference call. If you have follow-up questions, please feel free to contact us. Thank you. 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. 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EarningCall_233838

Here’s the entire text of the prepared remarks from Cendant’s (ticker: CD) 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. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Sam Levenson, Senior Vice President of Corporate and Investor Relations. Please go ahead, sir. Thank you, Adrian. Good morning everyone, and thank you all for joining us. On the call with me today are our Chairman and CEO, Henry Silverman, our President and Chief Financial Officer, Ron Nelson, and our Group Vice President of Investor Relations, Hank Diamond. Before we discuss the results of the quarter, I would like to remind everyone of four things. First, the rebroadcast, reproduction and retransmission of this conference call and webcast without the express written consent of Cendant Corporation are strictly prohibited. Second, if you did not receive a copy of our press release, it is available on our website at www.Cendant.com or on the First Call system. Third, the Company will be making statements about its future results during this call. Statements about future results made during the call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and their current economic environment. Forward-looking statements and projections are inherently subject to significant economic, competitive, and other uncertainties and contingencies, which are beyond the control of management. The Company cautions that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are specified in the Company's form 10-Q for the period ended June 30, 2005 and in our earnings release issued last night and filed on form 8-K. Finally, during the Company will be using certain non-GAAP financial measures as defined under SEC rules. Where required, we have provided a reconciliation of those measures to the most directly comparable GAAP measures in the tables in the press release and on our website. The Company reported third-quarter earnings per share from continuing operations of $0.44, which reflects an estimated $0.03 impact from the disruptions in the global travel environment, primarily the hurricanes in the Gulf Coast. - Free cash flow for the quarter increased 23% to $665 million and for the year-to-date was approximately $1.6 billion. As Ron will discuss in more detail during the call, we are reducing our fourth-quarter 2005 EPS estimate by $0.03 to $0.04 per share, to a range a $0.23 to $0.26. This projection does not include any potential charges associated with a contemplated separation of the Company into four separately traded public companies announced yesterday. Thank you, Sam. Given the volume of shares traded yesterday and a decline in our share price, I would like to start by addressing some of the questions and concerns that have arisen following our split-up and earnings announcements yesterday. We understand that it was a lot of information to absorb in one day. Most importantly, I urge you to first take our releases at face value. Our Board has adopted the four way split-up plan to unlock the value of our operating businesses, since it is clear to us that our stock has suffered from a conglomerate discount that is both persistent and consistent. This fundamental strategic efficient to separate Cendant into four independent companies is about longer-term value creation, and was not prompted by, or impacted by, third-quarter results or near-term operating trends. Furthermore, we have told you what we know. Despite some recent weakness, due in part to exogenous events, we are seeing strong demand for the services our businesses provide. And, we have no secret plan to disadvantage Cendant's unsecured bondholders. Let's take a moment to examine the facts together. While the reported earnings per share for the third quarter came in at the bottom of our lowered guidance range and was down versus a year ago, EPS was actually up if you adjust for the spinoff of the mortgage business to our shareholders and the impact from Mother Nature. In addition, the underlying health of our core businesses can also be seen in the details provided in our earnings release. I would like to refer you to Table 4 of the earnings release where we disclose the operating drivers in our businesses. There you will see double-digit increases in average transaction prices in real estate, lodging RevPAR growth superior to our segment, a solid rise in subscribers at RCI, double-digit turn growth at Timeshare, a double-digit increase in rental days in vehicle rental, and online transaction growth in excess of 25%. From an operations standpoint, the third quarter was quite strong. As we told you several weeks ago, the biggest challenge were the year-over-year earnings per share growth, particularly for this quarter, it is apples to oranges comparisons, including the onetime items we disclosed to you last year, the spinoff of the mortgage business and the charges associated with the hurricanes. As we complete the fourth quarter and, more importantly, look forward to next year, I would like to remind everyone that our tempered growth assumptions are primarily related to increased financing costs for the vehicle rental company, assuming higher interest rates on our fleet debt as the forward curve suggests, shifting patterns in online bookings domestically and the continuation of the weak economic environment in Europe, which will impact both online and off-line leisure travel, which over time will pass. These are not insurmountable challenges, nor are they differ from the issues we and every other company you own face every day. In the meantime, this is a $20 billion company that we expect to be growing revenue and EBITDA by double-digits next year, despite the challenges that we have highlighted in the release. By any standard, that is a significant accomplishment. Absent the split-up, our current forecast indicates that we will grow EPS in 2006, just not as much as previously anticipated. Some of us have also voiced concern that we might take our eye off the ball in 2006, since the separation is expected to happen mid-year. This could not be further from the truth. As we hosted Town Hall meetings yesterday for our 85,000 employees worldwide, one of the most important messages we delivered was the need to remain exclusively focused on Cendant as one company. Throughout the organization, we take our commitment to earnings growth and creating shareholder value very seriously, andRon, Richard, Steve, Sam Katz and I are determined that our focus on these objectives will intensify, not dissipate, beginning today and continuing through the spinoff date. In calculating the sum of the parts analysis for Cendant, our Board and our advisors looked at multiples of 2006's results as the spins will not occur until the third quarter. So we recognize how important it is to continue to grow all of our metrics. So, for the reasons that I have expressed, I firmly believe that we have sound financial health and excellent prospects for continued earnings growth. We continue to have strong BBB credit ratings from all three credit rating agencies. Anyone who has been a shareholder or bondholder of Cendant for any period of time knows how seriously we take our credit ratings and the open lines of the communication that we maintain with the rating agencies. Obviously they have had the benefit of being briefed by us on the separation plan under confidentiality agreements, and understand the financial health of Cendant. In a moment Ron will elaborate on our recent results as well as our earnings outlook. He will also walk you through the revisions to our 2006 forecast and will again address our plans with respect to share repurchase, which, obviously, we did not communicate clearly on our call yesterday. However, before he does so I would like to offer an apology to those of you who are disappointed by our decision to postpone until today answering questions about our quarterly results, which had not yet been released in detail on our call yesterday. As I believe most of you know, we take disclosure very seriously. We believe that few if any companies provide more disclosure than we do, and we as a matter of course endeavor to give you the information you need to make informed investment decisions. One last point. As many of you know, I have a tranche of in-the-money options that are expiring in 75 days. That said, I want all of you to know that I will receive 100% of the after-tax value in additional Cendant stock. Thank you, Henry. Before we discuss the third-quarter results, I would like to reinforce one point that may not have been stressed enough on yesterday's call. For the next nine months, we are mindful of how critical it is that we remain focused on delivering the earnings that are going to launch the four new companies into the public world. To that end, we have established a separate team of executives whose principle responsibility over the next nine months is to plan, organize and implement the series of transition services and other agreements that are going to be necessary to support the individual companies in the early months. They will have no other operating responsibilities other than managing the transition. Having accomplished several complicated acquisitions, where transition and integration were critical to success, we understand fully how challenging the other side of the process can be, and want to assure you that we set this process up so that our operating executives can remain focused on running their business and delivering on profitability. That said, let me now move to the third-quarter results, and more to what I assume is everyone's primary interest, how the trends we discern in September have impacted fourth-quarter and full year guidance. First a little perspective to set the stage; third quarter EBITDA from our core operating segments increased 9% notionally and 4% organically. If you factor out only the hurricane related losses that were booked to the P&L in the quarter, those numbers would have increased to 12% notionally and 6% organic, driven by even higher revenue growth. From this you should draw two simple but important observations. One, the businesses are healthy and growing, and two, there would appear to have been some cost challenges during the quarter that squeezed margins. In fact, as Henry mentioned, almost half of the cost challenges were really comparison challenges, brought on by non-recurring benefits in last year's P&L. In addition, our recorded EPS comparisons are impacted by the lack of discontinued operations and treatment for mortgage. And at the risk of asking you to focus on the negative I would also draw your attention to the organic growth in EBITDA in TDS, down 5% in the quarter but then compare it to the notional growth, up 30%. I draw your attention to this to emphasize that the Orbitz, ebookers and Gulliver's acquisitions added both 5 points to Cendant's overall revenue growth rate and substantial incremental profits. It is also clear that the transition from off-line to online travel is negatively affecting the GDS industry and without investment in online travel we had a challenging model in our Travel Distribution business. We continue to believe that all of our 2004 and 2005 acquisitions will by year-end 2006 generate run rate returns well above our cost of capital. So with all this goodness and wisdom in TDS, why do we fall short of our target for the third quarter, and why did we take guidance down? Let's start with the third quarter; I will spare you the obvious. Hurricanes, higher fuel prices and terrorism including the London bombings have taken their toll in varying degrees on our consumer travel businesses. Whether it is simply declining consumer confidence or an actual slowdown in the travel economy, it is too soon to tell. But the impact is the same, slower growth across our segments of the markets and a lower baseline from which to project 2006 growth. The details are as follows. The majority of the issues that impacted income were in the online consumer world, even though GDS volumes in certain international territories also fell short of our growth targets. In the GDS business we were able to offset the majority of the revenue shortfalls with cost containment by taking very aggressive and timely management actions. But in online there were two very distinct issues separated by geography. Domestically it has been challenging for us and our competitors to meet hotel transaction growth and merchant mix objectives as the large chains continue to aggregate their own demand and allocate fewer rooms on a merchant basis to the online travel agencies. We were also impacted by slower than expected implementation of Orbitz new contracts for merchant hotel inventory with the former TravelWeb owners. This caused our gross bookings to fall short of our forecast targets even though we still grew our domestic business 15% during the quarter on a pro forma basis. Internationally it is a different issue. The European economy, particularly in certain regions, remain soft. With the London bombings and ebookers concentration in the UK market, bookings during the course of the summer months have been a challenge. The largest shortfall from budget that we have experienced has been in this unit, and it has been exacerbated by a static conversion rate at ebookers that we had forecast to increase. Even though it has started to tick up in recent weeks. In order to increase our conversion or “look to book” ratio, we are moving quickly to transition the ebookers platform to Orbitz technology as we believe this will help enormously. But it will not be complete until the second half of next year. Our other European platforms, Fairview and Travel2/Travel4, our UK specific travel consolidator, have been similarly impacted. Normally we expect geographic diversity to help our business. In this instance it has complicated it. All of these elements taken together caused us to lower our 2005 EBITDA projection for TDS to $570 to $595 million with a decline equally split between the third and fourth quarters. That isn't to say there haven't been notable achievements in the quarter for TDS. In particular ones that validate our integrated online off-line strategy. For example, as part of a GDS content agreement with Lufthansa we secured the white label hotel business on Lufthansa.com for Octopus Travel. Our GDS sales force continued its selling success, bringing the number of subscriber segments won over the past twelve months to over 12 million. Our Travelport corporate online business grew bookings by 124%. Orbitz experienced a more than tenfold increase in the sale of international hotel properties by accessing our enlarged inventory of content. And we delivered the migrations of Lodging.com and Travelport onto our technology platform in Chicago on time and on budget. I am also pleased to report that just a few days ago Orbitz was ranked highest in customer satisfaction according to J.D. Power and Associates independent hotel website study. In particular Orbitz scored 21 points higher than second ranked expedia.com, which represents a significant difference between the two brands. So while all of us are conscious of not meeting our growth objectives, there is nevertheless strong momentum in these units that will ultimately drive profitability. Looking ahead to 2006, the issues I mentioned combined with a very preliminary look from our 2006 budget cycle have caused us to adjust our revenue and EBITDA projections for 2006, as well. Again, history and perspective is in order. Last December we estimated that EBITDA for 2006 would approximate $3.7 billion, including $220 million of acquisition opportunities outside of real estate. That number also included an estimate for TDS of $750 million and for vehicle rental of $560 million. Those estimates taken together with the others implied a 19% growth rate for Cendant's EBITDA from core operating segments and 22% for TDS and 12% for vehicle rental. With the acquisition of Gulliver's and ebookers which closed at the end of the first quarter, we increased our estimate for TDS to $900 million and obviously reduced our acquisition opportunities by a like amount. Since that time three non-controllable events have come to bear on our profit picture. One, interest rates have risen some 175 basis points, causing the cost of financing our rental car fleet to rise. Two, the OEMs have increased the price of cars to the rental car companies by approximately 15%, adding about $40 million to the cost in 2005 and $120 million in 2006. And three, eight hurricanes and three terrorist events internationally have lowered our base of earnings in 2005, off of which we project 2006. Our current forecast for 2005 EBITDA from core operating segments now totals slightly under $3 billion, excluding any charges associated with the spin-offs. Where we to overlay the same 19% growth we had originally projected, our new forecast for 2006 would be about $3.5 billion. Instead, we are now forecasting growth of 11 to 13% for 2006, taking into account all of the above factors along with slower growth projections for TDS resulting in a midpoint EBITDA forecast of just over $3.3 billion. The difference from last year's December projection is approximately $350 million. Approximately $40 million of that relates to acquisition opportunities not being consummated. Another $40 million relates to restructuring charges occurring in 2005 and of the balance about 60% relates to travel distribution and 40% to car rental. We are still producing strong growth overall. It is simply a matter of these units not growing to the extent we had anticipated. The $900 million estimate we gave in the second quarter conference call had TDS growing at about 35%. We now think it will be closer to 25%. This is not a reflection of our inability to integrate these acquisitions as projected, but rather a reflection of the market not growing as fast as previously thought. In addition, our TDS growth rate in 2006 is being impacted by a couple of other items, including the inclusion of our membership travel business in the sale of our marketing services division which took with it certain synergies anticipated in the Orbitz acquisition. In car rental the issue is simply what we have been discussing for the last few months. The impact of higher fleet costs cycling through the year combined with higher interest costs. We now think that with the impact of fleet cost increases and interest rates it will be a challenge to hold this year's income level. Further, price increases next year will be necessary simply to stay even with this year's earnings, and offset the impact of higher fleet and interest costs. I know it would be helpful to be more specific, but we are just now beginning our review of the 2006 budgets and will not have final estimates for 2006 until sometime later. Let me say a few words about the rest of the business, and then we can turn to your questions. First on the real estate front there is no question 2005 will be a record year, even though there is some evidence of moderation of growth. Moderation of growth was inevitable, but I for one think it is important to distinguish a period of more modest growth, which we foresee from the much more negative connotations associated with the often referred to bursting of a real estate bubble, which we do not think is going to happen. The numbers speak for themselves. Sides are down 2% at NRT and 5% on a same-store sales basis. Even though price is up 16%, it primarily reflects increases earlier in the year. Both trends suggest moderating growth but nothing at this juncture suggests a downturn and certainly the demographic trends that have been operating in favor of the residential real estate market aren't going to change overnight. Open gross profit at NRT which reflects houses under contract but not yet closed at quarter end was up 9%. This has historically been a good indicator of quarter forward results. Senior leadership at our brokerage units noted in our recent management meeting that properly priced homes are moving well, regardless of whether it is a high-end or a low-end property. While that may seem self-evident, it really does tell you three things. The frenzied market that has characterized the recent environment is starting to ebb. Things are returning to a more normal buyer/seller interaction. And lastly and probably most importantly, the market remains healthy and active. As a result, we continue to believe that we will be able to drive incremental growth over the next several quarters by way of increased franchise sales and tuck-in broker acquisitions. In the third quarter alone we acquired the largest Coldwell Banker broker in Arizona and will very soon close on the largest broker in one additional high-end market segment. By year-end, assuming no further acquisitions, we will have acquired over $400 million of gross commission income, some 36% ahead of our initial projections which will add roughly 6% to our sides growth for the coming year. The significance of acquiring the largest broker in strong market segments is that it gives us a strong anchor to begin a cluster. Clustering makes for very efficient operations as there are many more synergies from office combinations, management overhead and media buying, our three largest fixed or semi fixed costs. Similarly, franchise sales continue to be robust. Our renewal rate across all our brands remains at the 98% level, and by year-end we will sign new franchisees representing $580 million of gross commission income, some 13% greater than last year. Coincidentally, Sotheby's continues to be an increasingly important part of our franchising portfolio. Last week we announced the signing of our largest Sotheby's affiliate to date, Daniel Gale & Associates which generates about $46 million of gross commission income annually. Looking at next year's projected income from Sotheby's, we will on a cumulative basis be some $84 million ahead of our acquisition forecast for the same period. This is clearly a home run for our real estate business. We continue to gain traction with our organic growth initiatives, particularly LeadRouter, which is our proprietary technology tool designed to enable our agents to follow up on Internet based leads in a timely manner. So far we have 75,000 agents trained to use LeadRouter and additional 12,000 that will be trained in the fourth quarter. On average, agents using LeadRouter respond to Internet leads within 11 hours versus a realtor dot.com report that indicates that only 44% of Internet leads are responded to within 48 hours. More timely follow-up should allow us to capture disproportionately more business. And early results would suggest that the use of LeadRouter has more than doubled our conversion rates on Internet leads. Turning to travel content, each of these businesses generated solid top line growth. This was due to superb execution by our management team and decent travel trends for two-thirds of the quarter. September being somewhat tempered across all our travel units primarily due to the hurricanes in the Gulf Coast along with the associated rise in fuel prices. Timeshare had a very strong third quarter, and EBITDA would've been up an estimated 16% absent the estimated effects of the hurricanes in the Gulf Coast. Tours at Fairfield and Trendwest were up 10% and revenue per guest which is a function of price and close rate up 6%. Taken together, these dynamics form the basis for very strong performance. Trendwest, which did not meet our expectations last year, is now making a much greater contribution to the bottom line. The management and strategic changes that we made last year are proving to have been the right one. Given the relatively underpenetrated market, favorable demographics and value proposition to present to consumers, timeshare remains a double-digit long-term growth opportunity for us. Our lodging franchise business also continues to perform well with RevPAR up 7% organically and the acquisition of Ramada International adding another 177 basis points to RevPAR growth and about 500 basis points to room count growth. We did flip a little in room growth domestically in part due to terminations related to condo conversions. Some hoteliers, especially in Florida are concluding that the highest and best use of their property is not as a hotel but rather as condos. While on the subject of hospitality the recent acquisition of the Wyndham Hotel brand deserves a comment. This acquisition gives us both an upscale brand and a hotel management platform to round out our lodging product offering. In particular, franchisees will now have an upscale Cendant brand to move up or develop into as opposed to leaving the Cendant system. We should also be able to attract new groups of franchisees but more importantly, new and larger sources of developer capital. Most development money has been flowing into upscale and luxury brands lately, and this gives us a vehicle to grow rooms in a growing marketplace. This is typically a group which also seeks management services in addition to a brand so that the property management portion of the Wyndham deal fits well. Equally important, we didn't have to acquire any real estate, nor did we have to agree to share control of the brand to make this happened. We paid a price that the lodging business alone will support from a return on capital standpoint and acquired in effect a free option to ultimately use that brand to market timeshare. The major hotel chains with timeshare businesses typically have marketing costs significantly below ours so there are substantial opportunity to improve our timeshare margins over the long-term, if we succeed at rebuilding the Wyndham brand in the hotel world. Turning to car rental car revenue growth of 17% was driven by increased volume of the same amount, reflecting increased share for both Avis and Budget. Commercial volumes were up 9% during the quarter while leisure volumes were up 23%. It is hard to conclude that our repositioning of the Budget brand could be more price competitive with the devalued priced leisure focused peers has been anything other than successful. Apart from the estimated impact of the hurricanes in the Gulf Coast, organic EBITDA growth would have been 8% versus the 2% notional amount reported. On the pricing side the increases we put in place earlier in the summer in order to offset higher fleet costs so far appear to be sticking. And we expect positive year-over-year pricing comparisons beginning in the fourth quarter. The important measure is that pricing increased sequentially from the second quarter 2005 to the third quarter 2005 by 6%. That said, price increases are likely only to approach equilibrium with higher interest rates and fleet costs, the combination of which as we note earlier will likely impact our rental results in 2006. It was also good news that the recently enacted federal highway bill includes a provision which will finally eliminate rental car companies liability for non negligent accident claims in 10 or so states, including New York. This should result in substantial savings on insurance costs at both Avis and Budget going forward. Before we turn to questions a brief comment on our share repurchases during the quarter, which were substantial and our plans going forward. Net of option exercises we utilized $521 million of cash to repurchase stock during the quarter and $790 million year-to-date. As a result, our diluted share count decreased by 15 million shares versus the second quarter. So the reality is that our share repurchase efforts have made good progress at reducing our shares outstanding. In terms of our share repurchases going forward I want to clarify that we are not suspending the share repurchase program. Rather, we need to reassess the amount and pace of share repurchases in light of the anticipated capital structures of the four new companies. We do anticipate repurchasing additional shares within the bounds of required disclosure and subject to not shrinking the capital of the Company that remains after the spin-offs to a position where it could not sell finance. The one technical point we failed to mention yesterday is that because the car rental company will be the legacy Cendant entity, share repurchases and non allocable onetime transaction costs will be reflected in its equity account. Because of this unit sensitivity to credit ratings we need to be careful as to how a diminishing equity account impacts its ability to finance its fleet. However, we do feel we have room and we are not abandoning our share repurchase program, only reassessing the $2 billion target while we deal with the credit issues. 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_233839

Here’s the entire text of the prepared remarks from Rediff's (ticker: REDF) Q3 2005 conference call. The Q&A is in a separate article. 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. Hello. Thank you Lara. Wish you all very good morning and thank you for being with us to discuss rediff.com’s financials for the First Quarter ended June 30, 2005. I would now like to introduce you to the management present on this call, who will take you through our company’s highlights. We have with us Mr. Ajit Balakrishnan, Chairman and CEO and Mr. Joy Basu our Chief Financial Officer. [Standard disclaimers omitted.] I would now like to introduce Mr.Ajit Balakrishnan our Chairman and CEO. Mr.Balakrishnan. Thank you Debash and Good morning to all of you. Our registered user base at 37.5 million users. At end of June 2005 showed an increase of 19% on a year-on-year basis. During the quarter ended June 30 2005, our revenues totaled $4.2 million an increase of 63% compared to the same quarter last fiscal. Revenues from India Online grew 114% to $2.7 million and revenues from US publishing increased 3% to $1.7 million. Gross margin during the quarter ended June 30 increased 68% compared to 54% for the same quarter last fiscal year. Net profit for the quarter was $63000 of $0.02 per ADS compared to a net loss of $506,000 or $0.02 per ads. We at rediff.com continue to focus on our key strength as the company, which is product innovation, and I will briefly update you on the highlights of our recent efforts. First, we had launched a beta version of our automated news service called newshounds; this service has made headlines from 700 news sources with headlines updated every five minutes. Since the launch we have been continuously monitoring the service and we will keep you informed regarding future developments. VOIP, Instant messenger which is also yet to work on low bandwidth condition for launch for commercial use earlier this month after several months of beta testing. We are encouraged by the initial user response and are monitoring its progress regularly. Our connection service is based on social networking technologies has been under beta testing for some time now. And currently has over 1 million testers of from all over India proving valuable insights. We expected we will be able to release this service on a wider scale soon and we believe, it will be particularly useful in searching the services that satisfy your unique individual needs, also in locating people with specific business interest. In the third quarter we had informed you about the pending launch of our options service. We are happy to announce the launch of this service earlier this month and we are in the process of stabilizing the platform. We start opening it up for wider audience, the initially response from participants has been quite encouraging. Our pay-per-click platform as you know is finally targeted at the online user while our recently launched pay-per-click classifieds.com is mainly targeted as the online classifieds print advertising base with the SMS based response mechanism. This context, we are partner with the leading print classifieds resellers throughout India. We have been integrated to online platform even online reseller marketing. At present our paper click classifieds platform has over 160 online category and we believe that the platform is one of the most comprehensive classifieds section in the Indian media. Online advertising continues to strengthen its position as the leader in the Indian online advertising space with over 120 clients advertising results during the quarter. This closer 53% increase over the number of clients that advertise with us in the same quarter of previous year. We believe that our range of products like VOIP, Instant Messenger, Social Networking, Automatic News Listing and Paper Clip Classifieds will allow us to expand the user base not just in India but also internationally. I now request Joy Basu our CFO to take you through our financial performance for this quarter. Thank you Ajit and Good morning to all of you. Revenues for the quarter ended June 30 2005 grow $4.2 million at increase of 53% over in the year ago quarter. During this period revenues from India Online stood at $2.7 million an increase of 114% while revenues from US publishing were $1.5 million an increased of 3% over the same period last year. Gross margin during the quarter improved to 68% or $2.9 million compared to 54% or $1.5 million for the same quarter last fiscal year. Specifically India Online, recorded gross margin of 83% while US publishing recorded gross margin of 46%. The Increased product development and brand marketing initiatives during the quarter saw operating expenses totaled $2.7 million compared to $1.9 million during the same period last fiscal year. After providing for depreciation, interest income and exchange gains and losses, net income for the quarter was $53,000 or $0.2 per ADS. As compared to a net loss of $506,000 or $0.02 per ADS for the comparable quarter last year. The net loss for the quarter ended June 30, 2004 included the loss of $150,000 from the discontinued operation of our Value Com business. Total cash and cash equivalents stood at $9.4 million as on June 30 2005. That concludes our financial review for the quarter I would now request Ajit to recapitulate our performance and sum up the call. Thank you Joy. Here is the summery. Revenues for the quarter totaled $4.2 million and increase of 63% year on year. Overall gross margin during the quarter expanded to 68%. For the quarter net income was $63,000 approximate or $0.2 ADS. We continued to invest and enhancing our existing products and launching new services. Some of them are listed, we launched the beta version of our new automated news service, newshounds, it compiles news sources from 700 news sources and that is updated every five minutes. We partner with the classifieds resellers to attract online classifieds for the new pay-per-click classifieds platform at present our classifieds platform offer 160 sections which we believe is one of the most comprehensive listing from the Indian media. A new version of our VOIP Instant Messenger has been open for wider commercial use, is encouraging early option for the service and our connections service currently under beta testing has already attracted over a million users from date. Thank you very much.

EarningCall_233840

Here’s the entire text of the prepared remarks from MIVA’s (ticker: MIVA) 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 today’s MIVA Third Quarter 2005 Financial Results Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions I’d like to turn the call over to Mr. Peter Weinberg. Please go ahead, sir. Good morning and welcome to MIVA’s earnings conference call for third-quarter 2005 results. I’d like to remind everyone that today’s comments include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties will be outlined at the end of this conference call and are also detailed in MIVA’s filings with the Securities and Exchange Commission. To comply with the SEC’s guidance on fair and open disclosure we have made this conference call publicly available via our website and a replay of the conference call will be available at our website and on, for 90 days after the call. I’d now like to turn the call over to our Chairman and CEO, Craig Pisaris-Henderson. Thank you, Peter. Welcome to MIVA’s third quarter conference call. To begin, we are pleased with our accomplishments in the third quarter and believe it represents a foundation from which we intend to build. Over the last several quarters we acknowledged a number of challenges up front, taking what we believe to be necessary steps to resolve those challenges and to correct our course. We now believe we’re on a path to growth and are modeling for growth expectations in 2006. Not only have we’ve put many of the issues to rest that others in the industry have yet to address, but today we feel confident in our future. We believe we have a strong foundation, we are seeing momentum on the new partner front and we have an experienced management team in place to execute on our plans for the remainder of this year and into 2006. In recent months we added several seasoned executives to our management team including Will Seippel as CFO, Peter Corrao as COO, and Adam Poulter who has joined to lead our European division. Now in the fourth quarter we are poised to initiate the final step of our recovery plan, rationalizing our expense infrastructure against current revenue levels. At the same time we are committed to maintaining our investment strategy into innovative products we believe will bolster our revenue and production in the short-term as well as the long-term. The bottom line is we believe that we have the right platform and the right positioning to be the strategic new media solution for publishers and advertisers. These beliefs are based on a number of important factors that many of our competitors simply cannot claim including our global scale, our access to certain essential core technologies such as our licensing agreement with Fast (ph) and Yahoo. Our independent position in the marketplace and our publisher focused strategy. We believe innovation will be critical to our long-term success and we are executing against an active product development pipeline. But in the near-term we believe we have assembled the critical pieces that will enable us to realize greater opportunities as we move forward. We believe that over the third quarter our mission for helping publishers to effectively compete for audience and media spend while protecting their brand, audience and content value has gained momentum. We are pleased with our progress to date and look forward to introducing a number of new products and services to further achieve our goals in the coming quarters. For us the third quarter represents a foundation that reflects the impact of prior traffic quality initiatives. We continue to be focused on the process of replacing intentionally dropped distribution with higher quality traffic. Adding high quality publishers to our network will directly benefit our advertisers’ ability to generate leads and improve their ROI while increasing the revenue streams we provide to the same partners. We announced a number of distribution partner deals over the last several months and we are encouraged by the response to our solutions and positioning. That said we will remain vigilant to ensure that our network continues to deliver convergence for our advertisers while traffic is generated in ways that meet our high standards. We believe our positioning is designating with publishers who have become increasingly weary of partnering with search providers who aggressively focus on aggregating end-users. In essence, threatening the business prospects for the very partners they claim to serve. We think newspaper publishers, media conglomerates and yellow page publishers have taken notice. To quote Rupert Murdoch on this very point, “Unless we awaken to these changes we will, as an industry, be relegated to the status of also-rans”. Our independence and publisher-focused strategy clearly differentiate MIVA from our consumer-focused competitors. Our mission is to help publishers effectively compete for audience and media spend by offering them a complete set of products and enabling the acquisition, retention and monetization of their online audiences. We consider these factors key to positioning MIVA as their choice for publishers seeking access to an innovative new media platform. We think publishers are beginning to appreciate our long-term strategic value. We understand the key to expanding our distribution is to continue to broaden the suite of customized solutions that enable monetization and user retention for our partners while highlighting the fact that we don’t compete with the partners we strive to help. We know MIVA requires partners for access to audience and ad impressions, but we also believe partners need MIVA to provide them with a competitive new media platform. Going forward we will concentrate on expanding our distribution network through quality of partnerships which we believe in turn drives high conversion traffic to our vast network of advertisers. Looking further ahead, we have begun the process of extending our core page search capabilities from today’s keyword-to-keyword matching to a platform that incorporates contextual, demographic and behavioral attributes. We believe this expanded platform is the next evolutionary step for our sector leading to higher relevancy, higher click through rates and convergence which clearly leads to higher monetization and retention potential for partners. It is our goal that our new product offerings will extend beyond page search and provide effective ways for publishers to compete directly with our, their competitors. I will now turn the call over to Will to walk through our Q3 financial results. Will? Thank you, Craig. Before I detail our results let’s review how we measure our financial performance. In addition to GAAP measurements the Company utilizes certain profitability based metrics to evaluate our period-to-period and year-over-year performance. They are EBITDA, adjusted EPS and adjusted net income. The Company defines EBITDA as net income before interest, income taxes, depreciation and amortization. EBIT defines adjusted net income and adjusted EPS as suggested as net income and net income per share before tax adjusted amortization expense related to acquired intangible assets and capitalized and purchased software. With that said, let’s discuss our results and expectations. I would like to begin by reviewing several nonrecurring events that occurred during the quarter and affected our financial results. For the three months ended September 30, 2005 the Company recognized as revenue approximately 1.5 million for resolution of disputes with certain European distribution partners and also recognized a one-time gain of approximately $600,000 related to the sale of Espotting Scandinavia AB assets to Eniro AB. Additionally, the company recorded a non-cash impairment charge related to goodwill and long lived assets in the amount of $4.3 million during the third quarter. In Q3 MIVA achieved revenues of $44.7 million. As previously mentioned, Q3 includes approximately 1.5 million in nonrecurring revenue that the company recognized during the quarter for resolution of disputes with certain European distribution partners. Q3 2005 revenue represents a 23% decrease from Q3 2004 revenue of approximately $58 million. On a sequential basis revenue was down $4 million or approximately 8% from Q2 to Q3. As we previously announced, starting in late April we began to remove certain distribution partners and/or their sub affiliates that had developed methods that did not adhere to our distribution guidelines. Q3 2005 revenue reflects the full impact of that effort that began in late April unlike Q2 where the month of April was mostly unaffected. The effect of these changes has been a reduction in our overall click through revenue. We recorded 206 million paid click-throughs in Q3 compared to 217 million in Q2. Q4 revenue will be less than the revenue recorded in the year ago period as events that commenced in the second quarter will continue to impact our results in the fourth quarter. Revenue in Q3 decreased from Q2 primarily as the result of the removal of certain partners and traffic sources and the reduction in traffic from our current sources. We have seen positive traffic trends in the US over October and into November, although it is still too early to say conclusively that is more than a seasonal trend. Notably, we believe the actions taken that resulted in reduced traffic were largely complete in the US as of Q3 2005 and we believe we are far along in our European quality efforts. Having spent much of my time in Europe recently, I can tell you that we have made progress in that market too, and at this point we do not anticipate removing substantial sources of traffic that would have a material impact on our revenue going forward. Having said that, I want to remind you maintaining traffic quality is an ongoing challenge and we will continue to actively monitor the quality and sources of our current and new distribution partners. Normalized operating expenses, excluding the impairment charge and the one-time gain of approximately $600,000 were $22 million in Q3 2005 compared to 19.7 million for the same period in 2004. On a sequential basis, after adjusting for the 1.5 million in nonrecurring revenue, cost of sales as a percent of total revenue were flat from Q2 2005 to Q3 2005. Amortization expense in Q3 2005 was 2.2 million and flat compared to the same period in 2004. Amortization expense included 1.6 million for acquired intangible assets and 600,000 for capitalized and purchased software. Amortization expense in Q3 2004 included 2.1 million for acquired intangible assets and $700,000 for capitalized and purchased software. During the third quarter the Company updated its cash flow projections for acquired businesses resulting in further indicators of goodwill impairment at MIVA’s small-business division. As a result the Company recorded a non-cash impairment charge related to goodwill and long-lived assets in the amount of $4.3 million or $0.14 per share diluted. As a result of the impairment charge MIVA’s small-business has no remaining goodwill and no associated long-lived assets. After recording the impairment the company’s intangible assets decreased with the balance of goodwill being approximately 74.6 million. Additionally, the company finalizing the estimated non-cash impairment charge taken in Q2 2005 and did not record any subsequent increase or decrease in to the 119 million estimated charge made in Q2 2005. We do not anticipate an additional impairment charge in the fourth quarter. We recorded a GAAP net loss of 3.5 million or $0.11 per share diluted in Q3 2005 which includes a pretax 4.3 million non-cash impairment charge taken for MIVA’s small business. GAAP net loss excluding the estimated impairment charge was $34,000 or breakeven per diluted share compared to GAAP net income of 4.8 million or 15% per diluted share for the same period in 2004. We recorded EBITDA excluding the impairment charge of $4 million in Q3 2005 compared to EBITDA of 11.2 million for the same period in 2004. Normalized EBITDA, excluding the 1.5 million nonrecurring revenue and the 600,000 one-time gain and the impairment charge was 1.9 million in Q3 2005. We recorded adjusted net income excluding the estimated impairment charge of $0.04 per diluted share in Q3 2005 compared to adjusted net income of $0.19 per diluted share for the same period in 2004. Adjusted net income excludes tax adjusted amortization expense related to acquired intangible assets, capitalized and purchased software. We expect our Q4 adjusted net income will include non-cash compensation expenses of approximately $600,000. Our cash, cash equivalents and short-term investments at September 30, 2005 totaled approximately $42 million which reflects the $8 million patent settlement made to Yahoo during the third quarter. This compares to approximately $50 million at June 30, 2005. Although with the exception of Yahoo our cash was flat quarter-to-quarter, I want to point out that it would have been lower on the quarter due to the payment of approximately $2 million in certain earnouts. However, those earnout payments were offset by 1.5 million nonrecurring revenue and the onetime gain mentioned previously. We expect additional earnouts to be paid in Q4 totaling approximately $2.7 million and such earnouts are factored into our guidance. Over the fourth quarter we anticipate maintaining investments into technology initiatives, expanding our suite of performance marketing solutions. We have transitioned to an R&D focus and in Q3 2005 our product development totaled 7% of revenue compared to 3% for the same period in 2004. We have an active global product development pipeline and plans to introduce additional innovative publisher and advertising solutions over the next several quarters. While we are committed to making investments into innovative products, we recognize that we must take a balanced approach and intend to deploy capital into initiatives we believe will bolster our revenue production over the fourth quarter and into 2006. To that end we expect to initiate our cost realignment plan during the fourth quarter. With revenue now at a lower base level we have to work to realign our cost structure. We continue to believe there is leverage in our model. Before giving effect to any potential adjustments to current cost structure we expect neutral to positive EBITDA margins in Q4 2005. As we told you previously, we are providing detailed guidance for the fourth quarter and the full year along with today’s earnings release. Q4 2005 EBITDA, adjusted EPS and GAAP EPS guidance includes approximately $600,000 in the non-cash restricted stock related compensation expense. Our expectations for revenue in Q4 are 41 to 44 million and for the fiscal year 192 to 196 million earnings per share in Q4 of minus $0.08 to minus $0.04 on 30.8 million common shares outstanding; for the fiscal year minus $4.16 to minus $0.12, again with the same outstanding share base. Adjusted EPS in Q4 of breakeven to minus $0.04 on 30.8 million shares and for the fiscal year adjusted EPS of $0.21 to $0.25 positive on 34 million fully diluted shares. EBITDA Q4 expectations of breakeven to 1.5 million, and for the fiscal year $14 to $16 million. Regarding our 2006 expectations, it is our goal to provide detailed guidance either when or before we report our full-year 2005 results in the early part of next year. At that time we also expect to detail our cost realignment plan. I can tell you that in 2006 we are forecasting quarter-over-quarter growth and we expect ongoing operations to generate positive EBITDA for the full year. Last quarter we asked you to focus on our initiatives for signs of progress. Since then we have announced several major product releases for advertisers and publishers. We also announced several distribution deals. In addition at this point we do not anticipate removing substantial sources of traffic that would have a material impact on our revenue going forward and we believe current US trends are moving in the right direction. We believe these are all strong indications of progress and we look forward to building off our Q3 base, managing costs, delivering new products and signing new deals over the coming quarters. Thank you. This concludes my review of our Q3 2005 financial results and FY 2005 outlook. I will now turn the call back to Craig. Thank you, Will. Given all of the challenges we’ve faced over the last several quarters, our remarkable progress on advertiser and publisher solutions may have been overshadowed. We have expanded our suite of solutions and over the past six months alone MIVA has introduced more products and tools and increased functionality than at any point in our history. To this point, just this morning we announced MIVA Match and new campaign management tools. We’ve also recently announced and deployed configurable algorithmic Web search in France, Germany, the UK, Spain and Italy. We’ve introduced Pay-Per-Call into the UK; we’ve introduce MIVA Mail into Europe. We’ve refined our innovative banner paid listings product and we’ve also implemented private branded toolbars, allowing our publisher partners to interact with their audience throughout the Web browsing experience rather than just while the end-user is on our partner’s site. This work, this investment is not just about offering a better service to our partners, it is the path we believe will lead to a definable, defensible sustainable position in a rapidly growing market and will lead us back to a revenue growth, quarter-over-quarter revenue growth in 2006. In summary we believe we’re forging ahead on the right path and we are focused on the opportunities that will most effectively leverage our independent position and publisher focused strategy to achieve long-term growth and profitability. Thank you again for joining our Q3 conference call. I will now turn the call to the operator for 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_233841

Here’s the entire text of the Q&A from MIVA’s (ticker: MIVA) 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. Thank you sir. The question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing the “*” 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 your signal to reach our equipment. And we do ask that you limit yourself to one question to allow everyone an opportunity to participate. Once again please press “*”, “1” on your touchtone telephone, to ask a question. And we will go first to Eric Martinuzzi with Craig-Hallum. Good morning gentlemen. My question has to do with your comment. I wanted to make sure I understood quarter-over-quarter growth. Is that to say, to suggest that this current, the Q4 guidance would represent, at least at the midpoint would represent a trough in the revenue and that thereafter on a sequential quarter basis we should expect growth? Or is that to say that year-over-year we should expect growth? Yes specifically, Eric, what I was referencing is the investments that we’re making we are modeling for growth, quarter-over-quarter growth going into 2006. So that was specifically tied to the way we’re seeing 2006 payout. We are still going through that ‘06 budgeting process and have some work to do, but nevertheless we are budgeting and, quite frankly, modeled for quarter-over-quarter growth going forward. Hi, I am just, I was wondering if you could sort of characterize what your publisher base looks like now. Obviously you’ve cut out at least a quarter of your initial guidance from the beginning of 2005. As we look at some of the other competitors in the independent space, if you will, like a Kanoodle or an IndustryBrains, I know IndustryBrains for example is focusing on the top 200 to 250 publishers. Is that also where you’re focusing your energy? And I guess and you look at your publisher base, could you sort of characterize the revenue coming from those top publishers that may be more weary of working with a Google or Yahoo for example? Sure. Obviously our network is, multiples larger than any of those referenced. Actually I would say in terms of comparison, probably the rest of the sector aggregated together still doesn’t come close to the size of our network so, I know you know that part of it. So, in terms of size clearly large. But in terms of the specific partners, we don’t go into detail, Christa. It’s kind of a long-standing let’s not map out what a good strategy looks like for others type of internal strategy. But nevertheless, we are focused on a lot of large names. On the fact where there are several proposals in-house right now for deals that are coming up with others because either they’re not being serviced appropriately or they’re looking for a strategic alternatives to possibly some larger names. So those are things we’ll look at, but in staying with our history, we’re not willing to do deals that aren’t beneficial or win-win both sides. So point being is, while we’re focused for the larger companies, we won’t do a deal that’s not win-win and, like I said, clearly we intend on continuing to manage to a multiple or larger network, if you will, of quite frankly all the others segregated together. Thank you very much good morning everybody. I guess my question has to do with pricing. If you were to normalize your revenues for the $1.5 million and one-time revenue that recognized, I’m kind of puzzled by pricing actually going down by some 7%. I would have thought it would have actually gone up as you eliminate low converting lower CPC traffic. Thanks. Sure and that’s great point Youseff. Actually that is the net effect. When you do take out lower conversions obviously you see advertisers respond in kind. That’s not exactly the effect that you get immediately. Actually I think we’ve discussed this point on calls past. When you take out the first initiative, if you will, from an advertiser standpoint, when you’re removing traffic it’s to lower you ad budget, not necessarily stimulate the bidding process. But nevertheless, good point but the first reaction as mentioned is typically there’s not as much budget or, excuse me, there’s not as much inventory available, not as much budget gets allocated in the beginning. Obviously they start looking at conversions and the return on their investment. Then you see that process actually get stimulated, the bid amount for the pricing gets stimulated specifically. In fact, as Will stated in his prepared remarks, we’re actually seeing some of that on the US side as we go into Q4. Craig can you just talk a little bit about efforts to expand the US publisher base and give us a sense of a breakdown between the number of active publishers in North America versus in Europe? Okay, actually I’ll tell you what, I’ll take the first part of that and may go into the second part in terms of a breakdown between US and Europe. But in terms of our efforts, we’re going after pretty much all across the board. In other words we’re going to continue to service the thousands of small publishers that we do service today. I believe the latest count it somewhere around 8,000 different publishers. Now not all of those 8,000 are meaningful publishers; there may be a click a month coming from some of the smaller guys. But nevertheless, that truly shows that we can work with the smallest of the publishers in a margin meaningful way, if you will. In other words, it actually makes sense for us to still continue to work with such small publishers as well as working or focusing some of the larger publishers out there. And when I say publishers, that’s an all encompassing word. That’s everything from search providers, localized or national, that has obviously contextual our content base companies that, let’s face it, the large content companies right now are being commoditized by the primary search engines. So they’re clearly looking for strategic alternatives to deploy their content in the marketplace. So we’re going after pretty much the entire range. In terms of a breakdown, we didn’t get into a revenue breakdown on both from the US and European side, but we don’t go into publisher breakdown, if you will. Thanks good morning guys. Maybe if you could finish off on that thought of between, the comment between the revenue breakdown between the European and the US division. But also, I was wondering, Craig, if you could give us an idea how many of your distribution partners at this point or percentage of traffic belongs to or comes from publishers that have multiple products with you or have taken some additional new products that you’ve launched in terms of the, that include the search product that they’ve launched, the toolbar that you’ve launched and so forth, the private-label toolbar and so forth? Just an idea of percentage of publishers or traffic that comes from publishers that have multiple products I suppose. All right in the US our revenue was 47% of total and in EU it’s obviously then 53% for the quarter, just to fill that in. Okay. And so that’s obviously wrapping up on the revenue breakdown on the US and EU. In terms of percentage of distribution partners that have multiple products, I believe that was the question, Richard. It’s not a large number today. In fact, just deploying their customized toolbar in marketplace a couple months ago would clearly not lead to massive adoption across the board. In fact, we’re being pretty careful with the types of people we want to deploy that product with. We want to make sure they’re obviously very reputable, high integrity, good download and deployment practices that we’re helping them define. We have recently announced that Dennis Publishing which has the Maxim magazine and a series of other magazine titles under their belts. We’ve just pushed that out with those folks. But at any rate there aren’t a tremendous amount of companies that are using the toolbar, the search components and the banner component, MIVA Mail component, the contextual component altogether. This is quite frankly what we’ve been very focused on this year making sure that we have that product suite out there or, excuse me, at least available to be sold out into the marketplace and that’s the initiative that we’re undertaking now. Good morning. Craig, could you elaborate a little bit on your Pay-Per-Call effort and how that’s going, if that’s contributing to revenue meaningfully at this stage? Sure. It is not contributing meaningfully to revenue at this stage. Let’s break this out; it’s actually a tale of two stories right now. On the US side there has not been widespread adoption. And quite frankly, I’ll make this statement which I hope this will make all of you sit down and model out something on Pay-Per-Call exclusively. If it grows as fast as Pay-Per-Click I will be very happy. Keep in mind, we’ve been doing Pay-Per-Click business since 1999; it wasn’t until in 2001/2002 that people said it was a legitimate business. But nevertheless, Pay-Per-Call has not had widespread adoption at this point on the US side. A tale of the different story, so to speak as we have announced the launch in the UK we’ve had very good adoption. Can’t tell you really that the call-through rate is this or the impression rate is that yet, but in terms of adoption totally different marketplace. It’s amazing that you’ve got a marketplace that’s clearly mobile oriented and call oriented that quite frankly most of the rest of the world and not so much on the US side, but nevertheless is definitely a tale of two different stories right now. Yes, I had a couple of questions. First of all, on the private-label side, any way you could give us a sense of how large that is now? Is it at least 10% of revenue and some of the growth drivers you’ve seen there, are there any contracts coming up for renewal we should be aware of? Thanks very much. Nope, we really haven’t gotten into the detail in the past on the private-label revenue and that’s something that we’re still not going to do. Craig can speak to anything in the pipeline. Sure, I’ll pick up on that. Actually it’s contractually based, we can’t speak to anything. So, I would actually urge you to look at what Verizon talks about. Verizon is pretty open in terms of their disclosure about this initiative. So I would have to push it that way, but contractually we don’t break anything out, we can’t break anything out. In terms of the pipeline, yes, there are a few. We made a comment, I believe it was Q1 of this year, that we felt Europe was going to have some opportunities. In fact we’ve announced that we have launched the private-label initiative with Eniro in Scandinavia and the Scandinavian countries. And I will tell you there are private-label opportunities in the pipeline currently within the European marketplace, not saying that there aren’t in the US, but Europe is really the area that we’re looking for right now. I will make one comment on that. Europe is not like the US, it’s not one market, it’s multiple small markets that make up one large market. So with that being said, when you have a primary player or a primary company in Germany or France or Spain or what have you, they typically are trying to protect a territory of German, France or Spain, not their Pan European footprint. So unlike the US, those folks over there represent a little bit of a different opportunity. So we really are focusing our efforts on the European marketplace right now. And again ladies and gentlemen that is “*”, “1” on your touchtone telephone, to ask a question at this time. And we will pause for just a moment, to allow everybody an opportunity to signal. And it appears we have no further questions at this time. So I’d like to turn the call back over to you, gentlemen. Fantastic. Well again, I’d like to thank everyone for joining our Q3 conference call. I’d also like to thank all of the MIVA team members for your dedication and work and your 100% effort. Thank you very much, folks. 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_233842

Ladies and gentlemen, thank you for standing by, and welcome to the Wipro’s Earnings Call for the period ending December 31, 2005. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions being given at that time. If you require assistance during the call, please press “*”0 then “0”. As a reminder, this conference is being recorded, and now I would like to turn the conference over to our host from Wipro’s management, Mr. Sridhar Ramasubbu. Please go ahead. Thanks Jerry, and thanks everyone for joining us for Wipro’s Third Quarter Results and Earnings Call for the quarter ended December 2005. I take this opportunity to wish you all a very Happy New Year. I am taking this call from India and have communicated both my US as well as India mobile numbers for any exigencies. Jatin and Lan from the IR team join me in conveying our warm welcome to all of you. With us today we have Mr. Azim Premji, Chairman, Mr. Suresh Senapaty, CFO, and other members of senior management team including the business unit heads. I hope you have had an opportunity to review the press release we issued today morning under US GAAP. Let me give you quickly the agenda for today’s call. Azim Premji would share his perspective beginning with an overview of our results and Suresh will take you through the financial highlights of this quarter. As a reminder, when we discuss our results today in today’s call some of the issues we discuss maybe forward looking and I would like to advise you that these statements may be subject to known and unknown risks and uncertainties that could cause actual results to vary materially. Such risks and uncertainties are discussed in detail in our filings with SEC. Wipro assumes no obligation to update the information presented during today’s call. The call is scheduled for an hour, the entire earnings call proceedings are being archived, and transcripts would be made available after the call at www.wipro.com. I am online on e-mail and if you have any specific questions which you are unable to ask, please send me an e-mail and we will address those questions as well at the end of the Q&A, so with that let me turn over the call to Mr. Azim Premji, Chairman, Wipro. Good morning to all of you all. At the outset let me wish you all a very Happy New Year and a very Happy New Year to your families. By now you would have seen results for the quarter ended December 31, 2005. While the management team would be happy to answer your queries, I would like to take some time before that to share our thoughts on performance and prospects. What made the quarter special was the fine balance we achieved between delivering short-term results and building a long-term sustainable business. In terms of quarterly results, all our major business segments recorded robust growth rates in revenue and profits. We crossed two significant milestones this quarter. One, our IT business crossed Rs.100 billion annual run rate and our global IT business surpassed 50,000 landmark in employee strength. Revenues in our global IT business at $473 million was ahead of our guidance of $463 million. The IT services business continued to witness broad based growth across verticals, across geographies, and across service lines. Our financial solutions and technology businesses delivered yet another quarter of double-digit sequential growth. Our differentiated services such as testing, technology infrastructure management and enterprise application services, continued to grow ahead of overall growth rates. We added 61 new clients organically, the highest ever customer add. Demonstrating the robustness of our business model not only did we absorb the impact of compensation revision for our offshore team, but improved our operating margins. Our business process outsourcing business, which has been a subject of much discussion, delivered sequential revenue growth, improved operating margins, increased billable scheme size, and one strategic assignment from customer. Over the last couple of quarters, our BPO business has demonstrated consistent improvements, reinforcing our confidence that Wipro BPO is capable of leading industry growth even though growth in the near term maybe muted. Our India, Middle East, and Asia Pacific IT business recorded year-on-year revenue growth of 19%. Improved business profitability in this segment, so the profit before interest and tax, grow faster at 45%. The Wipro Consumer Care and Lighting and Wipro infrastructure engineering businesses also turned in good performances. In terms of a longer term perspective, we built a stronger platform for growth in our product engineering business and banking solution business through the acquisition of NewLogic in Austria and mPower in US and India. Our investments in account management continued to pay off. The top 10 customers in our global IT business grew ahead of the market growth rate. We continue to see improvements in our customer mining efforts. Apart from increasing the number of million-dollar customers sequentially 210, we now have three customers with revenue run rate in excess of $50 million. With the NewLogic acquisition and the planned facility in Romania, we are expanding our geographical footprint. Looking ahead, the two questions that drive our business remain unchanged. How do we deliver superior solutions to our customers and how do we deliver sustainable value to our stakeholders? The answers to these questions lie in devising strategies that anticipate emerging challenges and opportunities and relentless focus on execution that converts strategies to business results by constantly improving operating productivity. I will now request Suresh Senapaty, our CFO, to comment on financial results before we take questions. A very good morning to all of you in US, and good evening to all of you in India. A very, very Happy New Year. I will touch upon a few areas in our performance and financials that would be of interest to you all. Let me start giving the composition of our growth. During the quarter ended December 31, 2005, we had a sequential dollar revenue growth of 9.9% in our global IT services business, which comprised of 10.6% revenue growth in the IT services, and a 3.6% growth in the revenues from BPO services. The 10.6% growth in services component was driven by a 12.7% growth in the volume of business offset by a 0.1% and 3.6% decline in the realization of work performed offshore and onsite projects respectively. The decline in realization was due to the impact of lower number of working days and not due to any change in pricing with the customers. Additionally, revenues from the quarter include $1.3 million from the acquisition of mPower Inc, the results of which have been consolidated effective December 1, 2005. The results of NewLogic, however, have been consolidated effective December 8, 2005. Our head count at the end of this quarter includes 351 and 120 employees from mPower and NewLogic acquisitions respectively. On the forex front realization rate for the quarter ended December 31, 2005, was up at Rs. 44.79 from Rs. 43.93 in the previous quarter. As at the period end we have approximately $600 million of hedges at rates between 44.25 and 45.50. We affected an increase of 12% in compensation for our offshore team effective November 1, 2005. The gross impact of the increase was 1.2% on OM for the quarter. OM for the quarter was also adversely impacted by decline in price realization and lower utilization due to gross addition of over 4,500 people, although strong volume growth, higher portion of offshore work, and other operational improvements helped absorb these charges and improve operating margins by 60 basis points. Capital employed at Wipro Limited level comprises of cash and cash equivalent of Rs. 25,402 million as on December 31, 2005. Excluding this cash, return on capital employed for the quarter was 66%. With a view to provide investors the performance of the organic business as distinct from acquisition we have effective quarter ended December started showing the performance of acquired business as a separate sub segment. This is in line with our articulated policy to show critical acquisitions as a separate sub segment for a period of two to four quarters. For the quarter ended March 2006, we expect volume led growth with broadly stable price realizations. The guidance for the quarter is based on organic revenue of approximately $500 million and revenues from acquisitions of approximately $10 million. Operating margins of the organic business for the next quarter would be impacted by the full impact of increase in compensation for offshore team and the proposed compensation revision for onsite team effective January 1, 2006. However, we hope to substantially mitigate this through operational levers and expect the organic operating margins to move in a narrow range. The operating margins for our acquisitions will in the near term be less than that of the global IT segment. We expect the acquisitions to deliver profitability in line with the segment profitability over few quarters. Also I want to clarify at this stage that all our press releases and the statements that we have released also have numbers, which are given in dollars, which typically are at convenient translation, which means all the rupee numbers had been converted to dollars based on the closing rate on December 31, 2005. Since the closing rate on December 31, 2005, between rupees and US dollar was lower than the average, the dollar numbers are little overstated as compared to an average rate realization. So, because you will all find multiple numbers when we talk about plus in the press releases and the segment reports we thought we will clarify this point and hope it does clarify. We will now be glad to take questions. Thank you. Ladies and gentlemen, if you wish to ask a question, please press “*” then “1” on your touchtone phone. You will hear a tone indicating you have been placed in queue and you may remove yourself from queue at any time by pressing the “#” key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you would like to ask a question, please press “*”, “1” at this time. Thank you. Good morning, a very good quarter. I wanted to just first ask you about some comments that your competitors have made regarding maintaining a larger bench over time to have flexibility to serve its larger deal opportunities. How do you think about that, should we expect any depletion in the utilization rate as we move forward as you go after these larger opportunities? If you look at our bench, this is Sudip Banerjee. If you look at our bench, we have in the last few quarters although stated that we would like to keep sufficient people available for the opportunities, which come in, and so our utilization is, and our bench numbers have that fine line drawn between them. Each quarter we look at it and then decide how much we would be requiring on the bench for the business that is to come. So at this point in time we are comfortable with the numbers that we have, and we have planned adequately for any of the business that is expected in the fourth quarter. Okay. And as you go after these larger deals also are you seeing a shift in your service mix to more, higher end offerings, will that creates more lumpiness in your revenue stream, and if so, how do you deal with that? I am Girish Paranjpe. We have been fairly well represented in our revenues by various service lines that we have, and to that extent we don’t foresee any, any major skewing happening as a result of any particular deal. I think people who had different mix in their service lines maybe expecting something along those lines. Also what happens is, in Wipro while we do lot of recruitment from the campus we also have a fairly strong engine to be able to hire from a lateral basis. So whenever there are requirements, typically the cycle time to be able to do a lateral hiring is much, much lower than that of campus, and hence we are always able to leverage that to be able to expand as and when we need higher head count in a shorter time. Also a point to make here is when we have refunded is that our utilization going forward will improve and that will in no way effect our requirement of people for growth. No, we had a very large inflow of campus people in the last two quarters of the calendar year 2005, and it was little beyond our capacity to absorb them in terms of actual jobs, so a lot of the extra drop you see in utilization was primarily contributed by campus recruitments. In terms of the training requirement for the campus is little longer than when we do lateral hires, and that is why bench tends to be, or utilization tends to drop, which then picks up in the following quarter. And finally if you could just provide some more color around the margin impact next quarter, you mentioned about, that the impact, the full impact of wage hikes, also some, maybe cost related to the acquisitions, you could maybe provide some more color on that that would be very helpful for models? Thank you. You know, like we said we had given a compensation increase effective November 1, 2005, so consequently last quarter had the impact for the, only for two quarters, two months, whereas the current quarter will have for full three months, and similarly we are going to give a compensation increase effective January 1, to our onsite employees though will be a much smaller percentage than what it was in the offshore. Both these, plus we are also seeing so far a rupee-dollar is concerned little bit of softening of the exchange for the current quarter as compared to the last quarter. Given these three down sides, I think the other levers that we are wanting to look at is offshore mix, we are looking at the utilization improvement, and visa fees will continue to be, and any other cost management areas, I think there are multiple such areas we are looking at to be able to sort of make sure that on an organic operating margin we should be moving in a narrow range. I have one final question. In terms of currency impact on the operating margins, if you exclude the forex loss related to the depreciation, what was the impact quarter-over-quarter, that is, December quarter over the September quarter, any impact on margins if you back out the hedge related item? Actually if you look at the exchange we did not have any significant difference between quarter two and quarter three on account of exchange change. Because we generally have a hedging policy, where which is, with a view to be able to reduce this volatility and that has helped us in ensuring that. Sure, is you as maybe, maybe just little bit helpful if you could just, if you could maybe decompose the components that you discussed in terms of the operating margin improvement, you talked about utilization, you talked about the impact of wage hikes as a negative, can you give us maybe some basis point impact, or from the basis point, perhaps you can give us a sense on what the impact was? Right, if you look at the US GAAP we had an EBIT of 23.8% quarter 2 and it switched to 24.5% in quarter 3. So if you look at some of the, downside has been our rate reduction, like we said while the coupon rate with the customer have not changed, it is because of the number of working days it did reflect as a rate realization reduction which is about 1.3% plus, we had an impact of the offshore compensation increase which had an impact of 1.2%, and overall utilization drop for the reasons Mr. Premji explained because of the hiring about 0.7%. But the benefits we have been able to get to neutralize that or in fact offset much more is that onsite mix change, which means more we do offshore it enhances operating margins. Similarly, in quarter three, we did not have any Visa fees excreta, which were there in the previous quarters. We have also improved the bulge, which means the mix of people we have in our offshore team or in our overall team where you have lesser experience versus a higher level of experience, it changes the compensation structure, cost structure of per person, and we have been able to improve over a period of time from 35% to 42% for the people who are less than three years experience, that has helped us gain some margin. Similarly on the cost management initiatives whether it is telecom or depreciation, we got some advantages. Some rationalization on the SG&A side we got some 30 basis points. Another big factor was we saw a 350 basis point expansion in the operating margin for our BPO business that also on an overall Wipro Technology or the global IT business level did advantage of about 30 basis points. Apart from that, there are another 30 basis points on account of other miscellaneous things in terms of some exchange accounting within the US and the India GAAP, certain revenue recognition stuff, and that is how we got an expansion of about 60 basis points. That is great. Maybe if we can go back to the BPO business. Can you talk about the composition of the BPO business, obviously you are winning new work, is the type of work that you are winning changing, meaning are you moving away from voice-based call center work to transaction based work? Let me answer the question in just one sentence. The answer is really, yes. All the six deals that we have won this quarter have been exactly in that space, in the transaction processing space, and most of them have been in the back office area. Basically financial account and procurement are the two main areas. The way we look at it, we have changed a little bit the way we look at it because what we find is when we takeover back office work too we have a certain voice component. So when we takeover a process, we take over some element of voice that comes along with the process. To give you an example, if you take over the procure and pay process, what would end up happening is that you would probably make calls to suppliers and it is very difficult to decompose that component from the overall process. That, that, So we have changed that a little bit in the way we look at it, but overall as we stand, it is strongly, we are pretty much in line with what we had given as some kind of an indicator a couple of quarters ago of bringing our voice component down to 60%, we are pretty much down that path right now. Okay. And let me be back to Suresh, Suresh can you just give us a sense on what the, I think you said what the exact acquisition contribution was that you expected in the fourth quarter, can you repeat that please? Yes. Above the guidance of about $510 million that we have given for the current quarter, we expect about 10 million dollars to come from two acquisitions that we have announced. Last quarter we had, we have reported $1.3 million in our $473 million that is the acquisition revenue because it was; one of the, one of the acquisitions was consolidated effective December 1. So we will have the three months, three months contribution this quarter, and similarly NewLogic will have its full quarter impact from January onwards in the current quarter. We expect that revenue to be about $10 million against last quarter of about $1.3 million. Okay, and what will the, what would be the sequential growth for those acquisitions as you go forward, any sense on how fast we are expected to grow on a Q over Q basis? We would expect a decent growth at least in line with the company if not higher, but at least we have to allow us about 90 to 180 days in terms of complete integration before the growth engine gets turbocharged. Okay great. And finally from me, as we go back and look at the announcement with the mPower acquisition, there is also some expectation that there would be some revenues coming on line from Master Card, can you give us the sense on how you expect those revenues to ramp up, is this included in the 10 million that you are referring to or would that be incremental? No, that is also, when you talk about an mPower acquisition, yes, the customer, there is one large customer, and from that perspective the revenue of 10 million includes revenue that is going to come from that customer. Okay, thank you. I am surprised may be if you could go into little more detail as it seems that you and some of the other top Indian players are bidding… Okay, hopefully this is a little bit better. My questions is that, as you offer to bid on some bigger projects and wins, CPI actually highlighted that in there recent call, how is that going to change any dynamics in your margin structure, do you have to take on some of these bigger deals at lower margins for lets say the first 12 to 18 months or do they come in at the same margin structure, and then maybe if you could if possible give a comment on General Motors? You know, typically when you look at larger deals always you take a position of saying within the lifecycle of that project what is the kind of money you make. It is possible that in the first few months it could be a low margin and thereafter it picks up depending upon the nature of the deal because maybe the offshoring starts taking place more and more progressively or whatever that we talked about. So while, whatever we have done so far we have, it has not resulted into low margins but we cannot rule out that similar such deals could occur. Sudip Banerjee here. As we mentioned earlier General Motors continues to be one of our strategic customers and at this point in time we remain one of the bidders for the 2006 outsourcing contract. No decision has been taken as yet, and as and when the decision is available from the customer side we will be happy to share the details with you. Then on the same topic that you are getting involved in bigger deals, could you maybe mention how the pipeline has changed for you all with the bigger wins coming out over the last 12 months you know compared to where you are now, maybe in the size of the pipeline, where you were 12 months ago? Well, we have a pipeline today which consists of many of our existing customers who are giving us additional work, many of our new customers who are in our traditional space and they are giving us work which is in the same range as what we used to get earlier, and certain new opportunities which have come up because there are some large outsourcing contracts on the anvil. So our overall pipeline now consists of a healthy mix of all these three segments and that is the change from the earlier situation where most of our pipeline was based on customers whom we were already doing businesses with and very little of the other two types of customers. Having said that we have added in this quarter 61 new customers, so therefore the pipeline for the coming quarters would also reflect the business that we expect from these customers who have just got added off. Just to supplement that, you know, we are addressing these large accounts not only through the large deals that we talked about in terms of application development, but we have a practice which is called total outsourcing which generally has a fairly large component of infrastructure services, that as you know we have launched quarter two quarters ago, we have a fairly decent funnel on which we are working on. But the point to be noted is all these larger deals have a larger cycle time and they are very binary in nature. The difference is that with the services expansion which we had, the funnel, the whole of pipeline has changed as such. We are seeing traction in various other service lines, so to an extent it is not just ADM or R&D it is into various service lines, that is the big difference we are seeing in the last three quarters. Congratulations on a very good execution. A question for Premji, I was wondering this mPower acquisition seems to be very strategic in nature. I was wondering if you can walk us through the long-term benefits and how do you see this acquisition adding value to Wipro over the next say two to three years. Yes I certainly can, you know we are following an approach where primarily we are looking at acquisitions which are in a deal size at the current level which we have done for a deal size slightly more than the current level which we have done. We look at them from the point of view of certain target areas where we are having some needs to grow inorganically and be able to offer services, which are more unique and differentiated in that space. The second area is that we are looking at areas, which fill up our gaps and offerings and make us a more complete provider of desired services to our customer base. Areas in which we are able to improve our domain competence like we have been able to do both with the VLSI acquisition which we did of NewLogic as well as the mPower acquisition which we have done, and which we did previously of AMS and previously of NerveWire. Fourth area is also that we are looking at some companies particularly in the technology space that bring us a strong portfolio of intellectual properties because we think this can be a strong driver for a degree of non linearity in our prospective growth rates. We are now looking also at acquisitions in the European market because it is helping us get a footprint in a market particularly outside of UK and outside of Scandinavia and the Benelux countries, the countries like Germany and countries like France where we do not have a strong domestic presence at this point of time and the organic method of building that presence is taking significant amount of cycle time. I just wanted to add on to what Mr. Premji said. From our perspective we are trying to build deep domain expertise in the payments area and acquisition of mPower is I think a great step in that direction because it really bulks us up in that particular area. We had done some organic hiring and built some in-house expertise anyway, but this acquisition actually increases our footprint, deepens our domain knowledge, also gives us access to very strong client base which we hope to leverage on a longer term basis. Okay. Also I think in the month of February there is a major IT conference happening in India which is Nasscom sponsored and I believe the President of India is also going to address the IT community, I was wondering are you guys thinking this maybe the event that the Indian government may announce some incentive packages to the IT industry or any policy changes you anticipate coming out of this conference, what are your general thoughts about what the president may say? How many more incentive policies do you want for the software industry. To replace STP now with SEZ, including virtual SEZ’s, I mean that is as generous the policy as you can expect to get, and I do not think there are any other policies which are of any significance which are negative to the industry. Perfect, that clarifies it, and also lastly in terms of verticals, are you seeing any increased activity in certain vertical segments in say US versus say certain vertical a year back, are you seeing any shift in the activity levels among various verticals? I think it will be useful for us to give some response in terms of how in some of the horizontal services we are building a stronger traction, and I would request Suresh Vaswani to cover that quickly. In terms of verticals you are seeing the fastest vertical growth rate taking place in financial solutions businesses as well as in our TMTS business, our technology and the travel area of our business, and also in our healthcare business, though healthcare business still is reasonably small, so that large growth there is in terms of multiplier a little less significant. We have also seen that we have had increased growth rates in our product engineering services and telecom service provider space where we have had for two quarters running more than double-digit growth, and there is enough wind there to keep up attractive growth rates going forward. And let me just have Suresh talk a little bit about our horizontals. I will speak a bit about our differentiated IT practices, which are basically our testing services, our technology infrastructure services, as well as our package solution services. We have done extremely well in these services this quarter. We have had a growth sequentially in testing services of 20%, in infrastructure services of 16%, and in package services of 10%. We have made investments and we continue to make investments in terms of differentiating ourselves and delivering more customer value in each one of these practices. Just to give an example in testing services our solutions office focuses on building frameworks, point solutions, and tools to drive testing productivity with customers and reduce the time to market and basically deliver higher quality software. In infrastructure services recently, last quarter, we launched our next generation managed services which is all about delivering infrastructure services to customer’s business requirements as against IT SLA’s. And in enterprise application solutions we are investing strongly in the solutioning area as well as in the application outsourcing area. Forrester has rated us last quarter as being the lead system integrator, lead Indian global player in terms of leadership in global SAP roll ups. So these are practices, which we are focusing on strongly and we are building good traction. Sir, good evening, nice quarter. Majority of your peers implement their annual offshore salary revision in the April timeframe, is there a reason why Wipro favors a different cycle? Some of them is historical legacy in terms of how, when you started the cycle and it continuing on that basis, so it is not necessarily that everybody has to follow one particular pattern. That is fairly dynamic, Ashish, in the sense that nothing can be said for sure that it will never change, but it is a constant process and we keep revisiting all the time. For example, November 1, 2005, is when we gave the compensation increase, the year before we gave it on the October 1, 2004. So that is a continuous process where we keep changing whether preponement or postponement depending upon what the market conditions are, so what is important is not the cycle that anybody follows but what is important is depending upon our requirements what is required for us to be positioning ourselves in the market. Right, and a question on your India and Asia Pac business, it appears that revenue might have declined quarter on quarter which was not the case last year. Is there any explanation that we should be aware of? You know if you look at the revenues, overall there has been a growth of about 17%, and if you look at the service part of the revenue it has grown about 27% year-on-year, and because the services component of the Wipro Infotech is about 38%, because that is much more differentiating service that we offer to the customer, we typically use products as Trojan horse to be able to get more and more services and more and more higher level of share of the wallet in the customers and that is all growing, and that delivers better margin, that delivers better ROI, so it is a constant focus to be able to grow that service business which we have been growing. And Ashish, this is Lan, just to supplement what did happen last year, typically quarter three is a relatively weak quarter, quarter two is a big spike in the Indian IT business, there is spike in the quarter two of the fiscal. Last year however the third fiscal quarter, we had a few very large telecom deals that we won and therefore we did not see the decline but otherwise as a trend you would find that the quarter two and quarter four of the fiscal are spike quarters for the Indian IT business. Good, and can you site any situations where Wipro might not have won a contract, but nevertheless deflated pricing for the competition, specifically the type and size of work and any kind of price trap involved would be useful? Which part of, are you talking about the global IT business, Indian IT business, which part of the business are you talking about? Not necessarily, no, just that if that is the outcome some anecdotal evidence of that would be helpful where it might be occurring in the global IT business. No, the very fact that you are finding the large multinationals scaling up very strongly on India and similar low cost locations, resourcing bases, is the verification of the fact that there are finding that without having those advantages they cannot compete. So I think the anecdotal evidence is evident in the way they are scaling up, or desperately scaling up I should say. I do not think we need to give any isolated examples of what role we have played in trying to accelerate the process. I think we just believe that we have a very strong global delivery model, which is inherent to our strategy and many of the multinationals are now trying to mimic us on that strategy. Hi, I just wanted to ask a question, how much further can you get your mix shift to move towards offshore services to protect the margin, and I guess the genesis for the question is that if I look at the acquisitions that you bought, they are potentially at lower margins, they consolidate next quarter and a wage hikes are coming through, I am just wondering is it possible for us to keep flat margins or we are going to have look for lower margins as we go forward? If you look at our offshore-onsite mix, we have shown improvement over the past few quarters, but if your question is, is there scope for us to improve it further, of course there does exist scope because there has been in the past very well done, better than what we are currently doing, but it is always a case that whenever you are in the new practices, whenever you are getting the new customers it tends to start with high level of onsite business and typically when the growths are good, you know, even if you are driving more and more offshore business there will be more new onsite business, so it is a good news that we are getting new businesses, getting new good traction, excreta. The second point was with respect to. Just in terms of margins, just trying to work out how, if it was possible that we could see margins flat going forward given the acquisitions that consolidate and the wage hike because if am correct roughly 30% of your cost of sales is in onsite wages, which just went up 3-5%, so that looks like about a 100 basis points hit roughly on margins going forward, and I am just trying to work out how rather than not come immediately to the EBIT line, how we can see EBIT sustained and I assume that mix shift to offshore was the easiest lever. Yeah, your question was with respect to the acquisition. Now if you look at the acquisition, we have already started giving separate numbers for those acquisitions at least for two to four quarters. We are seeing that 1$.3 million that we have shown having come in already last quarter. It has a margin which is superior to the organic margins that we have, and in the current quarter we think the NewLogic one will have perhaps marginal loss and thereafter we think the margins will inch up, whereas the another acquisition which we did and which is reflected in last quarter will continue to have robust operating profit. So net-net our objective is to be transparent on the acquisition and show the separate profitability for a finite time. I am concerned, net-net acquisitions are margin, there is no impact roughly, and then I guess just in terms of the wage hikes that you have given we should expect that you can sustain your margins in part due to the mix shift to offshore, but ultimately we should expect margins to decline as we move to the next year. So far as acquisitions are concerned they would not be margin dilutive in a medium to long term, it could be for a shorter term because you go through the acquisition process, you go through intangible accounting for, and it takes few quarters for it to be nullified in terms of the synergy benefits that one gets out of those acquisitions. So consequently they will be in a shorter term margin dilutive. One that we consolidated last quarter was not, but it does not mean all the deals will be of that nature, because deal that we did there was completely offshore centric and it has a unique feature as a result of which it was not accretive nor margin dilutive. As far as the onsite compensation increase is concerned, yes, it is about 30% of our revenue, the compensation increase would be between 3 to 5% and impact of that will be adverse, but like we stated there will be other levers in terms of improvement in utilization, change in the mix, and other productivity improvements that we could achieve to be able to mitigate significant component and therefore we think that overall our operating margins would be in a narrow range. I would also request that our investors in addition to looking at percentage operating margins also look at profit growths quarter to quarter and profit growths year-to-year because that is also an important parameter in terms of how we are growing and how we are performing. Thanks, good quarter guys. My first question is for Mr. Premji, there have been a couple of initiatives internally kind of reorganizing the structure maybe I think what you have also done you have kind of flattened the pyramid in terms of, you know, on the management side of the business and you have done this pretty efficiently during the past 36 months. Can you talk about some of the results that you have been seeing since you have implemented those changes and then what does it actually mean to the amount of time that you are spending on the management side of the business as well? To answer your last question first, my workload has not increased in the past six months, so one has been able to reallocate priorities to focus on where the leverage to the stake holders is the maximum vis-a-vis my time. So that seems to have worked out well. I think in terms of what has changed or what has improved, I think you have to make that judgment based on the results, which we have delivered. The results which we delivered in Q2, the results which we have delivered in Q3, and guidance which we have given for Q4 financial year, I think we are in a higher growth mindset as a company and I think we are investing more for the future, and we have certainly become more aggressive in acquisitions in terms of using them as major strategic levers for future growth, in very summary terms. All right. And then, in that respect talking about investments, the question is for Suresh, during the past few quarters you have been investing in kind of restructuring Spectramind and the BPO business in general, are we done in that, is the investment phase kind of complete at this time, and has there been any impact on profitability from that restructuring this quarter as well, and is there any way you can specify or maybe quantify? Thanks. Let me answer that question in two parts. One is from the operation side I guess the restructuring is kind of done more or less from a structure perspective. We still have a little bit of operation efficiency that we can pull out which we are working on, like always there is opportunity in everything that we see on the operation side. I think that major investment now would come on the front end because we have to accelerate growth ahead of competition and that is going to be the focus in the next couple of quarters. So you have a couple of quarters to go, and at this point that is not operating at in terms of productivity, right? No part of our business is at level of productivity where we want it eventually to be in terms of its potential Moshe, we are sure on that, I mean, BPO maybe a little more extreme example but it applies right across the company. This question is actually a follow up to Suresh, when you were making comments about the composition of the pipeline it sounded like you said that there were some changes, can you just review those changes, and more important I guess I wanted to make sure that you did not say that the work, the composition was changing towards bigger accounts, maybe you can just rehash those comments please? What I said was that there are three segments of customer profiles that we have now as opposed to what we used to have in the past, and this is rather earlier the maximum pipeline, most of the pipeline used to be from our existing client base, and I said the two additional features of today’s pipeline are a number of large deals which have come into the market where we are bidders in most of those instances, and also a large number of additional new customers whom we have acquired in the recent past, as we reported in the last quarter we have acquired 61 new customers, and the customer acquisition phase is the starting point and then for the next few quarters after that is the time when you actually ramp up that customer, so your pipeline is generated from the customers who are recently acquired. So that is the real difference in the composition. These are three separate components of the composition of the pipeline. Okay, perfect. One thing I wanted to just clarify, as far as organic quarter over quarter revenue growth is concerned, coming out of December and into March, I think you are suggesting 8% total, 6% is organic, 2% is acquisition related, is that correct? I guess the sort of question I am trying to hone in on is, you know, you are coming off a very good quarter as far as organic growth is concerned, the trends all seem to point in the right direction as far as volume, head account, and the stability of the industry, yet the guidance is obviously little bit lower versus what you just put together on an organic basis, why the hesitance to sort of give guidance that might be a little bit higher relative to the current performance? I don’t mean to put you… That is a very Hobson choice question in terms of an answer. If we have a good quarter and then you start us to expect even much more in the following quarter. I think we have given a guidance, which we think is reasonable. Our quest is always to see whether we can do better than the guidance. I do not think you should take that for granted in terms of your model, in terms of having a reasonable approach use this in terms of your model, we will keep working to see how we can improve on it. Got it, and finally just related to that, is there something in the nature of the work that you guys do on the testing and R&D side and telecom service provide side that might lend itself to having maybe a little more volatility and less visibility, I think it is what we have seen in the past versus you know kind of the traditional application maintenance and development work. I will let Lakshman Rao, who is our Chief Operating Officer face the question of volatility in our telecom business because telecom business is a significant part of our product engineering services business, I think it is about 55 to 60%. In our R&D business we work in telecom and non-telecom business segments. We have integrated the entire business into one product engineering solutions business. You know, we had of course since entering the market three years back reasonably well with respect to the equipment vendors in the last couple of years. Post their restructuring, post their re-strateging of their products, we have been able to get a good junk of their new product development activities. But at that point of time we were not able to grow our service provider business. In the last one year if you see while our equipment side of the business in telecom has got matured, we have got increasingly good traction in the service provider space. So why I am telling this thing is that in the telecom because it is a little bit volatile, but because of the wide portfolio of competencies and services we offer in telecom we are able to get the average effect and then still grow. At one point of time our voice business has grown, at another point of time our broadband business has grown, and in the last one year the major growth came from our wireless competence and mobile side. Today our growth is coming from again surprisingly from the optical space we have got a good built, as well as in the service product space, specifically in the broadband services, IP enabled services, as well as the new third generation work that is going on whether it is in respect to video applications or with respect to data over IP or voice over IP. So there has been some amount of churn in different domains of the telecom business, but overall because we address almost every single segment in the telecom domain we are able to consistently attain our growth objectives. Thanks again gentlemen. I would just like to understand a little bit about possible constraints on the supply side in your business. Firstly in terms of what skills are currently in short supply and what actions you are taking to overcome those, what the implications is for example on what you are having to pay for those skills, and secondly taking a slightly longer term view, whether you have any sense of whether there is going to be a tightening of supply on graduate recruits, say in the next recruitment cycle? Thanks. Let me attempt to answer your questions. You know, bulk of the constraint on the supply side is in terms of experienced people, somewhere in the range of 6 to 10 years of experience, and that is the kind of experience profile that almost everybody is looking for, and it is only the more successful companies which have a higher brand value in the employer market, they are able to get the right sort of people, but if you ask me is there is a constraint today at the entry level in terms of engineering graduates coming out of schools, I do not see that as a constraint. Even in terms of the quality of recruits that we get, again, being among the top employers, gives us a chance to get the best candidates, plus all the investment that we have made in the last several years in terms of training people and orienting them to work into our model helps us to mould people that we have. So even looking forward let us say to the hiring season of 2006 or 2007, at least we are comfortable that we will get access to the best talent that we can get. There is some inflation creep that is bound to happen but I do not think it will be anything that will certainly impact our business margins. Yeah, we will take those last two questions from those people and then we will close the call. We will take the two questions. Thank you. I just wanted to followup quickly, Suresh, you had talked about the pricing, if you could just provide some more color on that in terms of was the pricing decline purely a function of mix or also I believe you said there were fewer billing days which may have impacted the number too? That is right; it is clearly because of the number of days overseas, number of working days being lower overseas that this impact has been felt. You know offshore pricing has generally been flat, and so far as onsite is concerned the reduction is primarily reported because of the number of working days being lower. Okay. And finally just wanted to get your take on pricing trends going forward, you know, some of your competitions talked about 3 to 4% increases on newer deals, are you seeing that too in the market place, and when does that begin to actually help your P&L down the road? Yeah, actually we discussed that in the morning session but just to recap, we said that generally we have been doing well insofar as for the fixed price projects are concerned. Some of the price increases that we have got in the last six months in some of the specified practices has been fairly decent and encouraging. The new customers are coming at a better rates, plus the change in the mix, so we think it is more like the pricing going forward short to medium term to be more stable with little bit of positive bias. Thank you. A quick question, your testing business was very, very strong year over year basis, I was wondering if you can provide some color in terms of the split in testing, is it custom application testing which is growing or is it package software implementation testing which is growing, or probably you may have expanded yourself into maybe security testing, any color on that will be really helpful? Thank you again. I think there is growth right across all our domains insofar as testing is concerned. Traditionally we have been very strong on the engineering side, on the product engineering side, but over the last one or two years we have been focusing extremely strongly on the enterprise side of testing as well. So we are beginning to see extremely strong growth rate on our enterprise side of the business insofar as testing is concerned as well. On testing you know just to give you a little bit of a backdrop, we have invested strongly in terms of building frameworks and point solutions as a part of our solutions office, and that gives us a very strong differentiator in the market place. Okay, thank you. Thank you very much for your participation. The IR team, Lan, Jatin, and self will be available offline to answer any further questions you may have. The digitized reply will be made available from 12 noon Pacific at the dial-in numbers communicated in our press release as well as email. Thank you and good luck. Thank you. Ladies and gentleman this conference will be available for replay after 9:00 a.m. Pacific Time today through February 1st at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701, entering the access code 813-698. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 813-698. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

EarningCall_233843

Here’s the entire text of the Q&A from Best Buy’s (ticker: BBY) fiscal Q3 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. If you take this statement together with the 5.4 comp, which I think represents the smallest delta between the centricity stores and your corporate average, I was wondering if you can maybe provide a little bit more color as to where the expectations are really falling short. Are you seeing additional expenses on the centricity side, or do you think that it's just taking a little bit longer for some of these stores to mature. Well, thank you. Actually, the older stores, as I believe Darren mentioned in his presentation, are continuing to perform best, and so what we knew as we accelerated our growth through, and decided to do more centricity stores that we were taking the risk that we really had less ability to influence those stores as we opened them, and there was a greater risk that it would take a longer time for those stores to ramp, or we may find that we made mistakes in terms of what we were ramping with because the speed with which we were doing it. I think what we've seen in this last quarter is evidence that all of those risks have had some impact. So we saw a lower rate of gain than we had seen with earlier stores. As we mentioned, both the new stores we opened, and we opened 118 new centricity stores in that mix, we've got the same team that was rolling out a smaller number of stores is charged with a much larger number of stores this year, and we are not seeing the same rate of gain we got from those first stores. Now, part of the thing with those first stores is it took even those stores awhile to get to the level they got to by last spring. We started seeing the very good results. We've got to be very careful as we look, we honestly face what we're seeing which is we were hoping for better results than we've got currently. As well as, so that would argue to pull back on expense structure, and be cautious about any further stores that you open. So we're doing some of that, but also we've got to be care that we look at the information and give the stores an adequate amount of time to adjust since we had less energy that we could apply to each store that we transformed than we did a year ago when we only did 70 stores. One more question, if I may. A couple of times in the call it was mentioned that the quarter got off to a slow start. Yet in mid-September, you issued guidance for 3 to 5. I would have to believe, having knowing that at that pint in time the quarter was off to a slow start, given the fact that sales did rebound towards the end of the quarter, were you actually expecting a greater rebound? No, we actually saw the weakest month of the quarter was October. So we actually, and November started relatively weakly, which when we looked at the, Darren, actually, if you wanted to comment, when we looked at the--. Alan, I think the word, you're right, we used the word both slow start but we also used the word choppy. Honestly, when we reflect back, one of the things we didn't want have in the forecast was the depth and how our senior management team would have to put energy into managing the hurricane outcomes in the quarter. And so what you saw, I think is a reflection of how consumer sentiment was dropping, gas prices, and then when that stuff started to stabilize, and quite frankly, as we focused getting into the end of the quarter and into, as we've talked before, November is a generally disproportionate amount of our results in the quarter, our focus turned to November, and quite frankly November was very good. That's why we had confidence to issue the results that we did, because quite frankly it was still early and a disproportionate amount of the results do come in the November time frame. Thanks. Couple of questions. If I could follow up on the customer centricity stores, first of all, how many stores were actually in the comp space that were opened a quarter that were segmented stores? You said the only ones were in the comp base, it wasn't all of the centricity stores, just the ones that were open a full quarter, so I just wanted to know how many were actually--? And you've acknowledged that this is a big HR challenge to roll this out across a whole chain, is this just execution? Did you have problems getting the people in the newer stores to understand what the program's about and up to speed on that, or is it just that as you roll it out to more stores and you have less management to oversee it and people to sort of watch it and make sure it works right, that it just becomes harder to do and it's kind of natural that the comps is going to narrow pretty considerably? Well, I think, first of all, for the first 67 stores this would be their second year of comping on top of the, with a centricity initiative. So it's the second year into the centricity initiative. Secondarily, I think, and to some extent we don't completely know the answer to that question, because with as many stores as new into centricity as we've got and the older stores doing better, we're not, there's a whole series of things that potentially it could be. It could be any one of the things you're talking about. It's probably, as we get more time, and as we make further refinements with what we're doing with centricity, I think we'll get a better picture. John, you might want to comment on that. Sure. Yes, as Brad had mentioned before, 118 out of our roughly 250, 260 stores just were segmented in this past quarter and represented, so part of them, at the very end of the second quarter, so third quarter is their first quarter, some of them just in November. So we're looking at some very early results. But as Brad pointed out, we just didn't see the speed with which we generally saw high revenue comps. And so what that does, particularly with the higher fixed cost labor model, it puts your SG&A out of whack. So there's a number of things we have to look at. Why didn't the sales ramp quicker? Could we have pulled back on the labor a little quicker? And could we have--. Right, could the quality of implementation have helped us ramp quicker, so there's a number of things we're going to look at. We will look at those, we will adjust them, but we also want to be careful not to conclude that based on one quarter's results of a bunch of stores that we're in the wrong space, we absolutely think we're in the right space. We just have to optimize this now and anticipate that these kinds of things will happen, and we will deal with them in the future in this fashion. But if I had to guess, I would guess that probably all of the things you mentioned are having some impact at this stage. All right. The other question I had was, given the strength in flat panel TVs, and you've been talking about triple-digit growth now for quite a while in that category, and it seems like the unit profitability on those TVs is pretty high, and the unit volume is starting to become pretty substantial, at least industry wide. I'm a little surprised that more of that didn't flow through to the bottom line. When you talked about competitive pressure or promotional environment, is it impacting that category in particular more than you've seen other categories, or not really? Yes, Mark. I would say that it is not disproportionately impacting the flat, we, again, are extremely pleased with how we mixed out. We're extremely pleased with both the unit and dollar velocity in the category. I think ASPs, ASP declines, to give you a more accurate number than the directional number I gave in the call, were at the low end of our anticipated decline range when we look at the year to date declines and we look at the November declines. So I would not say that they are disproportionately hit by competitive pricing pressure. I think they are certainly the highlight, one of the highlight categories in the industry right now, so you're seeing a lot of advertising and promotional attention on it. But they're also a major driver for us and all of our competitors, so we're not seeing what I would call irrational behavior where people are trying to use this category to disproportionately gain share, or disproportionately drive revenue. I think we're seeing a competitive environment but good balance in that competitive environment. So that, well, then my original question, so if it's not that those are becoming a lot more promotional, I was surprised that the profitability from those big ticket sales didn't sort of flow through. So, Darren, can you talk at all about what's offsetting that? Yes. Sure. Absolutely. So if you actually go into the detail of the press release you'll see for consumer electronics, our comparable store increase was 14%. The largest increase that we've seen in consumer electronics in better than two years. Offsetting that you can also see that we continue to be challenged in the entertainment software space. So I think it's fair that, as Ron highlighted in his call, and we see this phenomena in these cycles, that as we enter a new launch cycle, the old platforms begin to dive, and the software with it, and the profitability with it. We launched the new, we don't have enough units, quite honestly, to offset the drops, and we've been clear about this, that hardware doesn't come with much margin. Almost no margin. So consequently, we give it up in that part of our house, and that's what we saw in the quarter. As we look forward, by the way, as we look forward to software, there's some, one of the things we referred to is the gaming cycle, which looks very optimistic obviously with both Xbox getting more units in the market and with Sony launching their new PlayStation 3 this year, and we also think there's a good likelihood that HD-DVD launches this year. So we've got some refreshment coming in terms of some of those cycles but it will be awhile before HD-DVD has a big financial impact. Darren, you used to talk about how 3% was kind of at the 0 leverage point for the Company. Obviously you've gone through quite a bit of changes. How should we think about, where is the 0 leverage point right now? What is incremental spend as you build infrastructure, and what do we think is going to be kind of the ongoing higher fixed structure. Our current hypothesis is that it's above 3. Not to be flippant Scot, but I think a great example, last year in the third quarter our comp store sales were up 3.2%, our earnings were up 22%, and we leveraged SG&A by 30 basis points. I think that's part of the journey we're on and what we talked about today. Quite honestly, this third quarter was the largest quarter of all quarters of our transformation activities that we've experienced to date. What we're doing, and I tried to highlight this in my comments is that we're evolving and chasing capabilities to better manage that model. Scot, when you actually unwind the results, and the risk is we walk away from this call and conclude that customer centricity and that work is just not working. It is. So underneath what we're seeing in the initial waves is that we're seeing an accelerant in terms of operating income growth in the initial waves, we're seeing gross margin improvement above the chain in the initial wave, and I think quite frankly what we're not seeing at this point, or we may have just incorrectly assessed, was the productivity gains that we should get as we're launching these additional waves and the drain that it's having across all of management that's being felt in those stores and being felt in the balance of the stores, too. And so that's affecting all of the numbers. What we're committed to now, and you would expect this of us is that simultaneously with rolling out and implementing the new waves is to do a better job understanding what it takes to get productivity and balancing and beginning things that, as Brian highlighted, we're really, really quite good at, is beginning to optimize and understand GAAP management. We've already started that process, as you would expect us, and we're not backing off of our commitments that, our longer term goal is we should be able to see expense leverage and margin gains at a 3% comp store level. That's the longer term goal. What we're currently experiencing is that transition period, and we have to go in and make some choices based upon the evidence that we see now in order to strike that balance going forward. Is it going to happen in the fourth quarter? It's not. Is it going to happen as we go into FY '07? You bet it is. One other, just one other thing on that, too. Both, the very complex initiatives here that require thousands of people to do them, like customer centricity and service are both places where our expenditures are higher than we had hoped in relationship to the revenue. I don't think that's a shocking outcome. It was the biggest risk we took as we drove into this space. And in both places we're seeing similar results, and as we mentioned earlier, refining things and building GAAP management. We've got some places where both systems are working extraordinarily well and some places where they're not working at all. And so that's what we call GAAP management, it's trying to figure out what the difference is between those two and manage the system for the best operating results. In both of those major areas, we have the same challenge in front of us. Good morning, thank you. Question is on Geek Squad and its impact on comp. It looks like it's in the home office category for the first time this quarter. I might be mistaken on that, could you please confirm that, and then if so your overall comp in home office category is still down, and if it was just included this quarter it implied an acceleration and a deceleration of the home office comp. Can you comment on the contribution Geek Squad is having to that category and what we're seeing in the rest of the category? I actually don't have the statistics in front of me but I would say that it is a contributor to the comp, but we are, as you know, lapping last year's launch of Geek Squad. So we're seeing revenue growth in Geek Squad. We're extremely happy with the customer satisfaction still on Geek Squad, and we're extremely happy with the way the teams are building services into the total solution. So I think if you kind of look into the release you'll see that we were pleased with our growth in notebook computers. What was not highlighted in the release, we were also pleased with, as we were the first quarter of the year, the growth of computing accessories exceeding the growth rate of notebook computing. We're seeing the desktop business continue to struggle as we're in transition from desktops to a more notebook-oriented business model. Also, in home office, we saw cellular phones recover nicely to a strong comparable sales gain in the quarter. So what you're seeing is I think in the home office category as we illustrated in the release, you're seeing a fundamental mix change and you're seeing, as it relates to Geek Squad, the teams putting together solutions that include the product and the services much more effectively. This is Brian Dunn. I would just add one comment to Ron's, and that is we've doubled our Geek revenue in the quarter, and again as Darren mentioned and I mentioned on the call, this plays to a strength of Best Buy's, and that is our ability to gap manage to find things, capabilities that are working well and to export them to the stores that are not grabbing them as quickly. Our confidence is unshaken and the focus of the Company is clearly in both our customer centricity scale and our Geek Squad scale, and our ability to gap manage we have a great deal of confidence in. One quick follow-up for Brian. Brian, you commented on heightened competition coming from Canada contributing to the comp weakness. Can you just suggest where this competition is coming from? Yes, I think what I'd like to do is ask Kevin Layden, who is on the call, Kevin, would you like to comment on the marketplace. Well, certainly not unlike the U.S. a lot of the mass merchants are definitely looking at consumer electronics. That's added a level of competition in Canada that has been higher than normal. It's not, would not be unusual for us to quote the source at this point who have been spending quite a bit more on advertising as well. So those are the two primary factors. And I would just remind the call, remind everyone, that our market share gain was significant in Canada in the quarter and again that plays to our strength now of gap managing our operating model in Canada. I guess my question relates to costs and some of the investments that you're making. Do you see the outcome of this as actually scaling back on some of the investments, whether they be labor within the stores or the magnitude of conversion as opposed to kind of waiting out the improvement, and to the extent that you think we're likely to see some scaling back, in that investment, what's the time frame at which you think you might start to alter your investment framework and your investment levels? Well, we're going to respond to what we see in the data, and so if the data tells us that something is not working as well as the hypothesis, then we've got to look at is it just a matter of time or was there a fundamental flaw in the analysis. In some places we will be scaling back. In other place we'll be taking a very careful look in relationship to what we actually see as an outcome and adjust accordingly. I think one of the strongest things, and one of the reasons we move so aggressively in this space is, you can look at all of these areas that are challenging for us, they're challenging in part because they're based on labor, and they're based on thousands of people, we're also in a system with relatively high turnover. So it's a relatively easy place for us to adjust based on what we find in the marketplace compared to if this was a lot of fixed investment. So you'll watch us. We'll see what happens. We'll be watching both the time, we'll try to figure out what the gap, one of the things, we keep referring to gap management, gap management if somebody is doing really well with the same strategy and somebody else is not, historically that's been an opportunity to try to bring up the average. So in those cases we probably would not disinvest. If nobody is doing well in this space, then we probably will back off on the investment. Oh, yes, there's absolutely, that's kind of an ongoing, I wouldn't say there's a customer that fits that description. We don't see that at all. Actually, we thought we would be, when we started with the five segments we thought some of those segments would be gone. None of the customer segments are gone. We're finding value in every segment. But there are a lot of, part of this process is you're constantly trying new things, and there are a lot of things you try that just don't work, and you have to back off of, and that's a living part of the process. So if we had, like in the first quarter, where results were better than what we anticipated, we did what we did during the balance of the year, we would double down in macro on the investment. In a quarter like this where the results are not quite as good as we hoped for then we're going to do some culling of various kinds of investments. Has that started now in the fourth quarter given that you've had probably some insight as to where the payback has made sense and those areas where it hadn't? Fair enough. And then just finally, given that the comp was within your range, and given that the gross margin rate was within your range, it would seem like net-net, the expense dollars and the magnitude of costs you're putting in are sort of more of a problem, if you will, than the payout that you're getting on that. Is that accurate to say, or is it really both the return on that investment as well as the investment level that are not meeting your expectation? We reported $0.28 this morning. And, up, and we're not trying to hide from what's in that $0.28. $0.04 of that was gift card breakage, and we weren't counting on that. So you could say we did $0.24. The things are different than we expected honestly is that we had about a $0.03 miss in our Canadian business. We probably over, we didn't probably, we overspent our expenses by about $0.03. And so when we back up, we delivered the comp that we said and we have a couple of places that we got surprised. And so that's essentially the breakdown of how we're looking at it, and what you hear from us is that we are absolutely, we see benefits in the strategies that we're pursuing. We have some editing to do. We shouldn't be $0.03 overspent. And we're going to fix that. And in Canada, quite frankly, we were surprised. And similarly what you heard from Brian and Kevin is they're going to work to turn that around, too. And, Darren, just to close that $0.03 of overspending is $0.03 that you're willing to pull back on? That's not subject to contemplation and further research. You just feel like that's $0.03 you can identify it and you know where you need to scale it back or is it a little bit of a more complicated process? Good morning. I wanted to focus on the Geek Squad business. Can you help us understand whether that was an expense problem? You mentioned that it came up a little bit short as well relative to your expectations. Whether that was an expense problem and you overspent there as well, or whether you were putting Geeks in stores and you didn't get the revenue lift? Just comment on the utilization, both the in-store business and the in the field business relative to your expectations and what you've seen with demand so far. So, Colin, here's what, I'm looking at the P&L. We are absolutely on our expense plan in terms of dollars. I tell you, we more than doubled the business in terms of Geek, but in terms of our revenue forecast, which was, as Brad said early, very ambitious in the quarter, we came up a little short in terms of the top line versus our forecast for the quarter. Now that being said, in a business that's growing by 100%-plus we should be that good in our ability to forecast something above that where we're trying to hire, trying to increase the sales force by 25% in a quarter. So I think at this point when we look across the expenses overall, versus what we had planned for, I think we still feel okay about that business. I think it's to John's earlier point, in many of these areas what we're trying to sort out is what the productivity curve of those additions look like and when they're going to come. And we're going to get better with that in every quarter, and we're going to edit the things where the productivity is not coming. One of the things that I think we got to, is when you grow a business as fast as we're growing that business, when you're estimating your sales, it's an informed guess, because you don't have a historical pattern in which you're looking at. So you're taking a look at what you have, and then trying to guess, if I change at this rate what would it be, and what does it take. The second thing is that business because of the newness of the business, has not had a chance to be refined at all yet. So there is a lot of opportunity for refinement in that business. And just to clarify, the lower revenue than expected, was that in0store or in the field, and do you think it had anything to do with the quality of the hires as you're getting now into the 12,000 Geek range? We don't have, I don't have the numbers, this is Brian, I don't have the numbers right in front of me. I can tell you that our in-home business accelerated from where it had been running but we don't have the numbers in front of us. That's not how we manage the revenue. Apologize for that. So thank you, for your answers to the questions. Looking at the time I think I've got enough minutes left for one more caller to ask a question. Good morning. I guess Darren, your guidance for the first quarter for operating margins being down, I guess I was a little surprised by that given the year-over-year comparison, because fourth quarter of a year ago your margins were down, and specifically with gross, can you speak to what, what you, a little more specifically what you think your gross would look like I guess relative to what you reported for the third quarter? And I guess I'm looking at the third quarter as 90 basis points of expansion without the breakage. Yes. To frame that question, you're absolutely on to the right point. As we look into the fourth quarter, and I'll have Ron give you a little more color, we're expecting gross margin rates to increase, no doubt about that, but at a lesser rate. And in the fourth quarter, what we're recognizing, quarter over quarter what's different is that we know Xbox will be significantly more in terms of the mix this year. MP3 players more, and that's putting, honestly, more of a, somewhat of a cap in terms of margin mix, and the other thing, as Ron talked about is we are starting to lap some of the benefits. As we look at some of the key drivers that are a little less important in December, and the lapping of some of those capabilities, it is constraining the gross margin rate from its year to date trends of 100-plus basis points. And now before, Ron, you add to Darren's answer, Steve, if you could put your phone on mute, we're hearing a clicking sound. Steve, I would just amplify some of the things Darren said. I think we, number one, we are lapping some of the structural improvements we made in pricing, market assortment, sourcing, and private label which had been driving a lot of the margin. We will continue to see improvements in those categories, but they're not the initial step change improvements we've seen over the last 12 months. Additionally, as Darren said, we're going to mix a little bit differently, so gaming with Xbox we expect to be a growth category and a comp driver in the quarter. iPod/MP3 continues to be a significant comp driver at lower mark-on margin rates, but we, again, do expect to see a gain in margin rate in Q4 but not the kind of blistering pace you've seen the last few quarters. So should I compare that, I guess, if we assume adjusted gross for Q3 was up 90 basis points, as we look at the fourth quarter, are you assuming right now that the fourth will be up less than that? That's helpful. Second thing, if I could, so if we're assuming down EBIT margins for the second half here, I guess it looks like you might be a little bit up for the year. I know you're not ready to give FY '07 guidance until later but you're a far cry from your 7% operating margin target as you head into FY '07. Can you speak a little bit to how much up you might think FY '07 might look like at this point? Absolutely fair question. And so here's what I'd say. We are right in the throes of our strategic planning process. When we look at the things that are driving margin improvement, we, clearly, we have not lost any confidence around the supply, we haven't lost any confidence, honestly, around the four initiatives and what we'll evaluate as the timing of them. So we're clearly--. Let's go specifically through each four of those. For instance, the challenge we had in Canada was one of the places where we're going. Some of the reason we had a challenge in Canada is that there's like the payroll initiative that went on in the quarter, put the system through a lot of change to try to improve the earnings result to get to the 7 by 7. As they're doing that, as you go through that process, we're looking for what the impact has been, and so, in a number of these places, we're not getting the outcome that we were looking for, which is why we're not getting the results. So we're sharing with you as we go in terms of our objective. In Canada we didn't quite get the results we're seeing, with centricity we were also looking or basically, centricity and service we're also looking for an improvement in gross margin rate. That did not also happen in the third quarter. Did happen, by the way, in the first quarter. So the question is going to be whether we can, whether we see as these things mature, the change that we initiated in this quarter has a maturing positive result that actually drives the outcome. If it doesn't, then obviously it puts some challenge to our ability to get to that 7% objective or moves it way back from a time standpoint. So other things like the sourcing and IT initiative gave us the benefit that we were looking for. So we've got, that's part of what you see in terms of the margin rate growth. Some of the stuff that was in there is giving us good indicators, and other things are not at this stage, and we'll continue to give you a read as we get those results and we certainly, on none of these initiatives, have we lost faith that we can get there. But obviously some of them are not going as well as we hoped at this moment. Thank you Darren and Brad for that, and thank you, and thanks to our audience participating in our third quarter earnings conference call. Before we end, may I remind you that this conference call will be available to you for replay by dialing 973-341-3080, and entering the personal identification number of 6777800. The replay will be available from about 1:00 p.m. Eastern Time today until next Monday, December 19. To hear the replay on the web visit us at our website, www.bestbuy.com and go to the Investor Relations section. If you have additional questions about our third quarter earnings, or our fourth quarter outlook, please call Jennifer Driscoll at 612-291-6110, or you are welcome to call me, Charles Marentette, at 612-291-6184, and reporters should contact Sue Busch, Director of Corporate Public Relations at 612-291-6114, and I think that's probably enough phone numbers, so we are going to conclude the call. Thank you. 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_233844

Welcome to the Drugstore.com Quarterly Results Conference Call. At this time, all participants’ lines have been placed in a listen-only mode. Following today’s presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press “*” followed by the “0”. As a reminder, this teleconference is being recorded, Thursday, April 17, 2006. At this time, I’d like to turn the presentation over to Brinlea Johnson, please go ahead. Good afternoon. Welcome to the Drugstore.com First Quarter 2006 Earnings Call. With me today is Dawn Lepore, Chairman and Chief Executive Officer, and Bob Barton, Chief Financial Officer. Before we get started, we would like to remind you that the information on this call may include forward-looking statements. Words such as expect, believe, anticipate, and similar expressions are intended to identify forward-looking statements, which involves risks and uncertainties that could cause Drugstore.com’s actual results to differ materially from those discussed in the forward-looking statement. In particular comments about Drugstore.com’s anticipated future revenues, earnings, and gross rates are forward-looking. Factors that could cause actual results to differ materially from anticipated results are detailed in our periodic filings with the SEC. I’d also like to point out that during the call, we do mention certain non-GAAP financial measures, which will be explained during the call. Our reconciliation of these non-GAAP measures to most comparable GAAP measures may be found in our earnings press release, which was made available prior to today’s call. Examples include adjusted EBITDA and core OTC. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, and amortization of intangible assets in non-cash marketing and is adjusted to include the impact of stock-based compensation. Core OTC is designed as an OTC segment excluding sales associated with the wholesale agreement with amazon.com, which was terminated in the fourth quarter of 2005 and sales associated with our custom, interest, and category which is now largely reported on a net basis rather than a gross basis due to the change in the company’s contractual relationship with Dr. Weil. Finally, today’s call is being recorded and will be available for replay on Drugstore.com’s website at www.drugstore.com under corporate information and with this, the earnings press release for the first quarter 2006 including a summary of our financials and supplemental financial information discussed on this call will also be available on our website also under corporate information. With that, I’ll turn the call over to Dawn Lapore, Chairman and Chief Executive Officer. Thanks Brinlea. Good afternoon everyone and thank you for joining us. I’m pleased to be reviewing our results with you because I believe we’re making significant progress along the goals we’ve outlined for this year. Following my remarks, I’m going to turn the call over to Bob to go over the financials in more detail. There are four main messages in my comments today. First, we’re making significant progress on our profitability goals and expect to approach break even in the second quarter. Second, we’ve meaningfully increased the profitability of our OTC business through important business model changes. Third, we’re working on ways to grow the top line and bottom line of the pharmacy business. And fourth, we achieved modest growth in our vision business through product selection and favorable margin. Now, let me move to our results. Company reported quarterly net sales of $100.4 million, the second highest in company history driven by record orders of more than 1.3 million. Repeat orders represented 81% of net sales and exceeded 1 million for the first time ever. While new customer orders remain strong as well at $326,000. Our EBITDA loss of $1.4 million reflected a significant sequential improvement and beat guidance despite $1.8 million in final brand spend. Gross margin was also strong, g rowing by 100 basis points year over year to 21.3%. Our gross margin was even stronger in our core OTC business with 180 basis point improvement year over year to 28.2%. This encouraging bottom line performance is a direct result of the many changes that we’re making in our business that have long-term positive implications. Given this progress, we now expect to approach EBITDA break even in the second quarter. Our OTC segment continues to be a key driver of the business and represented 47% of sales. This quarter, we reported sales of $49 million with $48.3 million from our core OTC business which grew 21% year over year and we expect that growth to accelerate in the second quarter. Within our OTC business, there were some very high performing categories. Sale from beauty.com, our high end beauty site, grew an impressive 43% year over year. Our natural store was up 31% and sales in our personal care category, which continues to be a cornerstone of our business and a key category for our repeat customers grew by 26%. Our total beauty sales were impacted by some short-term product availability issues and grew by only 20% year over year, but we’ve resolved these issues with our suppliers and see additional growth in this segment going forward. In fact, there are a number of very positive trends in this business including the increase in our sales of color cosmetics and the strong launch of products targeting women over 50. New customer growth in our OTC segment was strong at 326,000 new customers. Search continues to be a critical channel for customer acquisition, in fact 46% of our new OTC customers came through Search in the first quarter. Year over year, we saw 28% growth in OTC orders through our Search channel while our cost for new customer in Search only grew 6%, but we continue to aggressively manage our Search cost through careful ROI management on an individual keyword basis. We manage over 150,000 keywords and have the flexibility to move away from some of the more generic words that see the most pricing pressure. I believe our online marketing efficiency will continue to be a core competency and strength for us. Now, let’s move to our mail order pharmacy segment. Mail order pharmacy sales were $18.3 million this quarter and reflected record basket sizes of $155. FSA or flexible spending account program was also strong, growing 89% year-over-year to over $1.1 million from our partners. However, total sales growth in the low-margin mail order segment was negatively impacted by Medicare Part D, in fact the impact while within our range of expectation is running at the end of that range and as a result we did not achieve double digit sales growth in this segment during the first quarter. In order to reach that double digit growth, we’re working on ways to grow the top line and the bottom line of the pharmacy business. Toward that end, we recently launched a marketing partnership with a leading insurance company to provide our customers information on their Medicare Part D plan. We are exploring additional advertising relationships with pharmaceutical manufacturers and ad agencies, monotize the more than 1 million unique visitors per month to our online pharmacy site. Visitors to our online pharmacy continue to gauge in our drug and health contents including the drug price checker, drug interaction checker, and the “ask your pharmacist feature.” In addition, we’ve outlined initiates to grow our specialty pharmacy business. Currently, specialty drugs represent over 10% of our cash business. These high priced drugs include biologics and injectables, some requiring special shipping and handling; the chronic disease states such as growth hormones, oncology, and multiple sclerosis. We plan to continue to build our online content and tool as well as our clinical expertise around these drugs and disease states to grow this high-margin segment. Overall, we’re aggressively moving to counter the impact of Med D, but it’s important to note that due to the low pharmacy margin, the EBITDA impact of this slower mail order pharmacy growth was only about $100,000 or less. Now, I’d like to move to Vision. Sales from our Vision business increased 4% year over year to $12.6 million. We believe that our focus on broad product selection, competitive pricing, and our commitment to maintaining favorable margins has paid off. During the quarter, we finalized an agreement with Cooper Vision, which allows us to offer our customers a private labeled version of the very popular Biomedics brand, previously available only through doctors. We also implemented a number of price changes targeted at further improving our margins and covering the cost of verifying prescriptions. The last segment that I want to cover is our local pick-up business. Sales from our local pick-up pharmacy decreased modestly in the first quarter to $24.2 million. The economics of this business continues to be good; however, as we’ve shared in the past, we do not view this as a growth segment. Job One in 2006 is to make our business EBITDA profitable and use that as a stepping stone to cash flow generation and GAAP profitability. During our last earnings call, I outlined many of the modifications we made to our OTC business to enhance our profitability. These included modifying our shipping policies, removing the Diamond deals program, and reviewing the profitability of each of our 25,000 SKUs. At an aggregate level, we gained more than $500,000 in EBITDA benefit from these changes and still grew our core OTC business at 21% in line with e-commerce. We increased the profit of our OTC segment while impacting only about $2 million in revenue, and we believe there will be additional benefit going forward. We are targeting our margin to continue to improve. In late March, we added a weight-based surcharge for orders over 20 pounds. Because this change was implemented late in the first quarter, the full impact will be reflected in future quarters. Just after the quarter end, we signed a new shipping contract with UPS. Under the terms of this new contract, we will benefit by even better rates than we have previously enjoyed. This should further reduce our shipping subsidy cost. Although many of our initiatives in the first quarter were aimed at the bottom line, we were also very focussed on driving revenue through continued conversion improvements, additional personalization, and new features. Specifically, we launched an important new feature in our OTC business, Auto Delivery. This new services allows customers to sign up for automatic delivery of key products every 30, 45, 60 or 90 days. We launched this service with about 40 SKUs mostly in the beauty and skin care category, but based on the positive customer response we’re expanding to several hundred SKUs over the course of the next few months. We believe this feature will aid retention and frequency and many of our vendors have expressed interest and are participating in the program. To summarize the quarter, we had a strong start to 2006. We’re making progress on our profitability goals and expect to approach break even in the second quarter. We have significantly increased the profitability of our OTC business while still growing at the rate of e-commerce. We’ve moving aggressively to counter the impact of Med D and we have achieved modest growth in our Vision business. While we are already seeing the benefits of many changes to our business model, the full impact of these changes will be felt throughout the year. Profitability is definitely our highest priority in 2006, where profitability is the beginning not the end. Looking ahead, we’re also working on a number of strategies to drive our long-term growth. As we execute these programs over the next nine months, I look forward to outlining the steps we’re taking that we think will result in both solid growth and a rapidly improving bottom line. Now, I’d like to turn it over to Bob to review the financial details. Thanks Dawn. First quarter net sales were $104.1 million, the second highest sales in company history. This growth was achieved despite our decision to exit the wholesale OTC fulfillment business with amazon.com in the fourth quarter of 2005 and to re-negotiate our custom nutritional relationship with Dr. Weil, which caused us to recognize those sales on a net basis versus a gross basis. Both of these changes impact our year-over-year comparison. Over the next few minutes, I’ll walk you through some of the details driving our first quarter sales and I’ll review expenses and the balance sheet and provide guidance for the second quarter of 2006. With that as an outline, we’ll get started. Total OTC net sales continue to reflect double digit growth to $49 million and core OTC net sales grew by 21% year over year to $48.3 million. Mail order pharmacy net sales grew by 2% year over year to $18.3 million. Local Pick-up Pharmacy net sales through our Rite Aid partnership were down 3% year over year to $24.2 million and our Vision segment improved g rowing 4% year-over-year to $12.6 million. Now, I’ll walk you some of the key customer metrics that drove our first quarter sales starting with overall order volume, which was greater than $1.3 million and grew by 4% year over year, and when excluding the impact from the termination of the Amazon fulfillment agreement, orders grew 11%. Average net sales for order was $77, and on a segment basis average net sales per order for the first quarter in our OTC segment was flat at $56. Mail order pharmacy grew by 9% to $155. Local pick-up pharmacy grew by 5% to $112, and finally average net sales per order for the Vision segment were up 5% to $87. Net sales from repeat customers in the first quarter made up a record 81% of total sales. In fact we saw repeat revenue in our core OTC business grow by 29% year over year for the first quarter. Also during the quarter, we added a solid 326,000 new customers bringing our total life today customer base to approximately 7.5 million unique customers. And since inception, we have now filled over 23 million orders and expect to achieve the 25 million order milestone within the third quarter of the year. Our trailing 12-month active customer base grew 10% year over year to $2.1 million while the trailing 12-month spend for active customer grew by 2% year over year to approximately $189. Please note that both the trailing 12-month active customer base and average annual spend numbers exclude net sales and orders associated with our wholesale OTC fulfillment business and our new fulfillment relationship with Dr. Weil, and reflect only the activity of customers making purchases through websites owned by Drugstore.com and our subsidiaries. With that, we’ll move on to gross margin. As Dawn mentioned, already gross margin was one of our best at 21.3% for the first quarter reflecting an increase of 100 basis points over the first quarter of 2005, and was comparable to the fourth quarter of 2005, which benefitted from seasonally higher margin product sales. Our margin improvement was a reflection of a greater mix of OTC sales and improved OTC segment margins, which resulted from our profitability initiatives. In fact our core OTC segment margins are up 180 basis points year over year. Absolute gross profit dollars for the first quarter increased by 10% year over year to $22.2 million, and our core OTC gross profit dollars are up 29% year over year. Now we’ll move on to expenses. Before we get started here, I would like to remind you that during the first quarter we did adopt FAS 123R share-based payments. In accordance with that statement, all share-based payments are recognized as expense in the financial statements based on their fair values of the date of grant, further, the expenses reported within the applicable operating functions within the financial statement. Accordingly, historical expense to sales ratio and absolute comparisons will be impacted from this change. The financial statements included in today’s press release provides a summary of stock compensation expenses included in the financial statements by operating function. With that as background, we’ll move on to discuss the expense line items and we’ll start with marketing and sales. Marketing and sales expense for the first quarter as a percentage of net sales was 8.6%, an increase from the first quarter of 2005, and as expected down from 9.4% of net sales in the fourth quarter of 2005. We anticipate that marketing and sales expense will be in the high 6% to low 7% range inclusive of stock-based compensation for the remainder of 2006. In absolute dollars, marketing and sales expenses for the quarter were $9 million and reflected $1.8 million associated with our brand campaign, which we concluded this quarter. Marketing and sales expense for new customer was just under $28 for the quarter, up from $23 in the first quarter of 2005, but down slightly from the fourth quarter of 2005. Almost all of the annual increase in our cost for new customer reflects money spent during the quarter on our brand development efforts. Fulfillment and order processing expense which includes customer care and credit card fees, for the first quarter of 2006, fulfillment order processing expenses were 9.8% of net sales, which improved from 10.3% in the first quarter of 2005. We expect fulfillment order processing expenses to remain in the high 9% and low 10% range for the remainder of the year inclusive of stock-based compensation. Other operating expenses, technology and content expenses for the first quarter of 2006 were $3.9 million, and general and administrative expenses were $4.3 million, and represented 3.8% and 4.1% respectively of net sales. We expect both of these line items to continue to be in the high 3% to low 4% ranges inclusive of stock-based compensation for the balance of the year. Now, we’ll move on to net loss. On a GAAP basis, net loss for the first quarter was $5.3 million or $0.06 per share, better than our previous guidance of a net loss of $7.2 million to $8.2 million. On an adjusted EBITDA basis, we recorded a $1.4 million loss which was also better than our guidance of an adjusted EBITDA loss range of $3.5 million to $4.5 million. Remember during the quarter, we spent $1.8 million in our brand awareness campaign. With this in mind, you can see that we are getting closer and closer to EBITDA profitability. On the head count front, we ended the first quarter with an employee base of approximately 715 FTEs. On the balance sheet, specifically in regards to cash, we ended the first quarter at approximately $41.9 million in cash, cash equivalents, and marketable securities. And in regards to inventory, our annualized return rate for the quarter was approximately 14. In summary, we believe the results for the first quarter were very positive and our bottom line progress was clearly ahead of plan. Our high-margin core OTC business grew at a healthy 21% clip while we expanded the margins in that business by 180 basis points. Even better, we expect the growth from our core OTC business to accelerate into the second quarter. We believe we are focused on growing the business in the right areas and are making the right tradeoffs between revenue growth and bottom line benefits. With that, we’ll move on to our outlook for the second quarter of 2006. For the second quarter of 2006, Drugstore.com is targeting a net sales range of $101 million to $105 million, and a net loss range of $4.3 million to $5.5 million. On an adjusted EBITDA basis, we are targeting a range of break even through a loss of $1 million. That concludes our prepared remarks for today. At this point, we’ll open the call up for questions. Thank you management. Ladies and gentlemen, at this time, we will begin the question and answer session. If you would like to ask a question, please press “*” followed by the “1” on your pushbutton phone. If you’d like to decline from the polling process, please press the “*” followed by “2.” You’ll hear the tone prompting your selection and your questions will be polled in the order they are received. We do ask that if you’re using speaker equipment please lift the handset before pressing the numbers. Our first quarter comes from Mark Argento with Craig-Hallum. Please go ahead. Good afternoon. A couple of questions for you here. In particular, you had mentioned Dawn that you guys will be approaching EBITDA break even in the second quarter, was that a little earlier than you had originally anticipated? I know your previous fiscal 2006 guidance had been to hit adjusted EBITDA profitability in the second half of the year. So, are you essentially a little bit ahead of where you originally had planned to be? Hi Mark, nice to hear from you. We didn’t give specific guidance about the second quarter. We did say that we would get EBITDA profitable in the second half of the year, but I am very, very pleased with approaching break even in the second quarter. I’m going to let Bob add any comments. I think what I’d add to that Mark, we are very pleased with the results in the first quarter and in fact clearly our first quarter results were ahead of our EBITDA plan. So, as we look forward, we feel very good about our overall targets in terms of breaking the barrier in EBITDA profitability this year. The almost 200 basis point improvement in the OTC business in the quarter, in terms of the contribution margin if I’m looking at this correctly, at a high level could you just provide just a little bit of color on where we really saw the most impact basically contributing to that impact. So, in particular just walk me through your thoughts on the reduction in the SKUs, eliminating unprofitable SKUs, how much of that really contributed to your improvement in the quarter relative to some of the other initiatives that you have in place? I’ll let add Bob add some comments. I’m sure we’re breaking out everyone individually, but it was pretty evenly spread around the shipping surcharges, the change in the shipping programs and the SKUs. The nice thing about what we did with SKUs is we were able to increase the margin on the SKUs without greatly impacting sales on many of those categories, which we feel really good about. We did that through a lot of demand curve analysis. Bob, what would you add to Mark’s question? Well, where I think I’ll start, we think of all the initiatives combined we probably saved ourselves about $0.5 million to start with, just from adjusted pricing, adjusting our shipping, and various other initiatives. I think in addition to that, we find ourselves continue to be very efficient on the marketing front, excluding the brand spend, and also on the fulfillment front. Those also had a big piece of our overall benefit for the first quarter. And the thing that I’m most encouraged when I think about what happened in the first quarter, we grew our highest margin category which is just under 50% of our sales and makes up about 70% of our contribution margin dollars. We grew that category to 21% clip on a core basis while expanding our gross margin. So, I’ve designed myself with excitement because that’s exactly what we need to do to achieve our EBITDA goal. It looks like essentially the basket in that category was flat, so you did it mostly through new customer ads and looks like through Search, and you did that cost effectively. In the second quarter, you said to expect to see accelerating growth in the OTC categories, should we be able to see expanding basket size or is that going to be predominantly driven through more customers? What I would add to that, I think to start with, we didn’t just see growth from our new customers. We actually saw record sales from our repeat customers as well. In fact sales from our repeat customers made up about 81% of our total sales on the quarter, so that was quite positive and I think where we’re continuing to focus is on the order front, is really continuing to increase the frequency of our customers. A couple of ways that we’re doing that is, when they get to the site we need to convert them. The marketing team has been very, very focused on that, has been reasonably successful on being able to do that at this point; as well as implementing features such as auto replenishment; they got launched at the end of the first quarter. That’s yet another tool that we can lure our customers in for another order, second, third, fourth, etc. So there are a number of initiatives that are taking place and I think we’re continuing to focus on driving new customer order volumes while expanding the marketshare, if you will, of our repeat customers annual Drugstore basket in a given year. Since brought Search, I just wanted to add another comment about Search, because this is something I’m really pleased about. I’ve read so much in the press about increasing Search cost, and I think our results really speak for themselves, the fact that we were able to increase the number of orders that came through Search while really, really managing the efficiency of the Search dollars, and I think that we will continue to do that going forward. One last question and I’ll let somebody else hop in. I know it’s not a clear focus for you in terms of the local pick-up business, in terms of the margins on that business, they were down sequentially, should we expect those to kind of plateau at current levels or are you going to run into continued headwind on the margin side in that business? I’m gong to let Bob talk about margins, but I just wanted to reiterate that we like local pick-up, we like the economics. It is not a growth business just because it’s really dependent on Rite Aid marketing rather than us marketing, but Bob can add a few comments about the margin impact this quarter. I think the one thing you have to keep in mind, sometimes the margins through the local pick-up will be impacted by the overall mix of prescription drugs that are being purchased by the customers that are going to Rite Aid to pick them up. The other thing that you’re seeing is the impact from Med D. Obviously, Rite Aid is participating in Med D to the extent that people are migrating to that program that you will see margins get squeezed in that category, and that’s why I have to go back and reiterate the fact that how exciting it was to see our high margin OTC category grow at such a great clip while we expanded the gross margins, and again that makes up 70% of our contribution margin dollars. Hi, I appreciate you taking my call. Just a couple of followup questions. You gave some detail in marketing expense and fulfillment in order expenses including stock-based compensation, could just repeat those please for the second quarter? The outlook, marketing and sales as a percent of sales going forward, we expect to be in the high 6% to low 7% range, and on the fulfillment order processing expense the high 9% to low 10% range. Could you talk a little bit about the stock-based compensation, it almost double sequentially year over year and it was up about six times sequentially, how should we think about that? Well, I think you need to keep in mind that this was the first quarter that FAS 123R that had been adopted, and we handled on a prospective nature. While the historical expenses by line item now reflect stock-based compensation, those expenses were simply based on under market awards or we modified stock grants. Going under our adoption of FAS 123R, all stock grants have an expense component of them. So, you’ve got a much higher volume of stock that now suddenly has an expense component that you did not have historically. So you really can’t measure it apples to apples. So I think the way you need to think about it is, what we recorded in the first quarter this morning is more indicative of what you will see in the future. Can you talk about how many options were issued and at what strike in the quarter and is it kind of front end loaded for the year, how should we think about it? Specifically the expense on your initial options will tend to be front end loaded. That will depend on the number of options that are granted over the course of the year. At the beginning of the year what we had shared with folks is we estimated most recently in our 10-K that based on options granted, we thought expenses would come in at about $6 million on a year. Again, that’s going to be subject to future grants, and I would point you to our cues upcoming to give you more insight in regards what the grants were and the information there. It looks like you burned about $4.2 million in the quarter. As you move towards profitability in the second quarter, can you give us a little color on kind of CAPEX and what you think your burn rate will be in the second quarter and how it will work out through the rest of the year? As we have shared more broadly, obviously our burn from an EBITDA perspective, as we approach break even, should start to generate cash from us and really it is going to come down to a function of CAPEX throughout the year, and what we had shared with the street at the beginning of the year was that we thought we would end with $35 million or more in cash, and we have not changed that at this point. Finally, can you talk about what you’re doing to reduce your marketing expense so you can accomplish this kind of 6%-7% of revenues target without impacting the topline? A piece of that reduction is because we ended our brand spend and although the brand spend obviously will help us grow with the business long term, short term we felt that the payoff wasn’t fast enough given that we were so close to profitability. So, that is a big piece of the efficiency, and ongoing Search efficiency will obviously be important as well. The brand spend represented $1.8 million in the first quarter and that was ended as of the first quarter. There will be no brand spend in the second quarter, third quarter or fourth quarter. Thank you management. Ladies and gentlemen, if there are additional questions at this time, please press the “*” followed by “1” and if you’re using speaker equipment we ask that you please lift your handset before pressing the numbers. One moment please for the next question. Management, at this time, we have no additional questions in the queue and I’ll turn the conference over to you for any further remarks. Once again we appreciate you joining us this afternoon. We’re very pleased with our progress so far and we look forward to giving you another update at the next quarterly call. Thanks very much. Thank you management. Ladies and gentlemen, at this time we will conclude today’s conference call. We thank you for your participation. If you wold like to listen to a replay of the presentation, please dial 1-800-405-2236 or 303-590-3000 with the access code of 11058599. Once again, if you would like to listen to a replay of today’s conference please dial 1-800-405-2236 or 303-590-3000 with the access code of 11058599. We thank you for participating. You may now disconnect and please have a pleasant day.

EarningCall_233845

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Gold Fields' Second Quarter Fiscal Year 2006 Conference Call. My name is Carlo, and I will be your coordinator for today's presentation. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's presentation, at which time, if you would like to ask a question, please press star one on your telephone. If at any time during the call you require assistance, please press star zero, and a conference coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's conference, Willie Jacobsz, head of Investor Relations. Please proceed, sir. Thank you very much, Carlo. Ladies and gentlemen, thank you for joining us for this conference call. We've got five speakers today. Ian Cockerill, our Chief Executive Officer, will kick off with an introduction. He will be followed by Nick Holland, the Chief Financial Officer, who will talk about the finances, followed by Mike Prinsloo, the head of South African Operations, who will give an overview of what happened in South Africa. Terence Goodlace thereafter will talk to the international operations, after which John Munro will give a brief overview of business development. Ian will then conclude. After that, we will take questions. May we please at this early stage ask that when we get to the questions-and-answer session, you limit your questions to one question per person so that everybody gets an opportunity. I now hand it over to Ian. Willie, thank you very much indeed. Welcome, everybody, today, and, firstly, let me apologize for the state of my voice, but I hope you'll bear with me. Today, I have the pleasure in welcoming Terence Goodlace, as he will be reporting on international operations for the first time, having recently taken over that role from John McDove. Now, for all those fans of John out there, don't despair because he's still with us, and he'll be giving us some feedback on our growth projects. So how did we do last quarter? Frankly, much more at the performance you've all come to expect from Gold Fields and totally in line with previously stated guidance. All out, our operations performed well, particularly in South Africa, off the back of the previous quarter's wage strike. Our margins have been restored not only due to a better but also due to output improvement, as well as continued good cost control. I'll leave a more detailed explanation of operations to both Mike and Terence. Overall, a safety performance of improvement, was much improved. Gold production was up 5% to 1.04 million ounces. Cash costs were down 2% in dollar terms to $341 per ounce. Net operating profit was up 73% to $147 million. And net earnings were also up six-fold to $40 million. And if that's expressed in U.S. cents per share, that equates to $0.08 U.S. per-hare earnings. We also successfully completed the Seoul, Korea transaction, and certain mobilization is now underway, and John will give us some more details on that. And, finally, it's a great pleasure to announce that we will be giving an interim dividend of 40 South African cents per share, and that is a dividend, which has been declared for the first half year. With that brief introduction, let me hand you over to Nick for more details on the financials. Thanks, Ian. You heard earlier that production is up from 993,000 ounces to 1,040,000 ounces. Virtually all of that increase has come from our South African operations. The price achieved for the quarter went up substantially from $437 an ounce to $482 an ounce, with the Rand virtually steady at 6 Rand 53 as against the previous quarter. As a consequence of this price increase and with the 5% higher production, we're pleased to report that our revenues increased by 15% to $533 million for the quarter. Our operating costs increased by 3% to $390 million. However, there are a number of factors behind this increase. Three-quarters of this increase came from our South African operations and related mainly to the impact of the strike last quarter, whereby we lost a number of shifts, somewhere between four and six shifts depending on the operation. And together with the fact that we have four number of shifts at work this quarter and the impact of the 6.5% wage increase, that contributed to most of the increase in South Africa. Briefly, though, we've also increased our volume by 16% in South Africa and our development by 18%, and you can see that investment also coming through these cost increases. In the Australian operations, we had an increase of some. That was mainly due to higher volumes and also the impact of the power credits of 3 million Australian dollars received in the previous quarter. Other than that, costs of all of the other operations were pretty flat. Operating profits, as a consequence of the higher revenue, increased substantially from $85 million to $147 million, and net earnings for the quarter increased to $46 million from the quarter. And there is really no more funnies in our earnings, as opposed to in previous quarters when we've had volatility caused by financial instruments. Most of those have been closed now, so essentially, the operating profit flows through to the bottom line, all to provision for taxes. The operating profits from the South African operations was up from $26 million in September to $71 million in the quarter. That's almost a three-fold increase. And our operating profits from South African operations is now 48% of our total operating profit versus 31% in the September quarter. And it just goes to show how important the South African operations are to this group and the investment we're putting into those operations, both in terms of the increased development, volumes, and capital expenditure are important for the future. Cash flow from operating activities also increased from $47 million to $90 million and would have been higher but for one soft working capital movements of around about $30 million. Our capital expenditure increased from $50 million to $62 million, and that reflects more investment into South African operations, with net cash at the end of the period just under $500 million. And if you take into account liquid investments that we have most of them are listed as well as deferred Australian dollar hedge receipts, our cash and near-cash is $761 million. And net of our debts, which all relates to another transaction, cash net of debt and including near-cash is over half a billion dollars. I think it's appropriate at this stage just to very briefly indicate to you the changes you'll see on our balance sheet as a consequence of the growth projects that we've announced recently and on the assumption that the Bolivar acquisition is closed. The Bolivar acquisition itself is slated to cost about $361 million. And the Cerro Corona purchase, which we've now concluded, and John will talk about that later, cost $40 million, and the construction costs of that project over the next 18 months or so are around $277 million. That gives total funding requirements for this group of $678 million, and we're going to finance this as follows. We've established a corporate debt facility of $250 million, which is a three-year revolver with a balloon payment at the end on what I think are very good terms versus the market. We've also decided to finance $150 million of Cerro-Corona's requirements by our project finance facility, which will leave the overall Gold Field balance sheet our incumbent once that goes on recourse. And then we're going to use that $278 million of our internal cash sources to fund the balance of this growth, which will still leave us with a comfortable financial position. If we look at a restatement of our cash costs as a consequence of the practice applied by the peer group, not just in South Africa but throughout the world, whereby development is capitalized, and when I say development, I mean essentially waste development to actually get us to the actual ore body itself plus associated share of overheads. We've shown in the results this time around a restatement of cash costs on a pro forma basis, assuming we adopt the same practice as the other entities around the world, and that would mean that the group costs that Ian mentioned earlier, the group cash costs, would drop about $341 an ounce to $314 an ounce, and the costs of the South African operations would drop $366 an ounce to $323 an ounce. I'd stress we have not changed our policy of capitalizing this development, which we could well do. At this stage, though, we feel to make sure that we have comparable results with the rest of the market, that we need to provide this restatement. Very briefly, Project Beyond is an area that a lot of you have asked about. A very quick update. Total expenditure we focused on was about 2.7 billion Rand, which we started back in September 2003. We've reviewed about 1.1 billion Rand of that. We expect to have completed 1.5 billion Rand by the end of June 2006. So far, we've contracted savings of about 127 million Rand, and of that, 60 million Rand has been realized in cash flow, of which 30 million Rand has come through this year. And if you take into account what else we're going to realize this year, we should realize, though, another 60 million Rand; alternately, about $10 million for the year. So these kinds of cost initiatives are continuing. They're picking up momentum, and we'll have more to tell you in the forthcoming quarters. Thanks, Nick. Good afternoon, ladies and gentlemen. As Ian mentioned, the South African ops had a strong quarter, lifting gold production by 8% to 21.7 tons, or just short of 700,000 ounces, compared to 647,000 ounces in the September quarter, performed largely as expected with slightly lower underground offset by improved underground ore volumes. As predicted in the previous quarter, Kloof and Beatrix experienced a much improved performance mainly due to the increased underground volumes as a result of the shifts lost due to the industrial action in the September quarter. Development was up at 18% at 27.6 kilometers. We maintained a strong grip on costs, which resulted in a 4% decline in title cash costs from $381 an ounce last year to $366 an ounce this quarter. Net and operating profit up nicely to 71 million U.S. dollars compared to 26 million U.S. dollars in the September quarter, with a margin more than doubling from 9% in September to 21% this quarter. That's at these price levels, capital expenditure amounted to $26 million compared to $20 million in the September quarter, and a significant portion of this expenditure was directed at the major projects and key development at the long-life shops. This increase was in line with our policy to increase capital expenditure and the revenue stream increases, so overall, a strong quarter. Now, turning to Driefontein, Driefontein's gold production was steady at just about 9 tons, or 290,000 ounces. Operating costs increased 3% due to lower grades and increased volumes and was fixed at $343 an ounce. Driefontein's costs increased sorry, our Driefontein property increased 31% to 36.4 million U.S. dollars, 25 million in the September quarter, giving Driefontein an operating margin of 36%. Capital expenditure was higher at 9.3 million for the quarter. In terms of Kloof, Kloof's production increased 16%. They had a good turnaround and achieved 253,000 ounces against 219,000 ounces in the September quarter. Total cash costs decreased by 10%, down to $378 an ounce. Operating profit improved to 22.2 million, compared to an operating loss of 6 million in the September quarter, giving Kloof the operating margin of 18%. Capital expenditure for the quarter was 8.2 million, compared to 6.5 million in the September quarter, and this increase was all at the number-four shop on key development for the future. Turning to Beatrix, Beatrix had a strong quarter as well, with gold production up 12%, from 139,000 ounces in the September quarter to 155,000 ounces this quarter. Total cash costs decreased by 6% to $391 an ounce. Operating profit increased to 12.1 million from 8 million in the September quarter, giving Beatrix a margin of 16%. Capital expenditure was also higher by 25% and reached 8.4 million ounces, and all of this was a conscious effort to accelerate redevelopment projects at the number three and four shop. So, overall, the outlook for the March quarter, we will decrease slightly at Kloof in terms of gold production as they had a slower start-up after Christmas. Driefontein and Beatrix had good start-ups both at Christmas and leading into the Christmas break, so they've had good Januarys and producing those mines going forward as if they will be steady state into the March quarter compared to December quarter, both in gold production and costs, with Kloof slightly down. We expect growth to be down about 6% of gold production for the March quarter. Furthermore, we will continue to focus on our quality volumes and key developments at all the shops. Our productivity projects are starting to gain traction, and we should see some of the benefits spilling through on to the bottom line. And, furthermore, we'll continue with our cost management, which are being there. And with that, I'll hand it over to Terence. Good afternoon, everybody. The international operations have provided a consistent overall performance for the December quarter, with attributable gold production at 342,000 ounces and managed gold production at 407,000 ounces. Costs for the quarter were $299 per ounce and 3% higher at $124 million. The production in cost performance, along with the 10% higher gold price of $482 an ounce, has meant a 29% increase in operating profits to $76 million. Operating margins are good at 39%, with Tarkwa and Agnew both in excess of 42% and Damang and St. Ives at 32 and 34%, respectively. Capital spend for the quarter was $34 million, and the primary spend was at Tarkwa and St. Ives. Tarkwa had a recently good quarter with a solid operating margin of 42%, albeit that gold production decreased by some 4% to 167,000 ounces. This gold production was affected primarily by changes in gold in process at the heat bleach facility, partially offset by increased gold production from the CIO plant. There were two main contributors to this change, the first being the commissioning of the Blue Ridge heat bleach, and the second, the speccing on the forklift at the North heat bleach facility. I must say, however, that over the last six weeks, it looks like this has changed, and we have had very good gold production coming out of Tarkwa. Operating costs were in line with the September quarter at $49 million, and total cash costs increased by 1.8% to $282 an ounce. Insofar as the March quarter is concerned, the mine will reflect an increase in gold production, along with lower unit costs, to below that reported in the September 2005 quarter. Damang continues to perform well, as seen by the 5% increase in gold production to 60,000 ounces. Gold production improved through increased open-pit grades at 1.7 grams per ton and the stockpiles, which delivered 1.32 grams per ton. Volumes through the plant were constant at 1.3 million tons for the quarter. Operating costs remained at $19 million, and the net effect of gold and fleet costs was a 12% reduction in total cash costs to $330 an ounce. During the coming March quarter, it is expected that gold production levels will come off slightly, while costs remain at current levels. St. Ives has improved quarter on quarter, and gold production was 5% higher through improved underground volumes in grades, offset by lower volumes mined from the open pits. Open pit results were affected by a redesign of the East Ecamendment open pits, where grade control drilling exposed high-grade oil, necessitating a new cutback. Heat bleach performance was unchanged for the quarter. Operating costs increased by 5.4 million to 54.7 million, and these costs reflect higher open pit waste volumes mined, with a strip ratio increase from 2.6 to 3.5, low maintenance, and a 4% increase in oil processed. In addition, the previous quarter reflected a par credits of $3 million. Total cash costs increased by 3.8% to 431 Australian dollars an ounce. The March quarter is planned to reflect an increase in gold production, which will improve unit costs to around September 2005 levels. Moving on to Agnew, this mine continues to perform well and in line with plan. Gold production this quarter is 11% lower due to reduced Kim volumes and grades and the Songvang open pit grades, which were half a gram lower at two grams per ton. This led to the 18% increase in total cash costs to Australian $351 per ounce. Operating costs were well controlled at $20 million, and the higher gold price has ensured a consistent operating profit of $16.1 million and a very good 45% margin. We are forecasting a slight reduction in gold production for the March quarter, which will result in a marginal increase in unit costs. Overall, the international operations should deliver an improved performance in the coming quarter. Margins and cash flows should continue to be robust, with increased production, a current high U.S. dollar and Australian dollar gold prices, and good controls on costs. And with that, I'd like to hand you over to John. Good morning, and good afternoon. Moving on to the area of growth within Gold Fields. Obviously, we'd like to talk about the body of our transaction and the asset itself, but given the litigation that is pending in Canada at the moment, it's prudent that we don’t go into too much detail there. So then moving on to Cerro Corona, which has clearly had some exciting developments at the end of the December quarter, you'll be aware that we announced that we both received the final permitting for this project in December, it was from the Peruvian authorities, as well as the Gold Fields' Board committing to proceed both with the final acquisition of the project and with the construction of the new mine. The acquisition of the project was completed in January, and just to be clear, so far, we've acquired 80% of the economic interest in Cerro Corona at a total cost of 40 million U.S. dollars. That's the deal we had struck two years ago with the Gubbins Family. They still remain another single private shareholder out there who also has a voting interest, and then they are there are the investment shares that are traded on the Lima stock exchange that have a 12% economic interest but no voting interest in this project. That corporate structure for this project is on our website. So moving on back to the timeline then, with the acquisition complete, we expect to start construction of this project in the month of February, and with the construction timeline of around 18 months, we'll complete this through the latter part of calendar '07. And that timeline remains very much on track. Earlier last, or late last year, we proceeded with the ordering of the mold and the crusher and some other heavy-duty equipment, and in fact, during the month of December, the mining fleet was shipped from Florida. And the mining fleet will be used in the early stages of construction of this project. So timeline remains very much on track. Just focusing briefly on some of the KPIs of this project, it will cost some 277 million U.S. dollars to construct. That's on 100% basis, as Nick indicated; $150 million of that will be sourced from non-recourse project financing. As I indicated, the consideration for acquiring this was $40 million for 80% of the project, implying a total price for the entire project of some 50 million U.S. dollars. Mine total cash costs for Corona are estimated at around 250 U.S. dollars an ounce. In terms of the scale of the project, at $3.75 gold and $0.90 a pound copper, which are the current gold reserve prices, this mine will produce some 4.5 million ounces of gold-equivalent over a 15-year life, but in fact, if you were to recalculate that at today's metal prices, that would be just short of some 6 million ounces. So this is a very substantial project. We have set up in the quality presentation, which is on the website, some of the acquisition metrics, and apart from referring to those, another way to give you some sense of the significance of this project for us is to look at what our operating profit would have looked like in this quarter had Cerro Corona been operating. And, in fact, on the 80% basis, our operating profit would have been some 17% higher had we included Cerro Corona and had it been operating. So this remains a significant asset for Gold Fields going forward, and we're very pleased with the progress that's been made there. Our other significant development project is the Essakane gold project in Bukino Faso in West Africa. While work continued through the December quarter and progress was good, we've had some disappointments in terms of being able to finalize a pre-feasability result. That's in back of the assay quality issue that we reported in the September quarter, and that's caused by an extremely high nugget effect that has been identified in the assay. And some of the assay, in fact, exacerbated that. So we've had a delay in completing that result and now only expect that late in the '06 calendar year. And that's because we effectively had to re-assay a very large proportion of all the drilled core that is in what we regard that is contained in what we regard as the olzyme. So that will continue really through to the September quarter of calendar '06. And parallel with that, we'll be continuing the pre-feasibility work, and other basic engineering and social work, as well as also continuing with the exploration, which at this stage is focused on expanding the Essakane and main zone but also looking at some of the satellite deposits that are located around the main zone. So Essakane continues to move forward, albeit with a bit of a delay due to the assaying issue that needs to be resolved if we are to get to a final on this project. Thank you, and back to Ian. Thank you. Now, all of you know through time Gold Fields has followed a three-prong strategy of operational excellence, growth, and securing our future. I hope that from what you've already heard today, you get a sense of a company that has delivered on its promise to make existing, grow organically where we can, and acquire and develop new assets that will certainly add value Gold Fields shell. Whilst we made good progress on the cost-containment front, the sense of the project team is there are many more opportunities that can and must be exploited. On the South African productivity project, we have gone a long way, so we have a long way to go, certainly before we can say we're happy with the results. What I am convinced of, though, is there's a passion at the operating level to deliver the necessary improvements that will drive profitability and enhance the life of these truly world-class efforts, irrespective of where the gold price is. You've heard from John the good news about Cerro Corona and of the start-up project that start-up of that project and also the progress that we've made in Bukino Faso. Also during the quarter, we did make to the shareholders of Bolivar Gold so we could acquire the majority interest in the Choco 10 mine in Venezuela. Now, a significant majority of the common stockholders, at 77%, as well as 82% of the warrant holders, voted in favor of this transaction. However, one shareholder, Scion, voted against and has followed suit in the Ontario and Yukon courts against the transaction. A status hearing that was due to be heard on January 19 was adjourned until February 7, 8, and 9 as a result of the filing by Scion of further claims. Though obviously we're disappointed by the delay, we're confident the courts will favorably resolve the matter and the will of the vast majority of shareholders will be respected. Many of you, I know, are going to be interested to know of the progress that's been made with our license conversions. I'm certainly happy to report that now all of our applications are in and are undergoing the necessary adjudication. These contain the most advanced of these applications, and we believe in due course, we can expect that these applications will be successful, and we will comply with an important component of the mine charter. Now, no report back this quarter would be complete without at least some commentary on the gold price. Whilst we're not surprised with the continued up trend in the price, there's no doubt that recent advances have been faster than usual. Consequently, whilst we do believe that the secular trend is still firmly up, short-term pullbacks certainly would not surprise us. Too rapid a rate of price increase can certainly lead to nervousness in the traditional jewelry markets, which is an important component, demand. And if that dries up, then we certainly could expect some price reversal. However, even if we do have a pullback, we believe that the trend is still supportive of better dollar prices in the medium term. Fortunately, the strengthening of the Rand these past few months has been ameliorated by the better dollar price, but even with a drop in the Rand-per-kilo price, our operations are now well positioned to withstand lower price environments. In fact, this quarter certainly shows why investors want to be exposed to the quality leverage play that Gold Fields is when the price begins to merger. For the next quarter, you heard the guidance from Terence and Mike. And certainly for the group as a whole, we will be looking for gold production in quarter three, it will be similar in both quantum and unit cost terms to quarter two but certainly some variations as to source of that supply. Overall, shareholders should expect, particularly at Kloof, a decline in South African production due to the extended Christmas break. We believe this is going to be counteracted by the potential improvement we're seeing in output from the international operations. So all in all, a very good quarter. I would like to thank all of our employees for putting in the effort to enable us to engineer this turnaround. Whilst the return to work post Christmas here in South Africa has not been without its normal trials, I believe the Company is in good shape and very well positioned to continue its stated goals of operational excellence and growth. In other words, we're going to continue to deliver. Finally, this is going to be Mike Prinsloo's last report back to you. I've asked Mike to apply his wealth of mining experience, knowledge, and passion for people to a newly created role of heading up Gold Fields' Business Leadership Academy. A major issue for us in the years ahead will be consistent supply of top quality, competent, and well-trained personnel to manage and lead Gold Fields over the following decade. In a world when mining skills are becoming increasingly recognized as scarce, it is vital companies such as ourselves secure our future with quality manpower. To this end, I'm delighted Mike has accepted the challenge of running this strategic and important facet of our business, and I'd like to thank him for his many years of successful input to our operations, and I look forward to him producing quality product, albeit as a human rather than a metallic kind in the future. Brendan Walcott, currently Head of Operations in Ghana, will be resuming Mike's role next month, and I'd like to wish both of them good luck. And with that, let me hand you back to Carlo, and we'll take questions from here. Thank you. My question has to do with this change, actually, I’m not going to ask that question since I only have one. I have a question on the progress of some of your development projects at existing mines. When your reserve numbers came out, you suggested that Driefontein deeps would be going to the Board for consideration in November 2005. I'm just wondering what any decision was. The second one is KEA. How's the feasibility going? And the third is at Tarkwa. Is there any thought to increasing the throughput at the mill? And, also, we noticed that the guided CapEx has increased at Tarkwa, and we're wondering if you can then tell us why. Yes, on the deep line project at Driefontein and I'll answer the Kloof one as well, we've done further work in terms of pre-feas and towards feasibility on these projects. We've revised the costs on these. And with the increased gold pricing and kilogram terms, we are now at this page where the teams are looking at whether there are any other options that might suit that deepening project. More specifically at Driefontein, we're reviving the exercise we'd done about two years ago on the deepening of number nine shop to see if that's feasible or more feasible at these price levels. So, yes, a lot of work is going into those projects, and a lot of renewal in terms of costs in those projects will be taken forward to a point where we will take it to the Board in the near future. Similar to KEA. It's, KEA, I would like at the two options. The first option was to deepen the sub shop with the work that was done at Driefontein within a deep plant option on the KEA project, and that shows that we'll cover less answers but much more profitably. So it looks more like the KEA would be a deep plant option, and at this stage, we're testing a vertical option on Driefontein. The last numbers we shared with the market haven't changed much in terms of the deep plan options. At Driefontein, we're looking at about 2.1 billion for phase one and two of those declines, and at KEA, slightly higher, about 2.5, 2.6 billion Rand straight over a period of between four and five years. In terms of the capital at Tarkwa, the increases really that have been shown were due to one of the problems that we expressed last quarter was the flaming of oil as we supplied into the moat. We've gone ahead and repurchased some vehicles to do that, and that's probably the prime reason why we've had an increase over the last quarter. Next question? Heather asked quite a few of the questions I was going to ask about the expansion. Michael, you said in due course it's going to go to the Board. Can you just get a little bit more precise on the timing of it, and if the Board does approve these projects, how quickly are you going to be spending the CapEx on KEA and at Drief? George, I think within the next two quarters, we'll probably be at a position where we can take a full proposal to the Board. And then in terms of start-up, initially a project like that would probably take three months to put the whole initiation together. And because initially by the projects we'd start up with just development of the mine decline and other infrastructure, it will be a slow start-up. It's not going to be an overnight, you know, a lot of money thrown at the project. That's why the two deep decline options look attractive at this stage because in a rising gold price environment, you can accelerate them. In an environment where the price drops, you can slow them down or even switch them off. And the decline options are explained in phase one and phase two. We've been necessary taking it in level, you know, two-level intervals as we did the extend, so you would sink down for two levels, go out on development, and start before you start at the phase two, which is sinking the next two levels. No, yes. Look, a lot of that five shop, one shop different than in the four shop projects and three shop projects. They all start getting to conclusion over the next four to five quarters, and then a lot of CapEx is then freed up a bit because those projects are complete. So it wouldn't be at any levels of CapEx higher than what got it. Thank you. I just want to ask Nick just one question. Just to clarify on the CapEx, you mentioned the CapEx numbers for the three projects. What is the total CapEx for '07 and '08 FY, rough estimates at this stage? Okay. Total capital in our operations this year, you can work on about 1.5 to 1.7 billion Rand. That's capital on our ongoing projects. The projects, as John mentioned, will start construction now at $277 million that has to be spent over about 18 months. That's superimposed on top of that 1.6 billion Rand, which is roughly 400 million Rand a quarter. Yeah, a few questions for John Munro. John, could you just give us an idea what the actual copper and gold production individually will be for Cerro Corona? And then you talk about locking in some of the smelter terms. I'm assuming that's on volume? You've not lined up anything on costs? If you have locked in on costs, what kind of numbers are those? Barry, in terms of gold and copper production, the best way to look at it is that over the life, it will produce 2.3 million ounces of gold and 412,000 tons of copper. So to give you a round number, you can divide that by 15, and then you can work it out in whatever ratio you want, depending on if you want to do gold-equivalent or not. Obviously, we've indicated previously that at the front end of this mine produces slightly more than the back end because there's some higher grades, so you could take it up about 10, 15% in the front end and 10, 15% of that average at the back end. My reference to smelter terms obviously was in the space of volumes judiciously manage to make sure we don't commit more than we can possibly produce. But it's also in terms of terms or actual smelter terms, TCs, RCs, the bulk of which, though, have been done a percent-of-copper-price basis. And the reason for that is that it provides a relatively natural hedge against copper price movements. So the higher the copper price, the more we can afford higher terms and vice versa. We didn't want to get into a situation where we were negotiating annually TC terms, being a small player in a very big, very rough market and with the danger of those markets, particularly the early years of Corona's life, being in favor of the smelters. That's why we opted for the percent-of-copper-price-type term, which, when you look at the economics, is quite favorable because you get the terms moving with the copper price. No, we can't, Barry. It really is the commercial, significant commercial term between us and the smelters and something we'd like to avoid. Right, okay. Fair enough. And then on Essakane, sort of what I sense, a good news/bad news story, good news in the sense that it sounds like there's more gold there in terms of grade, but bad in the sense that this is taking a year. I'm just wondering, that seems like an excessive period of time for re-assaying. Maybe you can just tell us why and what have you found to date in terms of what the potential upgrade is there? Barry, first of all, on the time, that's driven by two things, first, on logistics in that part of the world, given that into a decent laboratory, but it's also driven by the way we are now having to do this assaying. Because of the incredibly high nugget effect, we effectively have to pass a very large sample from each into core intersection through a mini-fault and concentrator or gravity concentrator to remove the gravity components and then use conventional assay techniques in the balance. So not only are we having to handle very large volumes, but as you're aware, the more you do splitting, the more you may risk exacerbating the nugget effect, which is what we've seen before. So, first of all, we're handling very large volumes of core and then in a fairly time-consuming process. But I guess we wouldn't be committing to this level of work if we didn't think it was worthwhile. I'm not going to tell you the extent of the upgrade and the downgrade because it's not at a level that is of enough confidence to talk publicly on it. But, generally, what we are seeing, because we've done limited re-assaying using this technique, is that the high grades came down but the low and very low grades came up, surprise. But it really requires a complete rework before we'll get some decent numbers out of this thing, Barry. No, because we've got more, we've got the sample, and it's generally in the right place. So it's not the availability of sample; it's the way the first was handled, and as a result, we are rehandling the other half of the core. You know, they normally split core in half. So it's not so much a re-drilling exercise. The bulk of the exploration going forward will be to target extensions to the Essakane main zone, as well as satellite to the Essakane main zone. Sorry, I had a second question, double-dipping. Are you going to be increasing your exploration spending at Tarkwa and St. Ives to catch up with what reserves might be at these higher levels? I think you last did them at 375. Heather, this is John. I'll field this, your curveball…. The level, I'll deal with the two mines separately. The level of exploration spend at St. Ives is pretty much driven by what makes sense in terms of a need there, the size of the human results space, and what you can practically do, so I don't see that changing in this environment. At Tarkwa, that reserve is pretty much proven. There's an odd bit of drilling that we do each year to gradually extend the results into reserve as we move to it. So I think one of the, just to put the whole, the bigger question in context of how our reserves will respond to these much higher prices, I think two points to make. The first is that our annual declaration of reserves is determined by the average for the last three years, and that's in terms of SEC guidance. There's no discretion on that. But I think, more importantly, we're also being quite cautious about ensuring that we don't have an explosion of our effective reserves on particularly mines like Tarkwa, where we can see at 555. You know, we can see a much bigger reserve position, but it would be at a much higher strip ratio and a much lower average grade. We're not convinced that that's the optimal way to exploit that ore body. So, first of all, in terms of near-term reserve needs, you don't need to do that, and Tarkwa's largely drilled out, and St. Ives has the right sort of schedule of drilling program. Not substantially, Heather, because what we would rather do at this stage, and obviously, we've got to watch this market and get a feel for where it's going, but at this stage, we'd like to stick with the current stripping ratio level, similar sorts of head growth, which gives you similar total cash costs, but obviously at $500 an hour and 550, a much bigger operating margin. And we are trying to walk that delicate balance between producing more gold over the life but also making much more profits today. We're concerned about making copper into a 30-year mine when it's already something like 22 years and just making it a low-margin asset over that entire life. So it's a balance that we've been working on for quite some time, in fact, long before this market took off, recognizing for, well become a challenge for us. And we're trying to find a judicious balance between loss of mine answers and near-term profits. And then that actually had the last part of my earlier question had been is there any thought to increasing the mill throughput at Tarkwa? Again, I had mentioned in the past. Yes, Heather, we have. We said when we designed the original mold that it was specifically designed on a base case to be doubled in size. Now, that work has been underway to look at the best options there. What has complicated that is, in fact, the mold being a lot better than we thought it would and so is the heap. And so some of the trade-offs that are being done is what's the optimal size for Tarkwa in terms of total throughput with its heap or mold, and if we were to double the size of that mold, would we shut down the south heat bleach? So that work is underway and hasn't gotten a definitive answer, but the one rule of thumb you can use is that the higher the gold price goes, the more sense you have in having a mold available to you because you make more money at these prices by fixing things through the mold than through the heat bleach, with the recovery trade-off against the unit cost. Good morning. Thanks, and great quarter. I've got a couple of questions that relate to the basis on which you're reporting now and will be reporting in the future. The first has to do with this peer group basis reporting. Are you able to give us some back data on how your numbers would compare to how your peers are reporting? And I assume by that you mean the Gold Institute's standard? Yes, John, what we've done in the results is given you the current quarter and then the previous quarter benchmarks against how we understand the peer group to do it. But we haven't gone back further than that for the simple reason is that we haven't actually made the decision to adopt a change in policy. We're purely giving pro forma information for those analysts and for those fund managers, etcetera, who want to try and model the numbers on a more comparable basis with the peer group. So we're not going to go back further than that unless we decided to change the policy, in which case, we have to go back and restate the whole of 2005 and do an opening balance adjustment as well. So it's quite a lot of work and probably not for a lot of benefit. So what we will do, though, going forward, we'll continue to give you the comparison, and then you can use that as you wish. But another thing that I would just warn you against is that if you want to actually model the full impact of this, you need to actually pick up the extra capital expenditure because over this quarter, we would have capitalized about an additional $30 million of capital expenditure, which, in turn, has the spin-on effect in terms of the amortization that comes through. Now, we haven't done all of that modeling. We've merely just restated our cash costs to give you an indication of what it would look like. So I think that's all we're going to give going forward, and at least it gives people an idea on a cash-cost basis what this means. I think, bottom line, over the longer term, there's not going to be any difference in earnings because this has to come through earnings over time. It's purely a timing delay. And instead of coming through earnings as working cost, if you capitalize all this development, it comes through your earnings and your amortization line. Okay, thanks. I'm sure that you're well aware when investors go to pick a gold stock, they do it on a comparative basis. And if everybody else is using a standard that makes them look bigger or better on a cash-cost basis, you're at a disadvantage. And I appreciate knowing what your numbers are. I appreciate your reporting it at this time, and I hope you'll make that change so that we can compare apples to apples and not apples to oranges. Well, at least you could compare the cash costs, which previously you couldn't do, so I think we've given you more information. But now, we'll take your comments on board, and I have to say this is the first quarter we made the change, and we'll see how it goes heading forth. Okay. And one other question, if I might, and that has to do with how you're going to report Cerro Corona going forward. Gold equivalent, putting the copper in gold terms, is not what most people do. Most would take it as a co-product. Are you going to record your cash costs on a gold-equivalent basis or a co-product basis? Hi, it's John here. I think at a headline level, we would use the gold-equivalent basis. What we find is the co-product tends to make some, you know, the gold production from Corona look a lot better than it necessarily is when you just see the gold production. So at a headline level, we would do it on a gold-equivalent basis given that there's not much copper in our Company at this time. However, we would always provide the detail behind that sort out what's actually happening in the numbers, but we do think the co-product method can slightly misstate gold production costs and give you an artificial sense of profitability. I hope it's okay to just ask one question still. The question I have is when you put all this together, pro forma for the Cerro Corona and Bolivar acquisitions, can you share with us what you think Gold Fields' production may look like over the next two or three years? I'll answer that question, and it's not the higher level, if you don't mind. We avoid very detailed forecasts of gold production. The Cerro Corona project and the Bolivar acquisition were part of a very clear strategy of growing the international side of our business by an additional 1.5 million ounces. Now, that strategy included, offered the expansions at our international operations. Now, those have pretty much kicked in. So if you take current sort of production levels, the Bolivar and Cerro Corona would add between the two of them, at least initially, between five and 600,000 ounces per year of gold and gold-equivalent production. Obviously, we've indicated that Cerro Corona can be quite variable, high in the front and low in the back end. It will be in full production in 2008. But, also, we've indicated that over time, we will look to the scale of Bolivar. So order of magnitude, the front end is between six and seven, we'll not say/well, let's say seven and 800,000 ounces. Yes, I'm sorry, just to go back in, that's in the back of the total company being at about 4.5 million ounces per annum at our current sort of levels, and that's after the full incorporation of the international expansion projects, which are pretty much in the bag now. Thank you for doing such a superb job. I have one perspective question, and that is this. A lot of us are puzzled. We know you have complete understanding of what you're doing. We know you know what you're doing . We know that you understand all the risks in South America. But the question is this. We hear in the newspapers and the media that there is a trend toward the left, toward an anti-capital, towards socialistic perceptions. And, yet, you are undertaking major projects there. Obviously, you have decided that it's safe. Can you spell that out a little bit so that we know you're not treading where angels wouldn't tread? Sam, obviously, it's all about risk and reward. Let's take Peru as an example. The mining sector in Peru constitutes a very significant percentage of that country's GDP, so the thought that the mining sector is going to get shut down, you may as well close down the country as a whole. So our view is that, sure, there may be a change in political persuasion in some of these countries, but I don't believe that it will fundamentally change the need for those countries to still carry on producing, interacting with the outside world. Frankly, wherever you go in the world today, you're finding that there's risk wherever you operate. And I think what we're doing is that we are carefully positioning this company around the world, such that we don't have undue exposure to any one particular area. And by doing that, you're building a degree of risk amelioration. I think having all of your operations in one country is, irrespective of where it features on the risk profile, is probably more risky than having your operations in a variety of countries. We're driven, first and foremost, with our operations in areas where we think there's good potential. We carefully evaluate where we go. We say, do we believe that we can operate in those areas? Are we happy to have operations there? And if the answers to those questions are positive and we believe that there's a good return, then we will take that. But, clearly, we don't want to have all of our operations in risky areas. And when we have gone in to the new countries, clearly, we take soundings with the government rulers of those countries. We take value judgment. At this stage, we believe that we have not, undue exposure to any one particular area, and we're very happy with where we are, and I hope that in a few years' time, people will recognize that. Just as a final comment, many years ago, when we first went into Ghana, Ghana was considered extremely risky. Today, Ghana provides us with a very significant proportion of our operating, or of our earnings. And we look through the present day, and we try and look over lifecycles of our operations and say, where do we believe this place is going? And that's how we make our investment decisions there. Okay. Ladies and gentlemen, thank you very much indeed for listening today. It's been a pleasure presenting these results. Once again, I apologize for my voice. Hopefully by the time I will talk to you again at the end of April, I will have found it again. Thank you all very much, and cheerio. Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect.

EarningCall_233846

Here’s the entire text of the Q&A from XM Satellite Radio’s (ticker: XMSR) 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. Good morning. Two real questions here and then maybe a follow-up. The first is on the MP3 product delay. Can you go through the core issue, and is any of this related to the RIAA and their recent sort of posturing for incremental fees? The second question on the total churn number, core churn very nice at 1.4%. How should we look at this going forward? Is it related to the conversion rate? Obviously, earlier this year you had a step up in sort of pull-forward auto OEM, promo subscribers. Or is it perhaps more related to the April rate hike? And then lastly, should we expect that 49.99 is the bottom price in the fourth quarter for retail product? Is there a chance that product pricing goes below that level? I think I will answer the first part of the question and then, Steve, you'll take the second part. On the Samsung devices, we had always planned to have significant volume of the device in the first quarter. We were trying to get some of the devices in the fourth quarter, but our numbers and our projections for the year did not encompass having that to be any significant portion of our subscriber growth. With regards to the other issues, Steve, do you want to address those? Sure. I think you had a question about the conversion rates, and we were at about 58% for the second quarter. That ticked down to 56% for this quarter. Remember, this is the first quarter where we are seeing the full impact of the rate increase, because we measure conversion rates 90 days after the trial period. So, we lost a couple of points. I think over the next couple of quarters, you will see that tick back up as we refine our programs. So, I'm not too concerned about that. And then I think you asked about the $49 a price floor that we've got out there for the Roady now. I'd really rather not comment on some of the upcoming price moves we might make, but we feel really good about our product lineup and the prospects for fourth quarter. I think the final question was the 1.4% churn. And there, obviously, that has been remarkably stable over three quarters in a row. And frankly, with the rate increase in the middle of that, that was, obviously, quite heartening. But a lot of people locked in their one year or longer year things at that timeframe. So, that keeps it stable just for that basis. Hey guys congratulations on another good quarter. I wanted to focus quickly on the OEM side for a second. The guidance coming out yesterday of GM doing 1.55 for the upcoming year, a million cars up from about 1.4, should we be thinking of that more as their previous guidance for last year was 1.1? So is there a potential outperformance here? How should we be thinking about GM's production? GM's production. GM will do 1.4 this year. They were aggressive. I think at the beginning of the year they had -- when we started the year, I think they had said they were going to do about 1.1; then they upped it to 1.5, I think in February, I think, prior to some of the challenges that they have been facing. And they are still going to end the year at a very healthy 1.4. And actually, during that same period, Honda had projected that they were going to do about 400,000, or probably do about 500,000. Now, for 2006, GM has upped its projected guidance for their factory installation to 1.55. I think that Honda has announced that they are going to do about 550,000 for the model year, so there's obviously some upside on that as well. So, I think that our whole strategy is to have relationships with the biggest automobile companies and some of the fastest-growing so they can balance out certain shifts that happen in the marketplace. And then what we are really looking forward to is basically the 2007 model year, where we start to have Hyundai and basically Toyota start to really kick in with their reduction, which will bump up OEM during that period of time. Actually, that was going to lead right into my next question. With Toyota, can you give us any sort of feel as far as volumes for factory install? Not at this time. We have basically been deep in the planning process with Toyota. But I think that you will see most of their activity coming with the 2007 model year, 2008. And clearly, Toyota is one of the biggest car companies in the world and growing, and they're going to be a very significant part of our future over the next couple of years. One last question and I'll let somebody else go. Could you give us a little more color around the 4G Radios, the My-Fi2 that's coming out? When should we start to maybe see product announcements and volumes on shelves and impacting sales? As we always do, we reserve the Consumer Electronics Show to unveil new products. And I think, and I know that most of you or some of you attend those shows. And that's when we would give you a preview on all of those new products that we expect going forward. Thanks good morning. I just wanted to first follow-up some on what Bob was talking about regarding the GM numbers. I'm just a little confused. I thought the original GM 1.1 million was related to the model year '05, and the 1.5 was for calendar year '05. And then the 1.4 they put out yesterday was also for calendar year. So, I guess I'm just confused about the 1.1 going to 1.5 initially, because I thought those were apples and oranges. And kind of related to that, based on the press release yesterday, it looks like there is a pretty significant deceleration in the calendar year factory installs from 230,000 this year to 150,000 next year. So I just wanted to check all those numbers first off. And then kind of secondly, if that deceleration is correct, then going forward then should we expect continued reductions, which are a little surprising at least to me this early on in the penetration cycle? Thanks. Let me address a little bit of that. When you are saying, you're looking at an individual automaker there as opposed to the industry-wide. I think that industry-wide, obviously, you're going to see a continued acceleration of the growth. And it's important to remember that that is also growth. So, we expect to see from General Motors, or they are certainly protecting to this point in time that even if their total volume production is, maybe fluctuates year-to-year, their actual penetration of model-over-model becomes heavier and heavier each year. But the big numbers that you see each calendar year to go forward will tend to be with new manufacturers coming on who are at like zero production now that will, obviously, just be hitting their first models coming in. Steve, do you want to address that? Just to add to that, we are currently in about 95% of the GM models. And we do continue to see an increase in the penetration in those models. We're up over 35% now, and we were at about 28% penetration a year ago. So, we are seeing continued positive progress and don't see that trend changing. Okay. Do you have any comments at all on GM's 8-K that they put out, it was either late yesterday or early this morning, regarding their investigation from the SEC regarding their relationship with Delphi? And if the investigation continues, what sort of impact could there be, not so much on radio production, as you said, Delphi does it overseas, but I suppose the real risk here regarding the Delphi bankruptcy and the GM 8-K is that auto production could be impacted. So, even if you have the radios, still the auto supply could be impacted. You would have to address those issues with General Motors. By us having relationships with a broad array of car manufacturers -- ranging, again, from General Motors to companies like Hyundai and Toyota and Honda, we are able to cover fluctuations in the market that are either caused by issues that are going on now, or even just changes in market share. So, you would have to address those issues with General Motors. I just wanted to, I guess, get a little bit more clarity on two items that were discussed. With regard to the comments out of some of the numbers of the RIAA, can you discuss a little bit about what your take on royalties are, how you look at them going forward, and what kind of changes we may or may not see as far as the royalty payments are concerned? And then, I just wanted to get a little more clarity on the churn number again. When you look at just pure gross additions less net additions, it looks like churn was up sequentially. I am getting a number closer to about 2.7% versus the 2.5 last quarter. I know this isn't consistent with what you guys look at as far as non-promotional churn, but you are still seeing a sequential increase. How should we see this going forward? Should we see this start to come down again as we have seen on a year-over-year basis? I will address the rights issue. Basically we pay a percentage of gross revenue to a variety of copyright holders that range from the labels to the publishers and so on. Those are all rights that under federal law we are required to negotiate with those rights holders as part of the agreement that we have, which also basically requires them to deliver us the content as part of a compulsory license. Those deals we struck and arrangements we struck several years ago -- and what occurs is, as has been my experience in other businesses that I have been in, is that as those arrangements end or the term of those arrangements ends, is what happens is you go through a renegotiation of those rates. You try to do it outside of an arbitration process, but if there is an arbitration process they, the arbitration board will set the rate. This is what happens with many other people who are in the same situation. Right now, we believe that we are a significant contributor to what is a new revenue stream to these parties that didn't exist prior to satellite radio becoming available. It's a ramping revenue stream for them. We believe that the current rate structure that we have now is adequate. And, clearly, that is the argument that we will go into in our negotiations. And we feel pretty confident about that process going forward. In regards to your second question, for those of you who like to take the inverse of our conversion rate and add it to our churn rate, although we don't agree with that calculation -- that number is 2.6% and is up from the 2.4% in the previous quarter. A quick question. Can you talk about what gives you confidence that the conversion rate is going to tick back up given, I guess, the higher price point, higher fuel costs sort of worries about a weakening consumer? And do you think we have bottomed out in the conversion rate in the third quarter? When do you think we're going to bottom if it's not in the third quarter? Thanks. I would rather not comment on whether it has bottomed out. We will see. We don't see it. It stays very consistent. It stayed pretty consistent quarter-over-quarter, except for this last quarter where it ticked down a little bit. I think what gives me confidence that over the long-term it is going to increase is that our content keeps improving, the awareness of the service is improving. All of those factors sort of tend towards higher acceptance rate at the end of the trial. We are also constantly refining our processes to contact the customers. And we have seen -- we have got a number of initiatives in place to improve those numbers. And we have got strong automotive support from both GM and Honda and some of the others in working those issues. So, I do see our ability to improve the rate over time. Thank you. Can you just comment about what kind of funding the Canadian opportunity and your sort of come along rights with wall space can impact your liquidity over the next two or three years? What is the magnitude of those two things? Thanks. This is Gary. I will address those. Those really are not a liquidity impact, or certainly there's no -- the way we have the deals structured there's no demands on the Company at all for cash infusions for XM into that. Canadian Satellite Radio has indicated they intend to take their company public shortly. John Vitoff, the entrepreneur who heads that, who has been working with us for a number of years on the pursuit of this license, has put a significant amount of his cash into it. And certainly that is where the funding for that entity will come from. We do have the positive advantage -- I think this is all public within the CRTC proceedings that went forward in our disclosures. We do have the opportunity to take a significant share of that company at a nominal $1 value. And once it goes public we would expect to do that. But once again, that is an asset value that is built for us, and we do get a portion of the revenue as a kind of royalty sort of treatment. So, all of those are positives. But there's not a cash impact liquidity issue on either of those. Thank you, with expenses relatively predictable, let's focus on initiatives for just a little bit. I call WCS Spectrum maybe one of your more interesting enablers. Hugh, can you just give us any kind of framework around that now that a few months have gone by? We're not prepared as yet to discuss the modeling for that. We are right now going through the process of having our engineering and our marketing teams kind of work through some of the issues. And I think that as we have expressed in the past, when we have a story to tell, we will find a forum to explain what our plans are in that space. Yes. I think, certainly, that sort of a timeframe is something that you would see it by. The real key right now, as we expressed on the last conference call and as I have indicated in all of the investor forums we have gone through, it's still in a regulatory process right now. It's still in front of the SEC for an approval. And until that question mark and issue is behind us and it's actually a completed transaction, we won't be -- we will probably in the next year timeframe be coming out with more clarity. We will be providing a significant number of amounts of our content on DirecTV. They reach, as you know, approximately 15 million subscribers. There is a real terrific crossover in people's interest in satellite radio who are also interested in satellite television. We have worked with DirecTV in the past on a number of initiatives and we are looking forward to having that opportunity help build awareness for our product as we go into the holiday season and, of course -- and beyond. We have been working with Chase and David Hill and the rest of the team there. And we're pretty happy with that relationship. One final one, the Connect-and-Play chip. I've been carrying mine around for a little bit. And I'm just wondering if you can maybe give us an update on that? You mentioned earlier, of course, that they're getting into some of these home receiver units, etcetera. But is there a bigger, broader picture regarding this Connect-and-Play? We talked about the fact that it is expanding across a wide range of different home electronics products. And you will see a bunch of those at retail this fall and on into '06. And then as we look ahead to some of the player products and other products that we have spoken about, I think that it is the technology that really helps enable a lot of flexibility in some of the upcoming products as well. Okay, great. You guys seem to have stepped up the level of rebating for your radios going into the holiday season. We haven't seen you guys be a significant rebater for much of this year. What could that do -- can you give us some sense of your early outlook on what that could do for ARPU, what the likely uptake is, and whether this is kind of a switch in strategy for you guys more towards rebating and less towards other ways of spending on subscriber acquisition? So, that is my main question right now. Thank you. Sure, I'll handle that. It really won't affect ARPU at all because we don't tie the rebate to a service commitment. It's really a hardware-only rebate. And really our intent there is we're reaching the point where we can start to hit lower and lower price points to really penetrate the mass-market. Because this is -- we do see this as a gigantic business as we're shooting towards 10 million by -- or 20 million by 2010 and that sort of thing. So, we can maintain our SAC at very reasonable levels and still hit some of these attractive consumer price points. So -- and Christmas -- the gift-giving season is the perfect time to do that. So, that is really what you are seeing. Just to clarify, you're saying because you're not requiring people to sign up for a six-month or one-year, you're not going to have this in ARPU, but it's going to be recorded where -- in subsidies and distribution? Good morning. I wonder if I could return to the General Motors release from yesterday again. Are there meaningful differences between the bundling and options package strategies of your different OEM partners? Can you talk about how General Motors, at least to your understanding, views satellite radio? Is it a stand-alone product that they want to sell or are they using it to sell larger bundles of, say, sound systems or even other unrelated features in bundles? It's a combination of many things. First of all, obviously, between the different car manufacturers -- and, obviously, some of them have different size portfolios of vehicles and handle their marketing differently. Hyundai has decided that they want to put it standard on all their cars. And that's one strategy. Honda, which has fewer models that fall into the Acura or Honda family, have basically put it standard on some of their higher-end cars like the RL and TL, and will move that into others as well. Toyota when they come out will have a very specific strategy that is customized to their portfolio of products. And General Motors handles -- has handled it differently because they're such a -- they have such a broad portfolio in terms of how they package it in different car lines. So for example, in the Cadillacs, they sometimes package it as a standard feature. On other car lines, it is packaged in as part of a kind of a sophisticated audio sound system. In others it is done differently. So, with each of the car companies, it tends to be customized to the kind of characters -- the character of each one of the companies as it relates to the size of their portfolio and what market they are going after. I guess I'm wondering is -- with it being around the low 30s again as a percentage of their availability for their total fleet, is that in any way sort of a ceiling for them, or are they constraining supply in order to push options packages? Or do they believe that in some way it might be constrained by demand in the 30% for their fleet? No, I think that they see growth in that percentage. I think that GM clearly has some challenges that they have been facing just over the short period of time. But they are going to basically produce 1.55 million next year. So, I think that there's just growth ahead of them. And clearly, as the rest of the automobile industry -- when you have a Hyundai that's going to go standard, and you have Honda and Toyota coming out, GM is going to want to even increase it more, just so they can be competitive in those particular segments of car buyers that are determined by those kinds of vehicles. You will also, by the way, just see some fluctuations that will occur due to mix. In other words, there are sometimes higher concentrations of satellite radio packaging in SUVs and full-size trucks. And so, when those sag a little bit, sometimes it goes down slightly. But as the new ones come out next year, it goes back up. So, you will always have some amount of fluctuation. The general trend line is denser and denser and denser penetration across all of those model lines. Okay. Three questions. First, can we discuss third quarter a bit more? Perhaps you can discuss the GM impact on the quarter. So, just taking a look at what -- with second quarter last year, by our estimates, OEM was like 23% of the year. And then in the second quarter this year it jumped up to 26. And then this year, obviously, it's a smaller percentage than last year. Can you talk about just kind of how we should think about that? Second, we had heard that during September, the wearables fell as a percent of the total retail. So, my question is, given you guys started marketing or effectively started talking about your wearable products in August, do you think that hurt the sale of wearable products in September? And then I have one follow-up. Thanks. You asked a lot of things there. First of all, some of the percentage growth in OEM from one quarter to another quarter was also pulled forward, let's say, in the June/July timeframe because GM had an enormously aggressive employee discount program that you're probably familiar with; you get the deal that they have, the employees have. And that caused our growth to be very high in that quarter. And then it returned to a more normal level. So, I think you have to look at the various promotions out there which can occur in the auto industry, depending on where people are in terms of their promotional campaigns or strategies. With regards to the portable devices, I mean, first of all we haven't given out any numbers, I don't believe, on the breakdown of those. But there is nothing that has impacted the percentage of those sales, you know. I think you were sort of implying that our player announcement was somehow impacted. That is not the case. And in fact, these are very different markets. I think that the XM2go device that we have right now is going after a certain demographic and the player device is going after probably a younger demographic. So, on your data you're showing that XM2go devices did not decline as a percent of sales in September versus July and August? We don't break down our percentage of sales by each one of these devices, so I don't know how much I can help you in this thing, on this issue. And then just last follow-up. Do you guys -- can you talk about, perhaps, headcount levels in the programming department, and perhaps how that's broken down between on-air and non-talent, and how that compares against a year ago? I'm trying to think about -- is there a way to think about how you're investing in the programming department? Actually, the headcount -- we have always had a real focus on having the right people in the right places in our programming area, different than some of the other companies out there that have used freelancers to do this. Actually, our programming headcount has increased because of just some of the initiatives that I talked about before. Just on the talk side, we launched a whole women's initiative. So, there's people associated with that. We launched a Spanish initiative; there's people associated with that. We, obviously, during the year when we -- for baseball we basically have the Home Plate channel. We are, obviously, getting very involved in college sports with Coach K. So, there's a lot of investment in making those programming initiatives work. And, clearly, you need that. On the programming side, we have also changed our management in that. We have brought in new people, more expertise, because we really think that the commercial-free music is important. I mean, you just could have seen some of the reports from the radio sector just over the last week or so -- is that I think people are migrating to wanting to have the kind of service that we offer and other companies offer. And that's why I think that there is a real upside for satellite radio between both of the companies that are out there, both XM and Sirius. I mean, right now both of our companies were to bet at about 2% penetration of a pretty big market. So, our growth is all ahead of us. And I think content is very important. And I think you'll see both companies investing in that, because the real upside is the rest of the universe that we haven't really touched yet. Great, thanks. I'm interested in the momentum in your family plan subscriptions, which has sort of quietly crept up to about 16% of the sub base. How high do you think that number can go over the next 12 months? How elastic do you think the 6.99 price point is? And what -- if you could sort of describe your marketing plans around driving that number higher. Well, I think some of the marketing plans -- and Steve will comment on this as well -- is as our base get bigger and the greatest strength of our service is people actually having it and experiencing it -- that as we move from 5 million to 6 million to 7 million, and our prices of our radios go down, is that you will see growth in the family plan just based on people wanting to give it as a gift and extending it. I think it happens very naturally. And there isn't necessarily a huge promotional plan other than various friends and family plans that we have out there to drive it. So, I think it's just part of the organic nature of the service that when as people, as people experience the product, that they would want their friends and relatives to have it because that's how much confidence they have in it. I think the final element, by the way. that is just intrinsically built into that that will continue to drive it as Hugh mentioned at the very beginning, we have both the automotive new car channel and the retail channel both hitting very solidly. And as long as you have a very strong OEM channel where that particular radio is not portable, that does not move into the home like a plug-and-play does, then you're always going to have somebody that loves it in their new car and is looking to get something than that they can maybe get it in other venues too. I think that concludes our conference call. We thank you for attending and we look forward to a great fourth quarter where we're going to grow the business and hit 6 million and exceed 6 million subscribers. So, thank you very much. 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_233847

Here’s the entire text of the Q&A from Amazon’s (ticker: AMZN) 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. Great, thank you. I have two questions for you. First, regarding Amazon Prime, earlier in the year, you changed your guidance pretty significantly for the program. I think you also said that it may be the most expensive initiative you’ve done since free shipping. Can you give us a better sense of really how it’s doing so far? Is it actually as expensive as you originally thought? And then, also, regarding the $12 million credit reimbursement during the quarter, can you tell us during which quarter that actually came into the P&L originally? Great. In terms of Amazon Prime, it certainly is expensive in the short term, but we think it’s certainly the right thing to do. What we are finding is certainly customers like it. They are buying more. They are also doing more cross-shopping, and as I had mentioned, it’s especially heavy in certain categories, as I mentioned in the opening remarks. It’s expensive, as Tom is saying, but it has a lot of benefits for customers and, long term, for Amazon and Amazon shareholders. So customers, when they start using Amazon Prime, it not only saves them money on shipping but because, for free, as members they get expedited fast shipping, it actually changes the way they think about and use Amazon. And we have seen significant lift in Amazon Prime members. So we did say short-term investment; it is expensive in the short term. We think it’s one of the most important things that we are doing over the long-term. In terms of the $12 million credit, we had previously expensed that over several quarters. We haven’t disclosed the exact amounts per quarter, but it was over several quarters. A couple of questions. It looks like International you were affected a bit by the currency effects. But can you talk about markets like Germany, where I think a VAT was implemented and I think growth had to kind of slowed down broadly in the e-commerce world out there, how that is performing as you have kind of compared against that? Second, Amazon Prime looks to be, I guess, generally successful, based on kind of your commentary. I guess one of the themes that you have kind of consistently executed on is rolling out these types of services globally across the broader franchise internationally, in UK and Germany. Can you talk to the concept of have you gotten enough data and analytics behind Prime to kind of look at this on a global scale, or are we still too early, in terms of kind of having the understanding of what the impact is on frequency and usage? It is still early. However, you are right that we do like to operate consistently globally. And so, we will be trying to do that over time, but you just have to sort of stay tuned for that. In terms of the first part of your question, we are not breaking out any of the individual countries within international. But you are right; we did get hurt a little bit by currency. International revenue was 26% on a dollar basis, 28% on a local currency basis. And then unit growth was actually faster than that. So that’s just a little bit more information on that. A quick follow-up, is there any way to leverage the 1 million sellers that you have that have grown 30% a year or two create pretty much an outbound advertising or distribution model for those products, and kind of leverage that and maybe create a distribution model around those seller or merchant accounts that you have today? Those are the kinds of things that we think a lot about. And it’s our practice not to talk specifically about what we might do in the future, but we do think about those kinds of things. Thank you. It’s actually Brian Pitz for Mary. A couple of things here can you talk about your add-on sales for Harry Potter more than your expectations and maybe provide a little more detail on the geographic breakout of sales for the book? And also, on a separate note, we noticed advertisements in your Gold Box items recently. Can you talk about the impact of these ads on your margins, and any thoughts regarding advertisements in other areas of your site? Thank you. The first part of your question, you said add-ons. I’m assuming you mean attachments to the HP 6 orders. We haven’t broken that out; the only thing that we said was that the total including those -- the total impact on revenue, including attachments were 260 basis points. In terms of the -- can you repeat the second part of the question again? Sorry. We haven’t split out, you know, Harry Potter by geography, but directionally, and you can assume that it’s approximately the same as the magnitude of the segments themselves. Again, that’s directional. Okay, and on the Gold Box advertisements, any thoughts for impact in areas where you could use advertisements such as that in other places on your site? Yeah, it's, you know, I think what you’re seeing, you know, I would think of it as small, but certainly something that we like, but it’s something that’s small. Thank you, very much. Tom, if I’m doing the math correctly, it looks like your trailing 12-month free cash flow is growing slower than your trailing 12-month revenue growth. I just wanted to comment on that. And it looks like it’s before the CapEx line, so I wanted to get a perspective on that. And the second question is, if I back out the one-time benefit that you just mentioned, the $12 million, from the $120 million pro forma operating income line, it means you did about $109 million of pro forma operating income ex that onetime item, which implies your operating margin of about 4.9%, which is the lowest we’ve seen it in quite some time. And if I compare that to your guidance, you have upside relative to your expectations in revenue in guidance, but you didn’t really have upside in operating income. And I’m trying to understand, is that margin and that lack of leverage due to an opportunity that you saw in the quarter that caused you to spend more money, so we could see a benefit later on in 2006, or is that because something was more expensive than you had anticipated? Thanks. In terms of the first part of your question, on our free cash flow, it’s actually not before CapEx, in terms of the numbers that you gave. Our operating cash flows is actually up 35% year-over-year on a trailing 12-month basis, and that includes the $40 million settlement. So if you back that out, it’s actually operating cash flows are growing on a trailing 12-month basis up 43%. Free cash flow, excluding the $40 million payment, is growing 22%. And what you’re seeing is we’re spending certainly more this year than last year on capital expenditures, and it’s in a few different places. Certainly, as we add more computer science and software engineers and we are capitalizing parts of that development, you’re seeing that included in our CapEx. Also, as I mentioned in my opening remarks, we’ll continue to support our growth; we’re adding capacity. We added three fulfillment centers in Q3. That’s reflected in the CapEx that you saw over the past 12 months and in Q3. We also are adding two new ones in Q4, one in Japan and one in the US. Some of the CapEx certainly has been spent so far in Q3 and prior as well on those. So again, what you’re seeing is an increase in CapEx. On CSOI, as you mentioned, yes, you did the math right. If you back out the 12, it’s actually 109. So it’s 121 less the 12, you get to 109. So instead of our revenue growth of 27%, our CSOI growth was 28%. If you back out the 12, it’s 15. And again, what you’re seeing is, if you look at the operating expense, the most significant increase is technology and content, and that’s an opportunity. We have been very successful in hiring, over the last several quarters, software engineers and computer scientists. We’re going to continue to add more computer scientists and software engineers. Those computer scientists and software development engineers are continuing to innovate on behalf of customers. They continue to work on the seller platform, making it easier for sellers to sell. We are continuing to work on Search, on Digital and A9, and these are opportunities that we’re spending those dollars on for the future growth of our business. Hi, a couple of questions. A pretty wide range for operating income guidance in the fourth quarter. I’m wondering if you can comment at all on whether other income is difficult to forecast, and that could be part of that. Also, what your expectations are for pricing in the retail environment. We’ve come out with a pretty negative call at the firm on discounting in the fourth quarter. Can that change your numbers? Do you have to kind of match your competitors as the quarter progresses? A - Tom Szkutak: We're -- just as it relates to Q4 in total, we’re optimistic. We are cautiously optimistic about Q4. Over the past 12 months, we have added a lot of great selections. We have continued to lower prices. So we are cautiously optimistic. It is, however, a seasonal quarter; it’s difficult to predict. From a cost standpoint, this is the first time we will have Amazon Prime in Q4. We think that’s going to be great for customers, but we also think it’s going to be expensive. And, since we haven’t gone through a Q4 yet with Amazon Prime, it’s difficult to estimate that impact. So that’s really, certainly, the key drivers; but again, we are cautiously optimistic. We think the experience of our customers is going to be the best experience they’ve had, and we are excited about it. But again, the wide range reflects the uncertainty that it’s difficult to predict. And the Amazon Prime point that Tom made is a good one because, in the holiday season, we know that people especially appreciate being able to get two-day shipments. And also, as Amazon Prime members, they can get anything shipped next day for just $3.99. So that is a very big event coming up for us. A follow-up, if I may. On the other income, it showed nice year-over-year growth. Can you provide any detail on whether that was related to the credit card referrals or whether it was merchant.com? What grew faster in the quarter? Yes, hi guys, two questions. First, I was wondering if you could comment on how much increased oil prices impact your gross margin. And secondly, if I look at international revenue, even if we look at it on the constant currency, the growth rate is 28%. It sounds like growth is decelerating pretty quickly from last year. I was wondering, what are you doing to maybe stabilize the growth rate in the international markets? Thanks. Sure. I’ll take international growth one first. International growth on a dollar basis was 26%, as you mentioned. Excluding FX, it was 28%. Unit growth is higher than that. Unit growth did not decelerate from the past few quarters. In terms of oil prices, our fulfillment and operations team continually work on trying to figure out ways to offset those costs . And we haven’t quantified that externally, but certainly we’re continually looking at ways to offset that cost in each of the quarters. And you can see the expansion that we had of 62 basis points in gross margins, and that’s reflected in those gross margins during the quarter. Good afternoon and thank you. Can you talk about the level of spending you have in content and technology? I understand you’re focus and your success, as you have said, in hiring computer scientists and software engineers, but both the absolute as well as the percentage of content and development as a percentage of revenue has increased. And if I’m not mistaken, it’s the highest you have had since Q3 of 2002, at about 5.8%. Can you tell us some concept of how many engineers you have? How many more do you think you need? Should we expect this kind of trajectory of increase as a percentage of sales to continue next year and beyond? Thanks. A - Tom Szkutak: Yeah, we're not -- just to take the latter part of the question first, we’re not giving guidance on 2006. You should expect, on a dollar basis, the technology and content is going to continue to grow. And, as I mentioned, you are right; it is at a high level from where we have been previously. It is 5.8% of revenue. And again, some of the things I talked about earlier, we’re going to continue to further innovate on behalf of customers. We’re going to continue to work on the platform, sell the platform, continue to work on Search, Web Services, Digital. Certainly, productivity within our operations is driven by technology, as well. So, again, those are things we think are important in the short and long term for our customers. And just to add to that, there’s a tremendous amount of opportunity and innovation yet to come, and we and our software engineering community are the ones who, in large part, help us unlock that innovation and opportunity. So things like Search Inside the Book, the fact that one of every two books that we sell here in the US now is -- the complete interior text of those books is searchable. Those kinds of initiatives are expensive. They require investments for many of those kinds of initiatives do not pay back in the initial period where you make the investment, but they are the right thing to do for the medium term in the business. I understand, but if I may follow up, you have always been focused on those new initiatives for customers, as well as for third-party merchants. But the rate of spending as a percentage has been accelerating significantly. Are you seeing new opportunities, or are there other areas that you need to spend this additional money on? The answer is we are seeing new opportunities. And we see it in some of the classic parts of our business, where we are able to do things like Amazon Prime, fast-track shipping, so that we can increase selection, have the stuff in stock and, at low cost, get it to you in two days if you are an Amazon Prime member. And also, in completely new areas of our business like Amazon Web Services, which we are opening up the insides of Amazon.com and making those available to developers all over the world. And that’s a business that’s growing very rapidly for us and something we’re going to continue to focus on. And then our Digital efforts, which we think are a very large opportunity for a company like Amazon that has a big media business. So some of those things you are not able to see and inspect yet, but we are working very hard on them. Hey guys, congratulations on a good quarter. I just want to ask a couple quick questions here. The first is, could you touch quickly on your EFT effort there and what that could end up doing to fulfillment as a percent of revenues going forward? Number two, could you touch quickly on IPXL and what is going on there with the one-click patent? And lastly, Jeff, touching on what you just said, could you talk a little bit more about the digital media downloads, when we think we could see something like that, and how that could play as far as a DVD rental business for the Company? The electronic funds transfer stuff, we have sort of been hearing you have been playing around with that to a degree; you have customers pay directly from bank accounts. And we know that the credit card portion is one of the large impacts of the fulfillment cost, as far as a percent of revs. And we are sort of wondering what traction you have gotten there, what progress you have gotten and where you sort of see that going, where it could take fulfillment as a percent of revs going forward? It’s very early. We have just launched EFT, as you’re describing it, on Amazon.com. You’ll probably recall that we launched something similar in Germany several years ago, so we do have some experience in this area. In terms of, could you repeat the other parts of your question? I apologize. Sure. The second question was on the IPXL lawsuit with the one-click patent and where that stands, and the last part was on the digital media downloads and sort of a timeframe on that, maybe margins associated with it, and the sort of time of any sort of DVD rental program. In terms of the legal question, I don’t think it’s, we have a long-standing practice of not commenting on litigation. So I’m not going to comment here, as well. On Digital -- On Digital, it’s too early to give you any details, any specific details. But it is something that we’re putting a lot of energy into with a talented team of folks, and we think we have some good offerings that we can bring to our customers over time. And I think there was one other piece of the question, but I forgot it. DVD rental is going very well in Germany and the UK. With respect to launching that in other countries, it’s not something that we’re prepared to talk about. Thanks a lot. I had a question around A9, just interested if you could update us on how you are progressing with the strategy there, and maybe some specific data points or metrics around the pi discount and the loyalty that you have wrapped around that in that marketplace. And also, longer-term, if A9 is something that is going to continue to grow organically, or you think there will be either technology or other acquisitions in that area? The A9, for those of you who don’t know, has two things. The team works on Amazon product search and also the product search that we give to our merchant.com partners. And also, they have a consumer-facing website at A9.com that licenses Google Web search results and then adds some of the customer-centric things that Amazon has done over time. So it says things like people who visit this website also visit these websites. It stores your history on the server side. To use the A9 toolbar, you can keep track of the history of the sites you’ve visited. Based on that history, it will make recommendations to you of other sites to visit, things like that. And that team continues to innovate. Their goal is to build an enhanced Web search service, and we think there are going to be many winners of different magnitudes and different niches in that space. Anything around the pi divided by 2 discount that you offer, and if that has added any loyalty or traffic to A9? I think there has to be a -- A - Jeff Bezos: Yes, we’re not providing any statistics or metrics on any of those A9 characteristics at this time. Thanks. A couple of questions. First, when I look at your operating margin internationally, it’s higher than the US, despite the fact that gross margins are 700 basis points lower. And I know you said that you put a lot of your technology development expense on the US business, but I was wondering if you could just help me understand why there is such a huge disparity in operating profit, despite, you know, or in gross profit, but that’s not showing up in operating profit, in those two businesses. And then, secondly, I know you don’t give out a lot of information on your third-party business. But the 30% of units that is third-party, I was wondering if you could give us a sense, at least directionally, of how much of that is outside of your media products? Sure, in terms of -- if I understand your question correctly, in terms of the gross margin difference between International and North America, there are a few principal pieces. One is both North America and International third-party growth continues to grow nicely, and we’re pleased with what we see there. But certainly, our third-party business is larger in North America than it is in International. So that’s certainly one of the key differences. One of the other differences is it’s still very early globally on our purchasing or vendor management initiatives. But we are further ahead, certainly, in North America than we are in International. So it’s an opportunity for us, and we certainly expect to capitalize going forward on that. In terms of what’s falling through in operating profit, I think you have it characterized right. Certainly, the bulk of the technology and content costs are certainly expended in the US and are allocated to the North America segment. You’re certainly seeing the significant portion of the G&A and/or legal-related costs hitting the North America segment as well. So those are some of the few differences. And the percentage of your third-party business that is done in media versus other, is that similar to your revenue mix, or it’s about 70/30? Great, thanks. You talked about the impact of Harry Potter on the top line. Could you at all comment on how much of an impact it would have had on the margins? And then a quick follow-up to Mark’s question on the third-party sales, particularly internationally. Can you just talk directionally about how much lower the third-party penetration in total unit sales would likely be internationally than in the US? And any particularly interesting trends or any inflection point trends in terms of when that could gap up or reach up to US levels? In terms of the margin impact of Harry Potter 6, it was essentially a contribution profit breakeven event for us globally. In terms of third party, we haven’t given any splits for the individual segments as to where we are there. But what we have said, again, is both segments continue to grow nicely. We are pleased with the performance overall, and we will continue to invest to make it easier for sellers to sell. And certainly North America is further along than International, and that’s an opportunity for us. Great, thank you. I was just wondering if you could just talk a little bit more about your plans for, or what you’re seeing in terms of marketing. As sponsored search and, obviously, comparative shopping becomes more meaningful, how is that playing a role? Obviously, marketing expense has been incredibly consistent over the course of this year. Do you see that changing much as we go into Q4? I would just say that most of our marketing expense is very measurable. And, as a result, we are able to -- it’s susceptible to analysis. We are able to spend the right amount of money marketing these categories. So if you could meaningfully spend more and have it be contribution profit positive to do so, then you can sort of do that when it’s measurable. And otherwise, you can back away from it. We also have other programs like the associates program and other kinds of marketing methods besides the sort of sponsored links. And the other thing, of course, that we do, even though it doesn’t show up in the marketing line is we consider some of the investments we make in things like Amazon Prime, some of the investments we make in things like Super Saver Shipping, to be a marketing expense. Our best first avenue is to figure out meaningful ways to give the money to customers rather than to advertising venues and then, by providing that good experience, have customers have a deeper percentage of their wallet share with us. And that does conclude our question-and-answer session today. I would like to turn the conference back over to our speakers for any additional or closing remarks. Thanks for joining us on the call today and for the questions. A replay will be available, as is typically the case, on our investor relations website at least until the end of the quarter. And we appreciate your interest in Amazon.com and look forward to talking with you again next quarter. 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_233848

Good afternoon my name is Ramona, and I will be your Conference Operator today. At this time I would like to welcome everyone to the Citrix Systems Fourth Quarter and Full Year 2005 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 period. If would like to ask a question during this time, simply press “*�? then the number “1�? on your telephone keypad, to withdraw your question, press “*�? then the number “2�?. Thank you, I would like to introduce Jeff Lilly Senior Manager of Investor Relations, Mr. Lilly you may begin. Thank Ramona, good Afternoon everyone and thank you for joining us. In this call today we will be discussing Citrix’s fourth quarter and fiscal year 2005 financial results. Participating in the call will be Mark Templeton, President and Chief Executive Officer and David Henshall, Senior Vice President and Chief Financial Officer. This call is being webcast with a slide presentation on the Citrix Investor Relations website and a slide presentation associated with the webcast will be posted immediately following the call. Before you get started, I want to emphasize that some of the information discussed in this call maybe characterized as forward-looking statements made pursuant in the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934. These statements involve a number of factors that could cause actual results to differ materially including risks associated with the company’s businesses involving the company’s revenue growth, products, their development and distribution, product demand in pipeline, economic and competitive factors, the company’s key strategic relationships, the effect of new account pronouncements on revenue and expense recognition including the effect of FAS 123 on certain of the company’s GAAP financial measures, and acquisition and related integration risks. Additional information concerning these factors is highlighted in the earnings press release and in the company’s filings with the SEC including the Safe Harbor disclosure contained in our most recent 10-K filings available from the SEC or the company’s Investor Relations website. Additionally during this call, we will discuss various non-GAAP financial measures as defined by SEC Regulation G. The certain adjusted figures, which include operating expenses, operating income, gross and operating margin, net income and earnings per share. The most directly comparable GAAP financial measures and reconciliation of the differences discussed on today’s call can be found at the end of our press release stated today and on the Investor Relations page of the Citrix corporate website. Now I would like to introduce David Henshall, Senior Vice President and Chief Financial Officer of Citrix Systems. 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We also deliver a good deal of our content at no charge via our email list, blog, free publications and summaries of our other research reports. Thank you, Jeff and good afternoon. Today I am pleased to report strong fourth quarter results for the company, demonstrating solid execution across all aspects of the business and growing customer demand for all of our products. In addition to providing you with some commentary on the fourth quarter results, I will discuss the current trends in our business and provide you with our outlook for the first quarter and a preliminary view in the full year 2006. Beginning with our financial results, I should note that certain numbers discussed are adjusted figures. Please refer the press release and our Investor Relations website for full reconciliation of the adjusted figures to US GAAP figures. So let us take a look at the Q4 highlights. Total revenue was $269 million, an increase of 26% over the last year. Our GAAP EPS was $0.32 compared to $0.30 a year ago. Our adjusted EPS was $0.36 compared to $0.29 last year, an increase of 24%. Adjusted operating margin was 29% and cash flow from operations was over $79 million, so across the board really a great quarter. Taping a very solid year in which we posted a record 909 million in total revenue and $1.17 in adjusted earnings per share. Now, I would like to discuss our revenue by product mix and geography as well as our operating metrics. In the fourth quarter, product license revenue was over $130 million, representing 23% year-over-year growth; this included solid growth in our Presentation Server and Access Suite solutions as well as 25% sequential growth in the SSL and Application gateways. In addition, our Netscaler products in their first full quarter contributed 14 million of revenue including almost 11 million of product license. Our online services generated almost $29 million in Q4; this is an increase of 60% over last year when normalized for purchase accounting adjustments. Product license update revenue primarily from our subscription advantage program was 89 million, up 18% year-over-year and technical services, which consist of consulting, education, and support was 21 million up 33%. But looking the revenue by geographic segment, EMEA was up 16% over Q4 last year to $103 million. The America’s region continues to execute very well growing 30% to $116 million and now representing 42% of total revenue. The Pacific region grew 9% now contributing 8% of revenue and online software services which were not included in these geo segments have grown to about 11% of total revenue. Look at the top 10 deals in the period, we had 7 transactions greater than $1 million with the remaining 3 all of over 750k. In addition, the Netscaler products generated two transactions greater than 500,000. By geography, 7 of the top 10 were in EMEA, 2 in North America and 1 in Latin America. Next let me talk briefly about expenses and operations. An adjusted operating expense in Q4 was $173 million, up approximately 15% year-over-year. This increase was driven by the full quarter impact of the Application Networking group and modest headcount investments. During the quarter, we added 85 employees to the company. 31 joined the Application Networking team including those from the Teros acquisition, 42 were hired into the online group and the remaining 12 in other parts of the company. In total, worldwide headcount now stands at 3171. On the balance sheet, deferred revenue grew sequentially by over $30 million, bringing the total balance to 286 million; this total is up 61 million or 27% from last year. The growth was driven by strength in our Subscription Advantage offerings. Renewal rates of this program approached 80% last quarter and we continued to be successful in driving our getCurrent programs, a strong sign that customers are seeing the value of our latest product releases. Cash, restricted cash on investments totaled 618 million down 5 million; this sequential decline was related to payments against an outstanding term loan, cash paid for the Teros acquisition and share repurchase activity. Please note that at the end of the quarter, we had $31 million outstanding against the term loan in EMEA. As a reminder, this debt facility was established in Q3 of last year to maximize the repatriation of foreign earnings under the American Jobs Creation Act. During the fourth quarter, we also repurchased 800,000 shares at an average price of about $26 and for the full year we repurchased approximately 7.4 million at about 23.50 each. And finally cash flow from operations continues to be very strong; including the 79 million from Q4, cash flow for the year, grew to a record $293 million. In summary, these results demonstrates the continuing progress the company has made and executed against our strategy to build a complete Access Platform to solve multiple access problems for our customers and at the same time diversify our product revenue streams with managers while still maintaining operational discipline and strong profitability. Now I would like to discuss our outlook and expectations for the first quarter and the full year ending December 31st 2006. It should be noted that we are about to make forward-looking statements that might incorporate certain risks. Please refer to the Safe Harbor statements noted in our press release and the risks that are stated in our SEC filings. Also, in the first quarter, we’ll begin recognizing equity compensation expense under FAS 123. While this number is included in our GAAP results, it will be excluded from our adjusted results. For the first quarter, we expect total revenue in the range of $240 million to $249 million. Within this total revenue number, we expect the Application Networking group to contribute 12 million to 14 million in total revenue and I would like to remind you that the revenue from this group is to split approximately 75/25 between license and services. In addition, our online services should contribute approximately to $30 million to $31 million. Adjusted operating margin was expected to be in the range of 24 % to 25 %, related. Weighted average shares outstanding should be between 184 million and 186 million. And finally we expect earnings of $0.18 to $0.20 per share on a GAAP basis and adjusted EPS of $0.27 to $0.28. For the full year 2006, we see total revenue in the range of $1.03 billion to $1.06 billion. Within this amount we currently expect the Application Networking products to contribute between $64 million and $68 million. GAAP EPS is expected to be in the range of $0.88 to $0.97 and adjusted EPS is expected to be in the range of $1.23 to $1.28. Also, I’d like to provide you with some thoughts on our 2006 operating model. As the Application Networking and then Gateway’s products continue to grow, we believe overall gross margin will be in the 92% to 94% range. With more profitability coming from these businesses and other US sources, the tax rate can increase by up to 4% when compared to 2005 and overall, we’ll continue to target total adjusted operating margin in the mid to upper 20% range. So, as the results show, we built a very strong foundation to work from. In 2006, we planned to build on this momentum, invest in the business and grow the product platform. Now, I would like to turn it over to Mark, to give you additional details on the quarter’s performance and to discuss our ongoing businesses as we enter 2006. Mark? Thanks David. And thanks for joining us on the call today. As you heard from David, we had an extraordinary fourth quarter, finishing 2005 with momentum across all areas of the business. I would like to highlight five of them. First, strong license growth for Presentation Server held by closing on some postponed projects in EMEA along with MetaFrame, end-of-life, and getCurrent programs. Second, continued traction across our other Access product lines, including the Access Suite our Access Gateway, our new Access Essentials product and our very popular Online Services. Third, great performance from the Netscaler product line and team our newest solutions for Web Application delivery. Fourth, another healthy increases in license updates with a record level renewal rate of almost 80%. And fifth, very good growth from our technical services especially in the consulting and tech support areas. So I’m really pleased with our Q4 results. A year ago, we’ve shared our 2005 financial goals with you, top line growth, expense management and driving revenue from new products, at $909 million for the year and adjusted EPS for $1.17, I think we delivered. We also shared our 2005 strategic goals to define, shape and lead the Access infrastructure market with innovative Access solutions that make on-demand computing a catalyst for business efficiency, agility and growth, again we delivered. In addition, in 2005, we added 500 new employees, integrated two strategic acquisitions, completed the acquisition of Teros, introduced several product upgrades and new products and won Microsoft’s Global ISV of the year award again. 2005 was a watershed year for Citrix and I have never been prouder of this team. You heard that Q4 deal next from David. I’d like to add a couple of comments about our two largest sales groups. Our North America team, coming off a rebuilding year in 2004, gained momentum all year and finished very strong. A profitable partner and ERM web customer segments. Our EMEA team turned in a superb Q4 performance, especially encouraging after seeing three quarters of the project postponement in government and Central Europe markets. Our product teams also executed well, expanding to 10 product lines. All number one in their category were getting there fast. And we grew in every customer segment from prosumers to FMB and from mid-market to global enterprises. We’re focusing on four high growth opportunities, small businesses, online access services, application delivery and access security and control. I’d like to take a look at each one of these with you in a little more detail. Citrix Access Essentials, built on our powerful Presentation Server technical platform is our first virtualization product specifically tailored for small business customers. It’s been called “Lite Done Right�? and customers and partners agreed. We call it Access Essentials because it offers secure remote access in an all-in-one, easy-to-install cost-effective solution. Released last July, Access Essentials is exceeding expectations. In the first six months since launch, we have over 1000 new small business customers and more than 1500 authorized resellers, over 600 of them are new partners. These are all leading indicators of solid growth ahead. To build on this success, we are putting even more emphasis on small business customers going forward. In two weeks, at our annual partner’s summit, we’ll introduce a competency program for partners focused on this segment, with specialized training on Citrix small business solutions including Access Essentials, Access Gateway and GoToMeeting. So, there’s a lot more potential here. Next, let’s look at our online access services which continue to outperform. Citrix GoToMyPC, the number one remote desktop access solution was up 43% over last year. And just a couple of weeks ago, we moved the bar even higher with the introduction of Version 5, faster performance, drag-and-drop file-transfer, true-color and Multi-Monitor support and lots more. Citrix, GoToAssist, the industry leader for online technical support grew 42% over the last year. In Q4, we launched Version 7, with better management, integration and seamless session transfer. Citrix, GoToMeeting, now in release 2.0 continued as our fastest growing product up 38% sequentially with impressive increases in both FMB and Enterprise Customer segments. To sum it up, our online services group posted another fantastic year, hitting the cover off the ball, quarter-after-quarter and winning 15 product awards in 2005, a new record for us. Now let us talk about application delivery. Citrix is by far, the market leader when it comes to application delivery. Our Presentation Server products prove it in more than 160,000 installations, are the industry standards for delivering Client Server Apps through virtualization. And Citrix’s NetScaler system ranked number one in both performance and customer satisfaction, are the industry benchmark for optimizing the delivery of Web Apps. Presentation Server and Access Suite continued to drive strength especially in our Enterprise Customer segment. After just two full quarters of availability, we were pleased with the positive uptake of Presentation Server 4, a must have release with over 50 new features. And an extremely compelling ROI story for both new and existing customers. And we are seeing best ever migration intentions. In fall ‘05, 69% of customers surveyed, indicated in plan to upgrade to version 4 and 29% are already using it. Following on in Q4, we introduced the 64-bit version supporting three times the number of users per server. PS4 for x64 fundamentally changes the economics and performance of Apps virtualization. In 2006, we are gearing up for next year’s release of Microsoft Longhorn Server. Last quarter, we previewed on a number of our project constellation technologies being built for Longhorn over the coming years. These technologies will further increase the value of our Apps virtualization solutions with some truly exciting innovations. Next in our Apps delivery product line up is our new Citrix NetScaler product, optimizing performance, security and cost in delivering web applications. We completed our first full quarter of operations with the NetScaler product line and the results were impressive. I’m very pleased with the business metrics slope which all points to success. Feeding competitors, solid customer re-orders, winning technical product reviews, retaining talent, adding integration partners and showing strong sequential growth. Also very exciting for us, was the latest Gartner Magic Quadrant on Apps delivery. Gartner moved Citrix up into the rise making us one of only two players in the leaders Quadrant. This will put Citrix on the shortlist of every enterprise that’s in the market for Web App Delivery systems. Also in Q4, we expanded the NetScaler product line with the new standard edition of our popular NetScaler Application Switch, bringing enterprise class Web Apps delivery to small and medium customers. And in November, we acquired Teros, the market leader and technology leader for web applications firewalls, adding their stunning technology and talent to our NetScaler products group. We believe the Apps delivery market is still an early stage market and the opportunity here is enormous. In.Q4, we previewed another App Delivery Solution, our project known as Tarpon, our newest technology for streaming Desktop Applications. App streaming delivers Desktop Applications without the cost and the headaches of traditional installations. We will be launching Tarpon as a product in 2006 so stay tuned. As a result, Citrix will be the first vendor in the App delivery market with the compelling product line that delivers best performance, best security and best cost for delivering every type of applications, virtualization for Client Server Apps, optimization for Web Apps and streaming for Desktop Apps. Next, Access Security and Control. In early 2005, we began the integration of Net6 entering the SSL VPN market and in combination with Citrix Password Manager created the foundation for a powerful Access Security and Control Solutions. Citrix Password Manager became the number one enterprise single sign-on solution last year, recognized by IDC as the fastest growing ESSO solution in 2004 and again in 2005. Our core offering for Access Security and Control is Citrix Access Gateway; its results have been nothing less than stunning for the quarter and the year. We began 2005 fairly on the SSL VPN radar and finished the year with the fastest growing SSL VPN products in the industry. Our SSL Access Gateway is now available in almost every market we participate in, in the world, through over 1300 authorized partners in both standard and advanced editions. It’s a great Magic Quadrant story here too. In Gartner’s latest on the SSL VPN space, Citrix moved up from the visionary space to the doorstep of the leader’s Quadrant, one of only 3 companies that improved this position. During 2006, we will expand the Access Gateway product line by leveraging NetScaler SSL technology, giving us the broadest SSL VPN product offering in the market. So, in each of these high growth business markets, Small Business, Online Access Services, Application Delivery and Access Security and Control, we are well positioned to accelerate our momentum throughout 2006. Although for the past three years, we really built a new Citrix. 2003 was about strategy, moving beyond a single product, 2004 was about investing in a foundation for growth, 2005 was about leverage creating revenue diversity, 2006 is about momentum, revenue from new product cycles and multiple markets. More specifically here is what we expect from Citrix this year. First, to breakthrough the $1 billion revenue market, balancing expense management and business investments. Secondly, to aggressively advance our lead in Access infrastructure, further expanding the product portfolio and acquiring new customers especially in the small business and mid-market segments. Third, successfully integrate the NetScaler and Teros teams and continue to set the industry pace for Web App Delivery Systems. Fourth, to streamline our partner programs and upgrade the confidences of our partners across small business, App delivery and Access Security markets. And fifth, to continue to attract the best and brightest to Citrix, to build a world class brand or rather single critical customer value and that’s Access. So, in summary, an extraordinary Q4 and year of growth, it’s says it all. Now we will open it up for questions. Ladies and gentlemen, at this time, I weould like to remind you if you would like to ask a question, please “*�? then the number “1�? on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Hi congratulations on the quarter, I actually joined the call just a little bit late but, David did you comment on how diluted and what impact the acquisitions of Net6 and NetScaler had on earnings per share? No, I actually didn’t talk about that, but if you remember when we announced the acquisition of NetScaler, we had talked about 2 pennies to 3 pennies dilutive per quarter and the back half of this year. And then becoming accretive to the business by the second half of next year, so I think in the fourth quarter it was between $0.02 and $0.03 so right inline with our expectations and as we look into next year, I would expect it to continue to be 2 pennies to 3 pennies in the first quarter, maybe 1 penny in Q2 and then breaking even to accretive in the back half of the year. And have you offered any comment on terms of the Netscaler sales force, are you growing that and what are your plans just for the size of that portion at this point? Hi Steve, this is Mark, we are in the process of integrating the sales force within the context of the overall sales organization, that process is well underway and we will grow that sales organization because we have more products and more opportunity. And, it will be a key theme at our upcoming summit week, in 2 weeks where we will be bringing every customer facing sales and marketing person at Citrix and then about, I think, we expect about 1700 partners to be there and that will be one of the key elements of the week. Hi guys, what a great quarter. Just looking at the license update line as well as just the core license growth, one of the things you mentioned was just the ability that you’ve had with the getCurrent programs but also just sign-on could offer some subscription advantage. Just wondering, if you can give us a sense looking from your legacy products 1.8 XP sort for where you stand for, what do you think you are going to install base feat is, but also what percentage you think is, actually on subscription advantage right now? Let me take the first track in that question, it’s obviously is the older platforms where the data becomes less and less precise, I think that, the crux of your question is probably trying to identify the opportunity that we still have to migrate those folks on older platforms to more current platforms or probably more importantly, what part of our installed base right now isn’t on a Access Subscription Program, then it’s really an opportunity for us to go and attach with our getCurrent program. And, the best estimates for that number is about 2 million feat at this point of time. Real active users that are not currently on subscription and will either need to maybe just re-buy the new product or buy what is essentially a migration pack through our getCurrent program, so it’s still a very large opportunity. What, I’ll just add, what we did see in the fourth quarter, a continuation of the strength that we talked about in Q3, where that business across those getCurrent programs has seen an acceleration really pointing towards the desire of customers to getCurrent on their subscriptions so that they can participate in newer platforms and the newer products. And Bill, this is Mark, the only thing all I would add is that, we’ve had now several really excellent years of performance in terms of execution around subscription renewals and a key part of that has been either, specifically the getCurrent program or other programs that are designed to recapture customers and keep them on subscription. Of course, that even goes back to the days of 1.8 in XP so many of those customers, as we have executed well here it really reduces the number that are out there that are not on subscription and candidates for getCurrent in the current period. And the other thing that we have going on in this area is that, maybe a little bit of Carrot & Stick, the Carrot that we continuously put out for customers whether they are on subscription or not and regardless of version is really the velocity on enhancements to Presentation Server that really are addressed by increases in ROI which tend to then pay them back for migrating. And then we’ve obviously with the product now in it’s 4th major generation, use the Stick by having to implement end-of-life on 1.8 and now the XP edition, so that’s pushing them at the same time. Hi, Good afternoon and congratulations everyone. Now that you have assembled in a broader portfolio of products over the couple of years, are you seeing any change on your enterprise customers in terms of buying behaviors and are you seeing, I guess what, are you are being seen as more in a strategic line and is that helping you pull through more sales the with existing Presentations Server, which but my calculation is up about 9% year-over-year on the core licenses, thank you. The fact is real. Absolutely, we have seen great acceleration over the last 2 plus years in the enterprise market, we’re being strategic actually matters to customers and where across selling based upon that strategic position matters to revenue to the company. We saw clear evidence of that in Q4 actually encouraging about almost 10% of the NetScaler product line was driven by either direct influence or referrals from incumbent customers that were using Presentation Server and the deal team servicing them and partners servicing them and that is after just the first full quarter of integration activity. So, there is tremendous upside there and that’s where we are going to see the notion of cross selling for building a strategic access platform. So, that’s how I answer your question. Oh, yes first a quick question on operating expenses, it looks like G&A spiked up a little bit, R&D was down, is there anything behind that? Nothing material Ed, I think it’s, like I mentioned in the comments, it’s primarily the inclusion of the fourth quarter impact of the NetScaler acquisition, variable comps, that always flows into the fourth quarter and other items but, really nothing specific. I would expect it going into the Q1 timeframe; you should look for G&A to be flat to even potentially down modestly on a sequential basis. Okay and question for Mark, could you talk about your contrasting channel strategies for the Access Essentials, the Access Gateway and the NetScaler products where your approach may differ in terms of the investment, cross training and requirements for your partners? Sure Ed, I think the sort of, contrasting element is that, we have a large scale partner ecosystem that has a lot of core competencies not all of which are the same. So, what we are doing is, maintaining a single-focused worldwide channel program and allowing them various types of partners to join and sign up for the different competency spaces. So, if you specialize in calling on and servicing small business customers, we’ve got a competency program and a product set design for you, if your focus is much more on the midsize to the large enterprise and you want a leverage your Presentation Server knowledge and skills, we are going to offer an Application Delivery competency that brings in the NetScaler products and obviously we will integrate the terrific Tarpon products when they are available. And if you have much more of a security kind of practice as an integration partner then we will introduce you to the competency in the Access Security and Control space and I’ll show you how you can build the business around our Access Gateway product line and our Password Management product line. So, that’s the way we are approaching it and some of it is from self-selection and on the part of partners like giving them the sort of, menu of options that will meet their appetites that address their competencies. Question for you on North America, where there are especially significant sales of new products or was some product mix, now given the strong performance in the geography was it balanced or was there any one particular driver that we saw there? I think the results in North America were quite balanced, participating in the top 10 deals and probably a little stronger than usual and then better rebalanced across all those types of licensing. So no, nothing stood out in terms of types of customers. I would say that Canada had a stunning Q4 and year that team was up almost 50% year-over-year and that’s coming off of the tough comp even last year. So, but there were many great performances but very balanced. Okay and then over on the EMEA side, you have mentioned, I think that you had recaptured a few EMEA deals that had fallen out of the prior quarters due to the government sort of, bouncing around there. Now where these deals that, you have had on the forecast at the beginning of the quarter to recapture and then close them or did you just have zero in the forecast and are they just coming as bluebirds? Yes, probably sum of both, as in most quarters but I think, the significance there is that, we really had three quarters where we saw postponements and frankly on an internal basis, we were disappointed that we couldn’t see that kind of behavior in the customer base and then we were sort of equally pleased in Q4 when we saw some of those get released because some customers, especially in government, especially Central Europe started to feel better about the overall political environment and released some capital spending projects. And I am not sure that was, that’s an overall industry trend per se but certainly we got, our fair share of the capital spending releases. Okay and then the last thing when you reviewed the bodycount that you added on the quarter, it seemed, I think you said was at 41 that were going into the online division, that’s a pretty decent spike, what are those folks going to be doing? I said, that’s actually just a modestly from the rate that we have been adding people to that team over the last year, it is a combination into the sales organization and into product development predominantly. Okay. And if I look at product development, is there a lot of that is going into, you just shipped the five clients, which are using nice job on that by that way and or is there some major server reengineering on the, the server side that you are doing? I think it’s really a combination of continued enhancements of the existing products as well as great new things that we haven’t yet announced. Okay. And the Presentation Server growth, somebody mentioned the 9% number, are you guys going to give us what that Presentation Server growth number looks like this quarter? Yeah, it was up a single digit. The hard part about starting to breakout the individual products and this is what I, I, the comment that I make every quarter is that, actually sell more in terms of bundles or suites or just different solutions to customers while focusing on doing what’s best for them, the numbers are going to move, up and down from quarter-to-quarter. But, overall, I mean, it was a great quarter for the core Presentation Server and Access Suite business coming off again, it was a really tough comp in Q4 of last year, posting high single digit growth, so we are very happy with the performance of that. And then with the end-of-life of some products in the first part of the year here, should we see maybe seasonality that is a little more frontloading to the year than historically? Well, we are not forecasting any major shifts in revenue between quarters based upon the end-of-life program. Actually for XP, we implemented the end-of-life program in international markets excluding Japan in Q4. And in Q1, it will go into place in North America and Japan. And so, this spreads the impact and any impact there might be over two quarters and will tend to offset each other so no frontloading. The only other comment that I’d like to add is, if you recall many of our customers are participated on subscription advantage or are participating in the getCurrent program so much of that revenue is deferred and recognized relatively over the period of the year. So, I wouldn’t expect any material frontloading of that revenue into ‘06. Great and then just lastly David you had mentioned 2 million feats, the folks still on subscription, what’s the average revenue that would be associated with one of those feats, is there a way comp all part of that? Good afternoon everyone. Congratulations on a good quarter. Couple of questions on the model for you David, the license revenue mix, we saw that fluctuate between, there is lot of seasonality obviously, let us say between a 43 to 44% range. A lot of these new products coming online, what’s the right way to look at license revenue mix if you can share that with me? Well, I think, the other line items in the business are a little bit more, surely a little bit more predictable on a sequential basis. We do see more seasonality in the license line and we are getting the new contribution from the NetScalar businesses as well as the Gateways entered in higher-and-higher percentage of the company. So, I would expect that the license component would grow, modestly next year. But it’s only approaching $400 million, so it’s going to be extremely hard to move the data materially. Okay. And then final, can you talk a little bit on the deferred revenue, what type of seasonality you might expect coming out of that as you get into Q1, we are still trying to get our hand around, get a grip with what do expect as far as that going to happen especially as your renewal rates start to peak? Let me make a couple of points there. First, I’ll take the second part of the question. And as far as the renewal rates, I mean, if you remember we’ve been moving those renewal rates up on about 60% two years ago, up in the current high up approaching 80s. So, I think the trend is still up into the rise, it’s surely not going to be a straight line, but we have some room to continue to move that north upward as it is right now. And, I think that from a seasonality standpoint we take a step back and we look at where the real opportunity pool is. And the pool is largest certainly in the back half of the year. So we have the greatest deferred revenue growth usually in the forth quarter, high end, record 30 million in the quarter just reported. So, I would expect it to be, much more modest in Q1, and then growing throughout the year. That’s just based on where the opportunity is. Okay. And, again I am not trying to put words or do it anyway? Does that mean you would expect the third revenue to increase there will be a modestly in Q1? Is dependent upon not only the renewal rate, but also the ability to drive get current revenue, and other things that fallen to deferred…. Right, I’ll appreciate what you did give us. And one quickly on that, can talk about the qualitative idea Mark, and if you understand the strategy of getting all these products into a massive installed base. Can you talk as much as you are willing to show at this quantitatively on what that meant, did you have anything to do with such a great performance in the large deals this past quarter? Well, I don’t think that we are going to share more quantitative information about sort of products and segments and channels when we have at this point. John. So, I mean, if you look at these largest deals for the quarter, all of the top ten are predictably deals driven by Presentation Server and or the Access Suite. As David, mentioned to make the top ten in a company, the bar was really high. It was over 750,000. In the Application Networking space both deals would tend to range from sort of big reorders from Media Metrics companies that will be in the north of $100,000 range to, the enterprise deals where, their customers are getting the first experience and it will be south of a $100,000. And so, what we are seeing, and I think that the indicator of what you are asking around cross selling and leveraging the installed base both on partners and customers is really evidences by what we saw in the a uptake of the SSL VPN across the year far exceeding our expectations for the year, and that is a result of leveraging our partner network across the years, starting the first quarter really behind plan catching up in mid year because all the work was front end loaded with partners and leveraging that in the back half of the year. So, that’s the partner’s synergy statement. And as, we can give you some of the quantitative there, maybe little later on, and then in the enterprise space were we are trying to leverage the relationship with larger scale strategic customers, just after the first full quarter of working together, the NetScalar team and the sort of Presentation Server centric team we’re able to collaborate and drive about 10% of the Application Networking product line during the quarter. And I think, that’s pretty good given the, I think from the first full quarter of working together. So it’s early, it’s very early and as longer range view here is that we’ll have the opportunity to integrate the products from a technical and messaging perspective that’s going on. Leverage the partner and customer base on both the relationship, and go-to-market and demand generation basis. So, I think, that’s why you know we look at 2006, when we look at our goals for the year. One of the big ones is to make sure that we get the integration done well, and streamline the programs well partners can be confident in bringing all these products together as a platform to our customers. So, that’s the way I need to answer your question right now. Hey guys again congrats on a great quarter. Just two kind of housekeeping accounting questions for David, first. I know you talked about stock comps FAS 123 being in the GAAP numbers. But can you specifically provide the impact? Okay, thanks. And then on the cash flow for the quarter basically flat year-over-year, it look like this a little bit more the back end loaded quarter with DSO and AR was there anything else going on there? Yeah I think, there is lot of things, lot of components moving the cash flow. The biggest drivers continue to be the net income, deferred revenue and, the normal drivers. I think the that normally that you saw in fourth quarter was related to the AJCA, American Jobs Creation Act, which the tax impact with of that provided us some upward pressure to cash flow in Q3 one in, the payment that goes off in Q4. So… Right and then more strategic for Mark, if you look at the industry you are starting to see virtualization on the desktop pickup some momentum, there is virtualization as a buzzword were it really taken off here. How do you see the operating systems on the desktop kind off playing into that, and what do you guys see Linux in your strategy longer term on the desktop? I think that virtualization is a very powerful concept, like most the powerful concept in our industry gets over height before they get understood. Our view is that in a virtual machine are very, very useful tools to our centralizing, lowering costs and improving the utilization of hardware, and have some edge conditions where they can be useful in some specific solutions. We also believe that application virtualization and desktop virtualization market place where we have lead for quite sometime is actually the largest virtualization market that exists today. And so, now on the desktop, honestly Todd, out you there is that desktop, the desktop is an environment that we need to connect into and display with as it changes overtime. There is a lot of, there is a lot going on there, I am trying not to jump dig down on this one too much. In the backend we’ll see more of virtual machine impact than on the desktop. That’s our view here. And that virtualization of applications especially Client Server Application will continue to have great value to IT organizations and that really is to the answer Linux as well as. Attach to a degree that Linux becomes a desktop factor we believe that virtualization of especially Client Server, and especially Windows applications will be an important component for every IT organizations to have on board making applications virtualizations even more strategic. That’s the high level and short version of the answer perhaps on your next visit we can spend a lot more time talking about that. Good afternoon, first on the Presentation Server it sounds like that this business maybe getting a little more seasonally backend loaded for the year. Do you think that the reacceleration in growth there was primarily due to seasonal yearend spending, who do you think there we’ve ride inflation point in the 4.0 cycle where we should see a year-on-year growth in the next couple of quarters? Adam, I think we’ve got all three impact going on, and certainly are contributing to our outlook into the future, so some catch up on postponed deals, some normal end of the year budget flush that happens every Q4, and as I mentioned in the prepared comments some really good uptake and responsiveness in this from customers and partners on the Presentation Servers 4 platform. And all of those things are contributing to good buoyancy in the Presentation Server business, including License Update business that had a record renewal rate in Q4 of almost 80%. And just a quick question on Europe your commentary and results on your, are much better that we seen out of some other coverage companies. You mentioned the impact of some large government transactions, to what extent were there other factors would play to drive what appeared to be relatively strong European results? I think the actually it was pretty broad based in terms of size of deal. So in some of those project that got released yes there are a couple of larger ones. But even more so there were many smaller ones. And I think that’s really a reflection of what was going on in most of the year, centered around Germany and conservatism around capital spending that we saw extending down to even smaller business customers in that marketplace. So pretty broad based in that area. No, not really, because and the reason is because its more of a progression if that happens, we are not, you can never truly identify whether somebody is buying a new license simply based on end-of-life of a product for that are something just expanding another deployment. I think that the best way to think about it is the fact that we are, seeing increasing, increasing renewal rates as we talked about on our subscription programs as well as just, more and increasing activity on our Get Current programs. And so, that’s what I use kind of a best proxy to point towards how customers are viewing the current value and future value associated with our new products. So, it is not huge boost to revenue in a current period, but it certainly helps increase the overall subscription balance over a longer period of time. Got it, okay. And with the straight at the end of the quarter are you still expecting the mid-single-digit growth in core Presentation Server, if though in addition to Access Essentials, what do you identify, the sling factor that will make it better or worse than mid-single-digit growth. I think there is a couple of things, in the last March to add, we continue to believe that the overall application delivery system on Presentation Server and Access Suite, it’s the mid-single-digit growing business. We think the things we are doing to help accelerate that, and really even drive further standardization and penetration of our customer bases is evident in like the 4.O is, we are increasing the scalability of the product, we are increasing the compatibility of applications, we are essentially just improving the ROI message to remove one of those barriers to adoption and the enhancements you saw in 4.0 are things we are doing in the future should help drive that forward. And the other thing Dino, is that you are probably should start thinking about separating these businesses out because yet well Access Essentials is built on the Presentation Server platform, technical platform we don’t really market it and sell it as a Presentation Server product. And so, if you want to sort of, and if you want to continue to measure, how much leverage is the company is getting off the Presentations Server technical platform, then you got locked in a lot of things, all right? We are building actually a significant part of content on the Presentation Server technical platform but it won’t be a Presentation Server product. And so what we will see here as we go forward is the product strategy that takes the technical platforms that we have and really purposes them to a much more customer-centric and segment sort of view of the world and go to market strategy. So, you can look to more and more of that which will allow us to talk more and more about markets and product that serve those markets as opposed to sort of looking backward and designing the company’s performance based upon what we used to do. Got it, okay. And just switching gears a bit, if you look at the channel, I guess Mitch coming on board and I guess in the October timeframe, it is understanding easily done about a few months, can you talk about some of the strategic opportunities you have identified or kind of more importantly are there any change as to what Ross was doing before? Well, I mean, I think as we’ve said our channel team is one of the best in the world and Mitch played a key role on that team, we are excited to put him in that role as leader and he is basically taking the strategy forward, obviously putting his own fingerprints on it, but really executing to, in a longer term vision we have around for channel programs and I think I mentioned a couple of those in the Q&A and that is let it be driven by markets and competencies to deliver to those markets, supported by the company when it comes to training, education, support and demand generation. And, so we’re, I think, well positioned to do that and that will be how we approach summit week in a couple of weeks. Hi Mark, I was hoping if you could talk a little bit about ICA client and what role you see for it going forward, with respect to Tarpon and maybe even NetScaler? Okay, we’re happy to see so, the ICA protocol is the core of the ICA clients, the ICA protocol is also the core of being able to display a virtual session on an endpoint device like a PC or terminal or whatever. And it will continue to be that there is also a technical platform underneath it, that is extensible that we have the opportunity to and will enhance to make it very aware of the NetScaler platform on the other end, make it very aware of the Tarpon Streaming on the other end and what you might actually find is that it won’t be known as the ICA client anymore, it will be more of an Access client that has a unified kind of set of capabilities around high performance secure and cost-effective Applications Delivery and obviously we are looking at a making sure it works extremely well with our FSL endpoint technology as well so that you get a secure high-performance connection over the internet. So that’s what you expect on the client side going forward. If it there’s something is becoming most strategic, I guess the other question is do you vision doing more in terms of delivery optimization of UDP applications like Voice over IP and streaming media, in addition what NetScaler does for a TCP-based typed applications? Yes. I think that later this year, we will be able to sell some additional interesting solutions in the voice area. We are already doing some exciting things on these calls, we have a limited amount of time and we can’t talk about everything we are doing but we have done some very exciting things in the voice area and we will continue to invest and actually upscale our investments this year in that part of our technology platform, so stay tuned on that. Hi, thanks very much. David could you just address whether or not, have you seen any uptake in the amount of deals that include the Access Suite rather than just find a Presentation Server, was there any uptake in that, on the number of Suite deals this quarter, or is it still a just Server gradual progression around that? Yeah, I think it’s a gradual progression, I mean Access Suite has a standalone product if you really want to isolate it, I mean; it had its best quarter ever, by a pretty good margin. So, I mean, we continue to see a gradual reduction in the Access Suite, and as we do things like add more proceed value to it, including the Gateway licenses and other things I mean, we expect that the Suite percentage of the Access Management group will continue to move up gradually over time. So I think Mark out pointed that 3 of the top 10 deals more Access Suite deals, so we are certainly seeing a broad scale adoption of that product. Okay and then just on NetScaler, Mark, can you just talk about two things, number one, I guess, as you brought in NetScaler I guess, what did you see happening in terms of NetScaler sales cycles, so if maybe similar bigger enterprise customers that they had, did they tighten up, given that that’s now a part of a larger corporations, so, if you’re seeing some benefit just bring in internally into Citrix. And then secondly, I think is it fair to say that maybe some competitors, Mark, or maybe you are caught off-guard with your acquisition or when even in the SSL VPN area, have you seen any of the competitors in either of those areas doing anything differently, in the channel around pricing or incentives versus what you first saw when you made this acquisitions, thanks. Okay Kirk. As far as sales cycles with, there is some puts and takes, obviously Citrix brand and so forth and reputation, certainly helped in some cases and those are the put on sales cycles and the takes, people are distracted with the integration and it does, there is take energy away from the sales process and so I would say at this point, we have seen a modest upside as I mentioned in the prepared comments in terms of re-pasting there. Longer term is clearly going to help in terms of Citrix brand and then just more knowledge and awareness on the part of enterprise customers in terms of the value of Web App Delivery System and certainly Gartner Group is probably going to have as big an impact on sales cycles as anything that we could do. The other thing that we did a lot of in Q4 was work with partners we have about 80 engaged right now, better actually creating deals, pipelines etc, half of them are new to the Citrix Access partner program and about half of them come from our classical network of partners especially, Platinum and Gold partners and they actually transacted business in Q4 which was very positive to see. And as far as competitors go, at this point we are seeing any specific actions taken by the competitors, we are more focused on the white space of running as fast as we know how to run both technically and in every other way to generate demand and we had a very great quarter for winning technical reviews and even head-to-head shootouts, technical shootouts on customer premises, very, very pleased with the results there. We are beating everyone when it gets down to just the technical shootout and we are not seeing any pricing actions, I am not sure in this sort of cycle of the marketplace being still very early that pricing actions has a big impact. Because these are more early adopters and they are looking for the best technology, the fastest, the most secured et cetera and they are looking for a company with a long-term vision, aggressiveness and I think we are fulfilling off on the all of that. So, I think that’s what we are seeing out there in terms of competition Kirk. Thanks, let me brief here. Of the seven deals over a million or any of those abnormally large in the quarter and also can you talk to your operating margin goals for 2006 with respect to the Citrix Online and then NetScaler division, thanks. Sure Jason, all the top 10 deals, there was nothing that was abnormally large, there were three deals that actually made it over to 2 million but as normal with our business, we never have a transaction that represents on a recognized basis more than 1.5% of revenue, so nothing abnormal there. I think on an operating margin outlook, I mean we have seen a good trend this year moving up throughout this year from 24% to 26%, 27% and now 29% operating margin. As we look into 2006, we continue to think that there tremendous amount of opportunities to grow, not only in platform but into the market from a revenue standpoint and we will be continuing into invest back into the business. And the output, we still believe that the mid to upper 20% range on operating margin keeps us near to the very top of our peer group from a profitability standpoint but also gives us that flexibility that I mentioned to continue to invest and so that’s the range we are looking at into 2006. I am sorry, go ahead. I was just going to say, in the past, in Citrix online, has been kind of 20% to 25% Op margin, can you curve out what kind of, do you see that improving, is that where you like it to be, and with NetScaler backing into it probably the flat operating margin right now where do you see the opportunity with that? Yeah, I think, we are now, the NetScaler and the Gateways products are running at a pretty material negative operating margin at this point of time which, we’ve talked about and that’s what is driving the 2 to 3 phases of dilution. We do think about that we’ll start to turn at the back half of next year as both businesses breakeven and go accretive. But at this point of time, we really haven’t modeled out specific operating margin targets for those two groups, online which we have talked about has in Q3, approached 20% for the first time and it was about 20% in the fourth quarter as well. I think that’s another place where we’ve got a pretty clean tradeoff between growth and profitability that we are making. And with the products growing at 60% range, we want to continue to invest pretty heavily. So I guess, my point there is that we are very happy with the profitability, we think that there is certainly some room to move upwards from there but want to continue to invest pretty heavily to expand the product base and continuing to gain market share. Good afternoon guys. First can you just comment quickly on what you saw in terms of US Federal Government or just the US Government in general State and Federal. And then I have one follow up quickly? Jeff, as I think you know, Q3 as the huge government’s quarter in pretty much anyone’s business, we didn’t see anything unusually, unusual in that market in Q4 of last year from the total year perspective, we were doing a lot of rebuilding the first half of the year in our Federal Government group and really got that done going into Q3. And so Q4 was about executing on the pipeline that was put in place but really preparing for ‘06. So, we are feeling good about our Federal business and state local we actually, we don’t fact that as part of Federal, goes more into that than normal geographic territories. Also, can you comment in terms of, what you are doing in terms of integration or maybe over relay with the NetScaler sales force and where you are in that process? Let’s be sure. At this point, as we go into summit week, we are actually taking the NetScaler teams that consists of very skilled enterprise relationship managers that really going to handle the relationships and the selling at that level along with some really great people in the Murphy team and taking those teams and simply plugging them into the local area Vice President structure. So we are not breaking those teams up, we are keeping them together by plugging them into the 3 in North America, the three area Vice President driven and managed regions. As we go forward, and there is a plan to deal more and more with specialization, where parts of the team will specialize in customer relationship, other parts of the team will specialize in the product. Particular products, other parts of the team will specialize in partner relationship and yet others will specialize in integrating it all and making it all work together including consultant. So, we are really at the front end of that process and the NetScaler team will be an important group of people to help us actually implement and deliver on that. Hi, just under the wire I guess, when we look at the NetScaler business, can you help us to understand the strength there this quarter, did you see the new standard edition, targeted at the SME space, have a meaningful contribution to the quarter? Yeah, the standard edition is just getting out of the gates and it is really designed for the partner network. I would say that a key part of recruiting partners is really associated with the availability of the standard edition because, from the price point and capability perspective and also training education and installations perspectives is within the reach of the broader partner audience. So that is really been, I think the early impact and I think we’ll actually see some revenue impact more towards sort of Q2 and beyond as partners build their pipeline and close business. And then quick comment around the EMEA business, you saw good turn around this quarter. Do you think you are turning the corner there or how you are going to looking at that going forward or you still approaching it kind of cautiously? Yeah Robert, we are going to continue to be the cautious about it, I think that’s the smart thing to do given what we saw last year. I think generally speaking Europe tends to be more of a backend loaded, sort of annually backend loaded kind of marketplace. And to begin with, and I think that any of the things that we saw last year related to economic or political sort of environment change just really exaggerated that. Those were, sort of going into ‘06 we just can’t approach it cautiously and hopefully we get surprise on the upside, that will be a good thing, but we are going to be cautious about it. Hey, just two questions for you. One, on the incremental deferred revenue added this quarter, can you just give us a little bit more detail as to what’s the contribution was understand at most maintenance has been in the past was that the case while this quarter anything else that was been there? Okay. And then just last question on the services clause it looks like those picked up quite a bit sequentially, I was just wondering what the source that was? There are no further no questions at this time, I would now turn the call over to the management for closing remarks. Thank you Ramona. And thanks everyone for joining us on this call today once again, not a lot more to add, so the number speaks for themselves an extraordinary quarter and year, and now it’s on to focus on 2006. See you in 3 months. Bye, bye. Research 2.0 combines in-depth, theme-oriented technology investment research with a lightweight business model. 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EarningCall_233849

Good afternoon. My name is Carol, and I will your conference facilitator. At this time I would like to welcome everyone to the Automatic Data Processing, Inc. second quarter fiscal 2006 earnings conference call. I would like to inform you that this conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator Instructions) I will now turn the call over to Karen Dykstra, Chief Financial Officer. Please go ahead ma'am. We offer over 30,000 online training titles and integrated tools for compliance and analytics to help companies maximize workforce productivity and achieve organizational excellence. Learn about OnDemand talent management and our industry leading products for large enterprises, small businesses, offices and K12. Or view our list of featured clients, and contact us for more information. Good afternoon. I'm Karen Dykstra, Chief Financial Officer for ADP, and I'm here today with Art Weinbach, our Chairman and CEO, and Gary Butler, our President and Chief Operating Officer. As you know, we issued our earnings release for the quarter earlier today. Our results were strong, with 9% revenue growth and 31% growth in earnings per share from continuing operations. And as you can see in our release, we recently completed the divestiture of our Graphics Communication business within our Investor Communications group. The business was the financial print business, which had declined in recent years with the decline in demand for research print. The revenues for that business were about $100 million annually, and it was close to a breakeven business pre-tax. During the second quarter we recorded a onetime charge for the write-down of the assets, and reclassified the business to a category called discontinued operations. Almost all of the charge that we took in the second quarter was related to the write-down of the assets. As I said, the business itself was running at close to a breakeven point. All prior periods now reflect this discontinued operation, and we have provided those reclassified numbers on our Website. Also I wanted to mention we've been getting a lot of questions over the last few weeks as the SEC issued its proposal on Internet availability of proxy materials, and I'd like to take you through how we look at this, although I'm sure, you're welcome to ask more questions during the call. The comment period runs about three more weeks, and ADP will be submitting a written response in the next few days. The proposed rule is directed at the annual proxy mailings for corporate issuers, with the underlying premise of access equals delivery, and a goal of lowering printing and distribution costs for corporate issuers. ADP will continue to provide voting services; that supposed to change. Access in this case means allowing shareholders to get this information on the Internet versus the historical delivery, the mailing of annual reports and proxies. The proposed rule impacts our proxy mailing business, which is within our Brokerage Services group. We deliver about 1 billion pieces from our Investor Communications group each year, and of that, about 300 million pieces represent equity proxies. The number of pieces mailed will not change, since ADP would be mailing this postcard notifying shareholders where to go if they elect to receive the material by mail. The weight of the mailings, obviously, would be lower from not mailing the annual report and proxy, lower, resulting in lower postage revenue, which has a large pass-through cost. So think of it as very low-margin business. The total for the potential revenue impact this year is about $150 million. Now, that's two-thirds postage and one-third fees. But the outcome, and I want to be clear about this, the outcome will likely be primarily postage-related, and a much lower number than the number that I just mentioned. And that also assumes there's no change in the process for shareholders that have already elected electronic mailings. So it's still very early in the process, and no one is clear on what the final rule will be, but we believe that it will be pluses and minuses. For example, just to give you an example, under the proposed rule, a shareholder can request printed copies, and the request must be fulfilled within two business days. ADP would fulfill those requests on a pick and pack basis, which will generate a higher fee per mailing than the current bulk mailing process. So overall, I think you should hear that there is pluses and minuses; there's still a lot to be determined. There certainly would be an impact to ADP, but likely not a significant impact to ADP, and we will continue to update you as more of this becomes available. So, having said all that, hopefully that provides you some additional clarification on these new topics in the brokerage business. Switching over back to our strong results for the quarter, we are halfway through the year now, and we've narrowed our guidance on earnings per share for continued operations to 23 to 25% growth, basically taking off the bottom of the range. We also improved our revenue growth guidance to 10%, which reflects the strength that we had so far this year, plus the additional Kerridge acquisition revenues in our Dealer Services business. I really did. Thanks, Karen. I guess my cut at it is we really had a terrific quarter. Our results were, clearly, stronger than our plans; 9% revenue growth, 31% earnings per share growth sounds pretty good to me. So I feel very good about the quarter. I must admit that I was surprised by the softness in our stock today, which just proves to me once again I never would make it as a stock prognosticator. But more important, when we entered this year I talked about momentum, and I talked about the importance of momentum in a recurring revenue model. It should be very clear now, six months into this fiscal year with the results that we've delivered, that we have it. There are always short-term aberrations in individual results. And unless those short-term aberrations are forewarnings of things to come, and we really don't think any of the numbers today really are forewarnings of anything negative, so we don't really believe any of that exists today. But these short-term aberrations really shouldn't get in the way of the very, very positive direction in which we're heading. I'm very comfortable with where we are six months for the year. And as usual, I'm optimistic, but for very good reason this time. I'm very optimistic about where we are going. Thanks; and good afternoon. If I could ask a clarifying question, and then hopefully something that's a little bit more insightful. Art, I think some of the confusion around, or your surprise around the stock price is confusion around the margins reported in the quarter. And I'm not sure that the press release really deciphered between if it was upside in the core operations or if everything came from interest rates, which, obviously, you wouldn't receive as much credit for if they were coming from the actual business. So when we take out the option expense from SG&A, COGS and R&D, to get an apples-to-apples comp year-over-year, I think the margins improved by about 230 basis points, excluding most of the investment activity. Can you say, can you give us a clue here if that's kind of the right conclusion to draw here? And if so, if you could provide more color around how the core business, how you're generating more leverage and operating profitability from that. I think if we look at the overall margin, we had a terrific margin first half. We're up over 200 basis, over 2%, I think, in terms of the numbers. Karen will tell you what the real numbers are in a minute. We had started this year, and we talked about every one of our businesses increasing their margins by 1% during the year. Certainly we're comfortable with that for our services in brokerage today. So I think we're feeling very good. And in addition, we are basically doing better than we had anticipated. Because we're doing better than we had anticipated, especially in Employer Services, we stepped up some investments and some expenses, and we took them earlier than we would have in another part of the year. So again, I'll let Karen cover what the real numbers are, but the direction you should hear is we're feeling very comfortable with where we are on a cost control and a margin basis. And I'm talking within our operating units, having nothing to do with the interest in any of those comments. And as everyone knows, the interest does not play into the Employer Services results, so the margins are, reflect real business growth and nothing to do with interest rates. Yes, the press release has one earnings statement that portrays the comparable periods from last year as if we had stock compensation expense in the number, so that is available to look at both ways. It is true on a year-to-date basis we're up significantly on a pre-tax margin basis, and in the quarter we're up significantly in, very significantly on a pre-tax basis, if you adjust last year for the stock compensation expense. Yes, interest rates do help the overall pre-tax margin, and the quick and dirty as you look at it are interest yields in the quarter was higher than last year's second quarter, and we give those results as well in the press release. But when you add up 7/10 of a point on a $12 billion client balance, obviously, that impacts the results as well. But I think even when you do the math, you say okay, if they increase their yield by that much in the quarter on that kind of balance, and you back that out of the quarter earnings and revenues, you still get a significant increase in the pre-tax margin. So the margins are improving in all of the businesses, I would say, except at this point Dealer Services, because of the acquisition of Kerridge. Our margin in Employer Services for the first quarter was a very large quarter-to-quarter of last year improvement in pre-tax. This year it was more or less flat, I mean this quarter, I'm sorry. The second quarter was more or less flat as we increased our investment in some sales implementation headcount. But we are still projecting a 100 basis point improvement in Employer Services, and again, having nothing to do with interest rates. Brokerage Services' margins also have improved, and are close without the, when you adjust for the discontinued operations. But on a full-year basis, we're still projecting about a 100 basis point improvement overall in brokerage as well. So I think we're well along the way to these improved margins, and hopefully with the data that we provide separately on comparable bases adjusting for stock comps, folks can get their in terms of what the real comparisons are year-to-year. Definitely verified my point. Thank you for that. My two questions related to the actual business are as follows. We focus on things like the metrics that you include in the press release, like retention and sales and things like that. Three issues I want to bring up to see what your views on them are, and how they're going to affect your business going forward. The first being wage inflation, the second being tightness or looseness of the labor market, and the third is the apparent easing of healthcare costs. Could that benefit or hurt your business, those three issues? Let me try and take each one of them separately. Wage inflation plays into our business all the time, especially, the easiest place for you to see it is in our tax filing business, where the balances go up. It's kind of a built-in growth that we have, just because wages and wage growth make the balances higher, and therefore, makes the amount that we have under investment and yield on it higher. Wage inflation, the numbers that we've been looking at recently look stronger than we had again anticipated earlier in the year. So I'm not an economist to comment on wage inflation, but if I looked at the trends in our numbers, I'd say it's moving up. In terms of the overall labor markets, which I think was the second of the two parts, the number that Karen talks about each period in our Employer Services business is paid for control, and that again plays into our overall growth in a meaningful way. The number was a little over 2%, a little bit over 2% in the U.S. for the, quarter or six months? Both the quarter and the six months. So that's there. And if you ask do we see any trend, we certainly have seen a relatively consistent 2% increase throughout the year. The third piece was healthcare. Clearly, we have a benefits administration business that's part of our Employer Services business which provides health and welfare services, and so we are affected by the methodology and by the plans that are in place. But unless there was some massive change, I think it would be an ordinary transition for us from the current healthcare environment to wherever it might go in the future. So I don't think the increase in healthcare expenditures by itself has a significant impact on us. If I could just sneak in one more, Art. At the last analyst day you said your appetite for larger acquisitions was in fact larger. And from this I assumed you would be doing some things in Employer or Brokerage, so I was a little bit surprised to see activity in Dealer and Claims. Do you have powder left to do other things, bigger things in your bigger businesses? How do you plan on allocating capital going forward? My prior reference was to Employer Services and to Brokerage primarily, so that you should not interpret the other transactions as in any way answering the question or the direction of where we are. And certainly the amount of resources that we put into these acquisitions is not enough for us to change our direction, in terms of our appetite for larger transactions, especially in Employer Services. I was wondering if you could talk a little bit about the acceleration that you mentioned in terms of the growth in the sales force and the implementation resources that you put in place. Could you give us a little bit of color on that in terms of how much should you move it up? Because when we look at the Employer Services margins, they were basically down about 20 bips on a year-over-year like-for-like basis, despite the 10% revenue growth. So I'm just trying to understand that to a greater extent. Our headcount in Employer Services sales is roughly up on a year-to-year basis, call it 5, 6%. We are also in process, not complete, but in process, to ramping up to our '07, at least desired, headcount for sales as we look today. So you will see that headcount increase another 6 to 7% over the remaining portion of this fiscal year, so that we are fully staffed and ready to go into field sales with that group as we enter fiscal '07 and beyond. And the reason for accelerating the growth in terms of the sales force, is that because you're seeing just a better business environment, a better selling environment, and therefore, want to take advantage of the environment? What's the rationale behind the acceleration? Several things. Typically, the most tried and true method of growing Employer Services, or Dealer, or any of our businesses for that matter, has been through the control of a direct sales force. So to the extent that we add more salespeople and add more quota and deliver more new recurring revenue, then we'll grow our core businesses. We also focus, clearly, on raising the productivity per salesperson in addition to adding headcount. So we have other measures and programs that would support that as well. And then thirdly, we would attempt to grow our new revenues through alternate distribution, like our arrangements with Microsoft or SAP on our GlobalView product. We also started the year a little softer than we wanted to be in terms of the size of our sales force relative to our plan, and the size of our implementation force in relation to our plan. So during this quarter, not only did we beef up and get a head start on next year, but we also filled part of that shortfall. So it's the combination of those things that I think really gets to what happened in the increased expenses in Employer Services during the quarter. Even with that acceleration, you continue to be confident that you should be able to show about 100 basis points of margin improvement for the full year, which would imply good improvement on a year-over-year basis during the back half of this fiscal year? Right. And on a year-to-date basis we are still over 100 basis points better than last year in Employer Services. And even with this expense, acceleration of new business expense, we are looking at a 100 basis point improvement. Normally we would hire those resources in the fourth quarter, but because we are having a strong year and we sense the marketplace being very receptive to additional deployment of direct sales resources, we've taken the liberty of moving those investments further up in the cycle so that we can be even better ready, so to speak, as we begin '07. That means the margin, the year-over-year margin improvement in the first half of '07 should be even stronger than what it normally would be; is that correct? We're not ready to go into '07, clearly, at this point in time. So we'll have a number of judgments that we have to make between now and '07, so I'm not getting, too early in terms of '07 prognostications here. I would also give us a little bit of leeway in that we're still only halfway through '06, so we still have time to make decisions about what we might do in the back half of '06 as well. Right now, based on our forecast, this is what we're forecasting. But we have a lot of the year to go to make those kind of decisions on what we're going to invest in. Art, maybe you can help us, or Gary, with the new business sales. It looked like it was 9% in the U.S. and 8% worldwide. Maybe you can just break it down. It sounds like it was strong in National Accounts and Small Business, but it's still slightly below expectations. Can you expand on that and give us some color? And then, how does that look going forward? Because you guys do seem pretty confident. As we mentioned in the release, we are forecasting double digits for the full year of '06. So when you take in the fact that we are 9% for the first six months, it would imply a fairly strong second half. The results in SBS and in National Accounts were very strong, and we continued to see a continuation of that result. As we mentioned at the end of last quarter, we did get off to a slow start in our international sales. We had a very strong fourth quarter of '05, but we did get off to a soft start, and we were under manpower in our international sales unit. They did have a very good December, and we are expecting them to have a strong second half as we finish out '06. I just want to clarify at the beginning, when Gary was talking about 9%, that was in the U.S. Our overall including international is 7% year-to-date. So we do have to have a pretty good second half in order to get to the double digits. Is it still being carried by the beyond payroll services? Is that where the crux of the pipeline looks like it is going to create the opportunities? Beyond payroll continues to grow faster, clearly, than our traditional payroll and tax service. So that will continue to be the primary driver. Karen, I don't know if you have the numbers, the breakout between, for that beyond payroll growth in the quarter versus the core business payroll. Yes, I have the growth. We're distinguishing between the previous conversations where we were talking about sales growth and what has to happen the second half of the year, and I will provide you with the revenue growth. Revenue growth for the quarter was 7% in the core payroll and tax, and then 14% for the beyond payroll category, which gets you to the 10% U.S. revenue growth in Employer Services. I think the good news in that is that 7% in the core payroll and tax is quite good, compared to where we had been in the last couple of years. So we're very pleased with that 7%. Finally, Karen, talking about the e-proxy thing. If we're talking about 150 million, two-thirds of that postage and probably most of that being, we're talking about a couple of pennies at most really. Am I looking at that right? And is it possible even that it could be accretive to your business? We're very hesitant to give out a range of what it could be, because it likely could swing in a lot of different erections. I wouldn't argue with you; it could be a couple of pennies. It depends on what way, assuming that we still do the electronic mailings the way we do them today, it would probably be in that range. It's possible, but I would say unlikely that it would end up to be accretive, but there's so many things going back and fourth at this point, and so early. It is really hard to call, which is why we didn't give a range on the earnings per share. I wouldn't argue with your number. I would say it's as good as anybody else's at this point. It's very clear that something is going to happen this proxy season. Whatever we're talking about, we're really talking about in the future. We are in the 60-day period where, for the SEC comment period right now. And once that ends, there will still be a lengthy discussion, the date period, and then we'll all have to see how it comes out. So there's just too much uncertainty to get more specific. I think I totally share what Karen said, we really don't think this is going to be very significant. And it would be '07 at the earliest, fiscal year '07 for you guys, probably more like fiscal year '08? Or is it still too close to call? I would say that their intention, as we understand it, is to try and have this in place for the '07 proxy season, which would be companies where the year ends December 31 '06 and later. But again, there is so much between now and then, you sure can't bank that number. Karen, can you give us a little bit more granularity on the flow, just the latest duration? And as you look at the reinvestment of instruments in that flow, are you looking at a lot of reinvestment over the next six to 12 months more at the two-year end of the spectrum, or perhaps further out where you might have some yield pressure on reinvestment? Sure. Right now, we're about 2.3 years duration. As we look at the next six months, for example, we have about 1.4 billion rolling over within, so just to finish off the fiscal year, about 1.4 billion rolling over with embedded yields of about 3.4%. And our new purchase rates, assuming we would go in the same, in a similar duration to what's rolling over, would be more like 4.6, 4.7% just for the next six months. In total as we look at a 12-month period, we think of it in terms of about 5 billion to reinvest, some of which is coming from maturities and then additional income and things, and all of those things that we've talked about in the past. So that number still is about the same. David, did you have anything further? On the 5 billion to reinvest, could you give us a sense of what the yield is on that 5 billion, and what the, I guess the duration, if you will, of what you're reinvesting? I don't have the exact embedded yield in the total maturing. The 5 billion to reinvest would not all be rolling over; it would be rolling over plus additional cash flows from operations and so on. So it's not all rolling over. I don't, I'm sure it would be slight, slightly different than the 3.4 that I said for the six months, but I don't think it will be materially different. In terms of where we're going, I think, is the bigger question, is where are we going with the maturities, right now we're intending to keep it about as is. We're about 2.3 years. As the interest rates continue to rise, we could always look at timing of when to go out a little bit longer. But we have not made any of those decisions, so right now you should hear that our investment philosophy remains consistent with where we have been in the past year or so. Just a quick question. If you could remind me what the standard yield is that you assess the Employer Services business, and what the variance was in other income from changes in interest rates in the quarter. The Employer Services gets credited with 4.5% interest rate, and the yield in the difference was $13 million period to period from the second quarter to the second quarter of last year. I don't know what the, I don't have that number in front of me of what that change is from, but the difference that is impacting the other segment is worth 13 million in the second quarter. I just wanted to inquire on the guidance. You beat the Street this quarter by $0.02. I'm wondering why not take up the upper-end of your guidance range. Is that just a level of conservatism, or does it reflect that the Street was sort of loading the quarterly earnings numbers differently than what was in your plan? We have done well. When we gave the range before, it was somewhat lighter than it is right now. What we basically said is we're floating around near the top of the range, and we know with much higher confidence we are not going to be at the low-end of things. That's really what we did this quarter. As always, we will continue to monitor it every quarter and let you know where we are. We also wanted to take advantage of some of these incremental investments and some of the expenditures that we're taking, because we're really convinced it's going to help our long-term growth for all the reasons Gary enumerated when he was talking about the increases in the sales force. Great. It's encouraging to see the core and tax business growing 7%. What would you attribute that to? Is it because your bookings number in the last couple of quarters has been somewhat lighter than the ultimate plan, and I guess retention is down a little bit year-over-year. Is the 7% growth just a function of the strong bookings and the better retention that you had a year ago, and the sort of ripple effect from that? Or is it attributable to something else? I think you can look at it as, one, good sales results last year and the beginning of this year. Two, it's the 2% increase in pays per control that we're seeing, 13% growth in client fund balances, which for the quarter $12 billion of client funds which gets credited to ES of 4.5%. Better retention, all of those things add up in yields a 7% growth in the core payroll business. Okay. Is there something changing secularly to help that growth rate, or is it really just sort of a function of your sort of investments and better performance in sales productivity and so on? Is there something secularly changing to help that a little bit? I don't think there is a secular change. I think the momentum I was referring to at the beginning of the year comes into play in our business. So what we have is all the things that drive growth in the normal time. And it's what are our sales going to be, what is our retention going to be, what's going to happen with pays per control, what's going to happen with client balances? Things like the wage inflation question that came up before certainly factors into it, because it factors into the client balances. But as you continue that, and as we talk about retention and it continues, but it's improving each time. So that as it continues to improve, you get not only that little bit of benefit, but you carry the whole base along with it. And so it's that kind of thing that helps fuel this revenue growth. So no, I don't think there is a major secular change. I think we're riding the current momentum base. If you could give a quick update on the Microsoft relationship and the progress of that, as it hopefully is in the early stages of ramping up a little bit. That would be helpful. Thanks. We continue to be pleased with our partnership with Microsoft. As you happily noted, it is very early in the process and very early in the sales cycle of a new product like their small-business accounting, which includes our payroll product within the product. The results are a little bit slower than we initially expected. We get continued good reviews on the product from the CPAs, as well as from the end users, or our client. Microsoft has announced a marketing campaign starting in January, which includes both media promotion as well as some price promotion. And as you again noted, this is a long-term relationship with them, and the partnership will take some time to deliver big results. But in time, we still have good confidence that it will be what we thought it was going to be. Karen, could you perhaps highlight the margin drivers as you see it in the second half of the year in Brokerage and Employer Services, and highlight if you can any differences that we may see in the second half of the year versus the first half of the year in terms of what the primary drivers will be? In brokerage, I think the most important thing to remember and to think about as you look at the margins are the huge effects of the proxy season at the end of the year. So if you look at our brokerage margins in the quarter, 15%, year-to-date 15%, we're really forecasting that for the year we'll be 18 or 19%, closer to 19%, which is about a 100 basis points better than last year in brokerage. And that all comes in at the end of the year with the proxy season, because it's an enormous scale that comes into play when we process all of those pieces and deliver all those pieces. So I think that's the unique thing to consider looking at the brokerage forecast. If you look at the Employer Services forecast, we are a little bit over 100 basis points better on a year-to-date basis. Our full-year forecast is higher, call it 23% compared to 22% last year. Our third fiscal quarter is our big quarter. It's the year-end processing. We get high margins on W-2 processing and the like. So that's the thing that comes into play, third quarter being the highest overall revenue quarter and highest overall margin. And that will buoy up to the higher level forecast that we're calling for the full fiscal year. But in terms of non-seasonal factors, are there any differences between the year-over-year drivers of margin expansion in the second half of the year versus the first half? Not really. I can't think of anything that's not seasonal. Like I talked about, last year we were investing all through the cycle. And this year we already talked about we have already started the investments. But there's nothing big that I would say we should look forward to in the second half of the year. And in terms of our expense levels, that would adjust it one way or the other. On the PEO side, I think you made an announcement the other day that you had entered California. Can you help us understand what impact both near and intermediate-term we should look for in terms of the overall growth rate of the PEO business, and any color you can in terms of how you view the market opportunity in California? California is a terrific marketplace for a couple of reasons. One is we have a lot of clients already in California that are good candidates to purchase our PEO services. The regulatory environment and the pricing environment around workers' compensation insurance has also changed over the last year. So we are quite excited about the opportunity there, and are staffing up our headcount to address that accordingly. It certainly will enhance our growth rate in the PEO, because it's additive to where we've been in the past historically. So all in all, I think it will keep us up in the kind of very strong growth rates that we are in today as we look into the future. So you would view it more as sustaining the current growth rate as opposed to accelerating the current growth rate in the PEO business? I think it will give us a short-term tick in the growth rate, and then over time, no business continues to compound out at the 20%-plus rate in the type of business we're at forever. So at some point in time, I would go where Gary was and say it will blend. But I think the important thing to note is that even in the non-California market, we are certainly not anywhere near penetrated to any significant level in terms of both the sales headcount that we can deploy, as well as the client base that we can upgrade. So we think this is just a great extension of more of the same good thing. One last question on Europe. It looks like, despite some weakness in Europe for the first time in several quarters, the pays were flat year-over-year. Can you, you can view that as stabilization, or do you think we're closer to a turning point in the European market? I think that we might, I would like to think that it's stabilization. I think really where we sought improvement was in France. And there was some significant seasonal hiring in France at the holiday time. As we dissected our numbers, we noted the clients, and so on. So I'm not sure that France wouldn't go back the other way and bring us perhaps back to the small decline. That was the only noticeable change. We've seen improvement, for example, in Canada and the UK for the last couple of quarters. But we still see weakness and decline in Germany and the Netherlands. And it had been declining more in France, and France turned into a slight positive this quarter. That I'm not sure will sustain. Congratulations on the quarter. My question is for Karen, and it relates to the ramp-up in interest expense. Can you just go through the components of that? Thanks. The ramp-up in interest expense is really related to leveraging our portfolio strategy. So the interest expense is most subject to current interest rates. So as the short-term interest rates have risen, that goes right to the interest expense line, because that's, and we borrow, as you know, more than 200 days per year based on our cycles of when we have high balances and low balances. The second quarter is typically a higher borrowing quarter; won't see as much in the third quarter when our balances are higher. But it's really the fed funds rate movement and the short-term rate movement that caused the acceleration of the interest expense line. As we look at our high peak balances month, the third quarter and going into April are really our higher balances. So there's less borrowing days. Now, as funds rates or short-term rates keep growing, that will offset some of it. But yes, I wouldn't expect to see the same growth in the third quarter. A couple of questions. In response to one of the first questions you had on the margins, can you just clarify? It appears to me that the pre-tax data that's in the press release and on your Website, the year ago numbers do not include option expense. And as a result, the margin this year is a tougher comparison. Am I looking at that the right way? And if so, what are the year-to-year actual like comps, excluding margin, I'm sorry, excluding the option expense in both periods? Let me give that to you. I thought it was in the press release. As a separate statement right after the as-recorded results, we try to put out an adjusted prior year column that has the adjustments for stock comps in. And it should be there or at least on the Website for all of the details, I will give you the numbers. The pre-tax margin this quarter, as we report it, is 20.4%. Compared to last year, without stock comp expense, the number was about 20.2. But if you adjust last year's numbers to take out the stocks to include stock compensation expense, the number would have been about 17.8%. So you're looking at an apples-to-apples 20.4 versus 17.8. I'm sorry; I must not have clarified. I was wondering of the segment level, if you would be willing to share that data. At the segment level we are not imposing the stock compensation expense in the segment results. The additional stock compensation is all at the other segment as part of the corporate results. All in the other segment. Okay. Thanks for clarifying that. A couple of other questions. How significant in your mind is the entry into the accounts payable market that you had a release out on earlier this week, and how large a market opportunity do you see there? And lastly on that, how much of this is an easy upsell into the existing client base? First of all, this is a relatively small initial launch into the accounts payable market. Obviously, we have terrific abilities around money movement and other kinds of electronic reconciliation and so forth in terms of moving data. So the accounts payable marketplace on the surface looks like a good extension of our core capabilities, and certainly, with the large number of accounts that we already have for our payroll services, a likely extension of add-on services. So we've entered into an alliance to kind of test the water with a company called Harbor Payments, to kind of see where it will take us. So it's early, and we'll keep you advised as things develop. Part of our strategy has been how do we extend our money movement type activities? And I think Gary expressed it very well; this is an extension which will in part play into that longer-term strategy. It's early. We will see how it plays. Are you willing to quantify the aggregate revenue contribution of the beyond payroll versus the core payroll and tax within the Employer Services business? Just for example, for last year, for the full year fiscal '05, the beyond payroll category was about 1.7 billion and the payroll category about 1.75 in the United States. I'm sorry; 2.75. 1.7 in beyond payroll and 2.75 in our core payroll and tax in the U.S., for about 4.5. The way we categorize the beyond payroll category has some product which you could certainly look at and say which side do they belong on, or do they have payroll and tax characteristics, or do they belong in the extension category total pay. Money movement would certainly be one of them. That's not tax filing, but it's the payment on an ADP check or direct deposit money movement aspects that's clearly related to processing and payroll. The way to think about that if you want to think of it over the conversations we've had for a long time since we first started talking about beyond payroll, we've been consistent in the way we report it. And that percentage is growing to where we think the beyond payroll piece on this consistent methodology we've been talking about is going to approach somewhere around 40%. One last question. Are there any attractive, or how many do you see types of attractive large acquisition opportunities in Employer Services? That stems from a lot of investor, investor frustration in the last year with the lack of activity there. And given what's been stronger growth, higher profitability and higher return on assets than your other business, why the delay in making a move there and/or investing in the Employer Services business more versus the lower return businesses within your portfolio? I think as you go up into really significant size, you could list the, and everyone could list how many companies there are and what the alternatives are. When you start coming down into what I will call the 50 million to $250 million revenue size, I think there are a number of opportunities. I can tell you our appetite is there. I can tell you we have a team that's clearly focused on trying to do transactions in the Employer Services space. I can tell you that Employer Services acquisitions is the highest priority in our acquisition program. And we'll see what happens. We're not in the business of forecasting any transactions before they get announced. A couple of questions, first around the hires in sales. If you could give us some color as to where you're adding them. You mentioned you were understaffed in international earlier in the year. Also just comment on major accounts versus national versus Small Business Services. And give us a sense for, particularly in Small Business Services, if they might actually be able to impact revenue in this fiscal year. The price where we would be adding the most headcount would certainly be in our small-business services. The place where we would be adding the second-largest amount would be in the PEO. In majors, that number would be relatively modest in terms of the actual account headcount. And we are trying to raise the headcount in our international unit across the board. And in Small Business Services and the PEO, do you think they'd kind of impact results fairly quickly? I know the larger accounts it takes a while. It would certainly have a positive benefit toward the end of this fiscal year, but not in a real significant number. On the employee, the client retention, you'd had some pretty nice improvements in a string of them. It seems like that stopped in the most recent quarter. If you could give us any sense for is there any particular reason that you can pinpoint it to? Are you seeing employee retention also drop off, or where do you think that might be going? As it relates to Employer Services, we were slightly behind last year's level in the second quarter. However, on a year-to-date basis, we are in essence even with last quarter. So we think our service levels are strong, and we'll continue to enjoy very excellent client retention. Can I have an opportunity to add something if I could. It's important, as you talk about that seasonality and the calendarization that Karen was talking about before, that we recognize how important the January period is to our Employer Services business. First of all, it is the key retention month for us during the year. And all we have at this point is anecdotal evidence. I know Gary was saying to me earlier today that the service levels and the anecdotal reports that we're getting are that we've had a very good year-end, and that our quality and our retention looks pretty good. We will see what the numbers are when we report them at the quarter. But also, on the sales side, January is our largest quota month during the year, and we had a pretty good January. So on both of those indicators, as we try and look at the very small number of retention that Gary was referring to that we were off in the quarter, I think it really goes to the comments I was making at the beginning. But unless there's a real trend out of that, those aberrations, anything can happen in a short period of time. I wouldn't read too much into it. It's Greg and Jeremy. Just back to new order growth for a moment. Internationally, you mentioned you were understaffed to start the year. Did you guys actually have an unusual amount of sales turnover there, or were you just late in making new hires, which are now maybe ramping up to give you the confidence about the second half comment? In international sales, we have had no unusual sales turnover. As I mentioned earlier, we had very strong fourth quarter in terms of our results, and we didn't achieve the planning levels of growth in terms of headcount that we had hoped to get in the first quarter. So it's purely a matter of a lot of strong sales in the fourth quarter and being below headcount as we finished out the first half of the year. We had planned the first time in a long time a pretty decent headcount growth internationally, somewhere in the 10% range. So when we miss the beginning of the quarter, especially in Europe, it takes, there's a longer leadtime to higher those people. So when we missed early in the year, we realized we would probably be missing for at least the first half. And we're still, where we had hoped to be in terms of headcount. Karen, I heard your comments with respect to pays per control in different geographies and internationally. What about new order growth just geographically? Was there any specific, are there any specific areas that are causing the weakness? Karen was talking about before when she was talking about pays per control. I think our sales in those two have been a little bit weaker. Other is comprised of a lot of different components. Basically think of it as there's two businesses in other. One is the Claims Services business, which we talk about pretty frequently. The other is a small processing, international processing business. And then the rest is a whole bunch of corporate allocations and charges and so on, plus, most notably new this year, the stock compensation chart that wasn't in the prior periods. But if you look at other, and if you look at apples-to-apples other versus last year's second quarter, if you included stock compensation expense in last year as well, you're looking at about a $60 million swing year-to-year. There were three basic components of what made up that swing. The first is in the second quarter of last year we took some onetime charges. There were a fair amount of, a whole lot of different reasons, restructurings and contributions and things like that. We took some onetime charges that did not repeat in the second quarter of fiscal '06. The second is one that I mentioned a little bit earlier on, another question, which is the tax filing offset, which is the difference between the 4.5% we allocate to Employer Services. And our actual interest rate earned actually was better by $13 million this quarter versus second quarter of last year. And the third is actually stock compensation expense, which year-to-year is better, some of the programs and things that we implemented that on a comparable basis was going to drive stock comp expense down. Those are the three reasons why you see the big swing year-to-year on other. Can we get an update on the comprehensive outsourcing solution or that business, and what the trajectory looks like in the competitive environment as well? That business is, as we look at all of '06, is around a 75 or an $80 million business this year. That will be up some 40% or so, 35 to 40%, versus last year. As we ended '05, we had roughly 15 good-sized accounts in that group. And we should exit this year somewhere around 25-plus clients in that group. We've got a strong backlog of about 30, $35 million of already booked clients, some 14 clients. And we would expect this year to sell another 20 to 25 million in new business, which would represent another 8, 10, 12 accounts that we would add to that list. But clearly, as we look into '07, we're talking about $100 million plus kind of business with pretty good growth rates. And are those clients coming mostly from within the existing, or are these deals put out for bid that you're competing against other providers? I would say it's a combination of both. Our existing clients are excellent prospects for these services, and they're particularly great prospects for a service that we would called internally managed payroll, which is an extension of the service bureau payroll. But with us taking over the payroll department. And in this a space where we mostly compete, which would be under the 15 to 20,000 employee level, we're certainly on the better list and do fine for those companies that are going out to bid. Great, thanks for that. One other question if I could, kind of switching gears on the brokerage side. Just wondering if you guys have heard anything from Ameritrade about what they to plan to do with the TD Waterhouse processing? We've been communicating with Ameritrade, obviously, since the announcement has occurred. The most recent indications we have are that they intend to take the processing in-house, and that it will probably be a year-plus before they'd be able to execute on that plan. Just a quick question on Dealer Services. It looks like internal growth has settled down to the single digits. Is there any reason to believe that this rate can improve going forward? I think the Dealer Services internal growth rate certainly has slowed down to single digits, and that this business has gone through some cycles before. Right now, with the state of the U.S. auto manufacturers, it certainly has made its way to the dealerships and, therefore, impacts our business in terms of ability to sell into the dealerships and transaction volumes that we get from certain processing. So it certainly is a thought, somewhat cyclical related to the health of the auto industry, and currently dealing with the state of the U.S. manufacturers. Having said that, our strategy is to continue to layer on applications and to grow geographically, and to continue with that application service provider model, which has been going very well. So at what point we get back to the higher growth levels, it's certainly hard to say. And certainly when we're in the typical, period with the manufacturers, it's nothing that I see in the near future. But I think they're still, at the core they're still a solid revenue growth business, and we've been through the cycles before where we have been low and then made it back up into the double-digit range. As long as we continue along with our strategy, and the Kerridge acquisition certainly will help in that strategy, in broadening our product set, particularly internationally, I think that we certainly can see it having a good solid growth rate in the future. Just to reemphasize the point, and Karen will correct me if I'm wrong here, our internal growth rates for last year in '05 were around 6%. And even though they're down a point or two this year from that year, it's not a dramatic change. So the real crux of the matter is the amount of new accretion that we have in terms of adding clients. And a lot of clients, particularly those who are heavily domestic in terms of their dealerships, are in many ways sitting on their hands waiting for the saga to unfold. Kerridge is roughly a $150 million business. We're very happy to add them to our ADP family. They clearly augment our position in Europe, where we already had in excess of $100 million in revenue. So as a combined unit, our international group now is in excess of $250 million, and operating throughout all of Eastern and Western Europe, as well as China, Korea and a number of countries in the Pacific Rim. They've got terrific relationships with the key manufacturers. They already have live clients in China, which we think is a big opportunity here. So in general, we think the consolidated unit is going to be a lot stronger than we were prior to acquiring Kerridge. Just a couple of quick following questions. Karen, is there any seasonality in that old Cunningham Graphics business, or is it pretty much sort of 20, 25 million per quarter? Great. And then, in terms of the ramp-up of the sales force, what is the typical productivity cycle, and should we start to see a material impact from the new salespeople beginning as soon as the March quarter? The ramp up, depending, depends upon where we hire the people. Obviously, to the extent that we hire new sales associates in our Small Business Services, these folks begin to be productive in the four to six-month kind of time frame. To the extent that we are adding sales force in our GlobalView international product, or in our high-end National Accounts or COF, clearly the startup curve is in the six to nine and, in some cases, even 12 month areas. And the PEO and majors would be someplace in between the two that I described. So to the extent that we are hiring up additional account in SBS, we should start to see a benefit in the fourth quarter. But I would pretty much project that the rest of the headcount ramp up, we would not really see that acceleration until '07. Also clarify, if I could. When we talked about accelerating the hiring of sales and implementation resources, as it relates to the second quarter, a lot of that was just getting us back to the original planned amounts that we had for fiscal '06. So we did not go over with this acceleration any amounts that we were not already anticipating for this year. And now, as we talk about, but we did have some catching up to do, by the way, in the second quarter. So if the expenses grew from the first quarter to the second quarter, now as we're talking about accelerating, we are talking about more hiring in the third fiscal quarter. And then to Gary's point, some of them if we hired them early in the quarter, and they're in SBS, we might get some productivity out of that in the SBS, but obviously not in the majors and national account areas. And it depends on how quickly we can get them on board. It's not going to all happen overnight. Karen, sorry, one other final question. I think you gave us the split of the equity mailings. Can you give us some further granularity there, specifically the mix within equity of M&A and non-M&A? Right, because I guess the SEC proxy doesn't affect, isn't affected by M&A mailings. And the equity mailings, is that where the M&A mailings are contained? So if there is an acquisition plan going on or something, that's really separate. That activity would go on independent of this notice issue as it's been laid out so far. Right. I realize that. That's why I'm trying to figure out, as we look historically maybe in that brokerage business, I remember specifically the compact Hewlett-Packard was a big event. I'm trying to ex-out M&A revenue to look at what percent of the business might ultimately be affected by your proxy. I think that you should use the numbers that I gave in terms of parameters, because quite frankly in recent years there hasn't been any big influence like an HP Compaq that we had a couple of years ago, where it drove a significant amount of pieces volume or posted volume. There was always some of that, but I would say it's a noise level in our numbers. The bigger issue is actually spin-offs, because if you think an organization which has a certain number of shareholders, and then you spin off that number into multiple entities, we in effect get three times if it's three entities, the number of shareholders that we had in the, not individual shareholders, but shareholders for investment than we had before. So as much, you really have to watch what's happening. And close to the time of it's really big, you'll hear about it from us. Pretty much all my questions have been answered. Could you just tell us the number of outstanding PEO employees at the end of the quarter? At this time we have time for one or two more questions. Our last question comes from the line of Greg Gould with Goldman Sachs. Karen, sorry to belabor the margin issue on Employer Services, but I just want to make sure I, there have been a lot of different ways it was asked, I just want to sort of put all the pieces together. The operating margin in Employer Services did not include employee stock options for either this year or last year, but it was flat for the quarter, up 100 bips for the first half. And the reason it was flat in the second quarter was because of investments that were pulled forward. And you're comfortable that the operating margin will the pre-tax margin will expand 100 BIPS for the year. Is that the right way to think about it? Yes. That's the right way to think about it. That's what our current forecast contemplates. And the only caveat I give is something I mentioned earlier, which is we've got six months to go in the fiscal year, and we could always choose to do other investment if we see the need and we see the opportunity. But at the moment, our forecast contemplates a 100 basis point improvement for the full year. We were very slightly down over the second quarter, and a lot of that had to do with this catch-up in some hiring. But still, as you said it, just right. The hiring in sales force, the 6 or 7% you want to do right now, when the new fiscal year starts, would you expect another 6 or 7% right away? No. We're basically, we basically hire in the fourth quarter as we get ready for the beginning of the fiscal year. This year, because we're having a strong year and we see a very receptive market by product, we're choosing to start that hiring at the end of the second quarter and as we enter the third quarter. So we're just getting a head start, call it four months over our traditional pattern, just so that we'll have people in the territory ready to go as we begin the fiscal year. And then lastly, the year-over-year comparisons for new sales are tougher in the second half. It sounds like the pipeline is strong enough and the sale folks, or the sales cycles are short enough that you can still hit that double-digit for global Employer Services for the year? That is certainly our plan and expectation. And we reviewed this pretty extensively, obviously, in preparation for this call. So we had a good January, so we were at our plan in double-digits over last January as, art, I think had reiterated. So we've got a pretty good confidence level in the double-digit number for the full year. Thank you very much. We'd like to thank you all for participating on the call today. And we appreciated your time and enjoyed talking to you. Thank you. This concludes today's Automatic Data Processing, Incorporation second quarter fiscal 2006 earnings conference call. Thank you for participating. You may now disconnect. We offer over 30,000 online training titles and integrated tools for compliance and analytics to help companies maximize workforce productivity and achieve organizational excellence. Learn about OnDemand talent management and our industry leading products for large enterprises, small businesses, offices and K12. Or view our list of featured clients, and contact us for more information.

EarningCall_233850

Here’s the entire text of the Q&A from Viacom’s (ticker: VIAB) Q3 2005 conference call. The prepared remarks are in a separate article. 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] Good morning. Thanks for taking my question. Question is in the entertainment division, there has been concern about an industry slowdown in DVD sales. It doesn’t look like you are participating in that slowdown at all. I was just wondering if you could give us some specific home video growth numbers if you’ve got them. Thanks. Okay, home video at Paramount, it constitutes now about 60% of our revenue. We think the category is still strong, it is still huge. Worldwide you’re looking at a business that is still in double digits and domestically in high single digits. As a category I think projections pretty much are for the same thing for next year. Year-to-date for Paramount, we’re up 29% in this category and you’ve got to realize we were really late to the party on DVDs and we still have slightly less than 50% of our film library yet to be released and about 85% or so of our TV library yet to be released. We’re spending a lot of time and money building out our infrastructure and distribution system and feel really good about this part of our business. And also on the horizon in ‘07, we’re all looking at as an industry the advent of high def DVD. The TV advertising growth across broadcast and cable is pretty strong in the quarter. Can you just talk about what you’re seeing in the scatter market for both cable and broadcast? And maybe talk specifically about first-quarter cancellation options? I think they were due in October. I will first talk about that and then I will turn it over to Tom to talk about cable. We are doing great in the scatter market. As reflected by our ratings, we are having a great opening of the year, as is ABC. I think we are taking the lion’s share of the scatter market. We’re seeing some numbers that are slightly above what the upfront was. There is plenty of activity. We are way ahead of where we have been with NFL sales; the NCAA tournament is way up. We sold slightly less of our inventory this past May than we had in previous years. So the strength in the scatter market because of ratings is proving to be very exciting. In addition in UPN obviously we have had better results than we have ever had before which shows that for the first time in many years with America’s Next Top Model and Everybody Hates Chris that people really want to buy. So we are anticipating continued great results. First quarter is looking very strong in terms of scatter once again. It is all performance based and we feel like there’s a great stability in CBS that is not seen in anywhere else and we are a good bet. Tom? On the cable side, we have seen a really terrific scatter market in the third quarter, up double digits. The trend we’ve seen in the last few quarters that money comes in hot and heavy, it just comes in later. But it does come in. As we look into the fourth quarter we’re up double digits again and we’re looking at unit rates pretty much across our portfolio. They are about 20% higher than the up front rates, which is certainly a good sign. And driven in part I think by the fact that most of our networks are at all-time ratings high. And our inventory is in good demand and the money is there. [Spencer Wang] I have one question for Tom and one for Les. Tom, could you talk about the affiliate fee outlook? Is it in the same 10% range? I guess it’s a multipart about the affiliate fees. Was the 10% increase all in the U.S.? And what is the biggest driver there? Well, all of our deals which are long-term deals have built-in rate increases on an annual basis that drives up our revenue. But as big a piece is the fact that we’re increasing our volume as our digital networks like VH1 Classic or Noggin or in Nick Toons or LOGO continue to roll out and get full distribution on the digital tier. So those two things kind of keep us in that high single digits/low double digit range on a quarterly basis. And then for Les, on retransmission consent, clearly cable you need to wait for the deals to expire but will the telcos like specifically Verizon, pay retransmission from the beginning? I don’t want to go into specific brands, but there are telco deals that are coming up that we expect to get retrans almost immediately. So we’re going to see some of that activity occurring very shortly and it bodes well for the future when the bigger cable deals come up as well. Good morning guys, its Victor Miller. Les, a question about radio, there have been many changes in the radio business for your business this year in ‘05 and you’ve been able to grow the business 2% the last three quarters. So it has been very good in the face of all those changes. But for ‘06 you face a larger challenge replacing Howard Stern, there’s about $100 million associated just with his show which is almost 5% of your revenue. And, as you know, as well as a network guy, the patina of that strength of that show impacts other day parts. So, given the fact that radio has held changes well in ‘06, but given the reality of Howard Stern in ‘06, sorry, the changes in ‘05 and given the reality of Howard Stern in ‘06, can the radio actually grow its topline in your mind in ‘06? Thanks. You know what, Victor; I’m not going to deny that the loss of Howard Stern is not of slight concern to us. However, I must say, the margin on the Howard Stern show as we were going forward was not that great. Yes, revenues will be down but costs will go down significantly. I think we have announced certain changes and I think you have seen over the last year with the radio business with the addition of Jack and pod-casting and these recent announcements of the various people in the various regions some of which will work, some of which won’t work, we have proven to be very nimble on that. The affect of Howard Stern on another day part is not nearly as significant as it would be a hit show in television for instance. So we’re not even including that as a major significant hit to us. As I said, revenue might be down. Costs will be down, but margins probably will increase because of this and in radio that is the name of the game. And on the outdoor side, you talked about onerous contracts. What is the negative impact on some of those when you actually do -- if you do decide to pass on those? What is the EBITDA impact of those that you’re really not doing well on or no interest in resigning? The EBITDA impact, our EBITDA goes up. We were involved with some bad transit deals that have now gone away. If it is a dumb deal, we won’t make it. There were a couple of deals recently that street furniture deal in New York where Cemusa paid $1 billion; we were not even in the ballgame. We’re not going to do stupid deals anymore. Every new deal we do with the outdoor business has to have the appropriate margin and the appropriate revenue and EBITDA affect. Fred, do you want to add anything to it? Yes. The outdoor business is showing a lot of really good strength here in North America and to Leslie’s point, if we lose some of these very expensive contracts and we are bidding smart, our profit goes up and our revenue still goes up on other parts of outdoor. So you will see margin expansion. Thank you very much. You have talked on several occasions about leverage targets and to be fair you have been the only entertainment company to not just use free cash flow but also borrow to repurchase shares. At the same time at this valuation level, why not be even more aggressive now even 2X what you are doing? Also how quickly do you expect to ramp the new Viacom at the new Viacom to the leverage targets you outlined today? Is that a, as soon as possible target, a one-year target, a two-year target? When do you get to three times leverage at the new Viacom? Doug, its Mike Dolan. Actually we’re buying now about as many shares as we can. We are limited in terms of the amount of shares we can buy. We’re pretty much at the maximum that we can buy. Our intention is to be in the market early next year with the new program and out of the gates from day one. We have not considered a tender. But you will see us in the market when we go in today as aggressive as the law permits. I was wondering if you could give a little bit of detail on the expense growth at the cable networks just in terms of how much of that is tied to the new digital initiatives and how much is just normal development spending? And then the second part of that is whether you are able yet to start to quantify some of the contribution of all the digital initiatives, I guess specifically at MTV Networks? Okay well, if you look of our expense growth, first of all we’re not looking at our margins on a quarterly basis and we have at the cable networks increased our margins over the years. This year we projected we would be flat year-to-year, sort of in the low/mid 40s and we are on line to do that. This quarter due to some timing issues we’re not there. In this quarter alone, we’ve probably got $30 million in new business initiatives that account for the expense growth. That would include things like the full inclusion of Viva on a year-to-year basis. It is a lower margin business. We acquired it last year. That alone is about one margin point. We’ve got startup investments in LOGO, our gay/lesbian service; Nickelodeon Germany; other international networks; acquisition of various digital rights that we need to fully prepare ourselves for what we want to do in the digital world; startup and broadband services like MTV Uber, Comedy Central’s Mother Lode which I alluded to; MTV Overdrive and so forth. We have invested in a company in Japan called Flux that we started. It is entirely involved in wireless content creation and distribution. Put some money into Neopets. And so you can see the lion’s share of our incremental spending is going into these digital businesses and these are businesses where we see huge growth rates. Seen our advertising businesses in this category are up over 50% year-on-year and we are trying to create more avenues for content where advertisers can connect with our audiences. So we think it is probably the best place we can put our money and we are able to do so with a relatively small impact in terms of our margin. In terms of quantification, I think early in the year you said that something like the total revenue contribution was a triple digit millions number and I was wondering as Bob Bakker said at a conference, at what point can you update on how that’s progressing? I think when we, this is Mike Dolan. When we talk to you in December, Tom and I will be out visiting with a number of you and I think we will update you more specifically on that at that point. Hi thanks, my question is for Les. Les, you articulated that your company has kind of, been positioned as the slower growing one certainly relative to Viacom. But yet you have talked about reinvesting in new growth areas and I was just wondering if you can give us a sense either quantitatively or qualitatively where that investment might go? And also whether or not there are any assets that you might be interested in divesting of? Thanks. Well, you know what, the, yes we, in comparison to the new Viacom we will be the slow growth company. It is obvious the cable channels do grow considerably faster and higher than we do and we are the value company and that will continue to be a goal of ours. In terms of looking at acquisitions, we’re not looking for major investments; however we are looking for new media companies that potentially fit with what we are trying to do with our core businesses. As I mentioned before, everything that we do will stem from our content. So as we go out to look at certain acquisitions and most of them will be tuck-in acquisitions, you’re not going to see a major transforming acquisition at any point. We are looking toward our future and how do we expand the businesses that we are already in. In terms of divestitures, right now in terms of the profile of our new company, there is no great need to look to divest anything. The businesses all fit with what the profile of our company is and that is where we are right now. Thanks. I have two. One for Les, two part (indiscernible) to next Mike Dolan. I just want follow-up on Kathy’s questions. You recently said at a conference, Les that you’re interested in cable networks and there is a report that you’re interested in college sports. So, is cable networks part of the acquisition plan going forward? To kind of, pin you down on that? You know what, we are looking at everything. We look at everything. I don’t see us competing with the other side of the family. I don’t see us buying a music channel or a kid’s channel. If there is something that fit with some of the businesses that we are already in, we certainly would consider that. The cable business is a very good business and we like it. So we’re looking at everything that fits into what we do. Okay, and then following up if you could just isolate for me if you take out in this quarter syndication, which I know is a onetime and Showtime which is inclusive first time and a write-down, what would the core profitability be at television on kind of a steady-state basis? Yeah, I think if you take those out obviously the lumpiness of a syndication gain like on CSI is enormous. My guess is you would see us up at least 5 to 10 margin points higher, fairly significant particularly with the write-down of the two stations which we don’t expect to have that happen very frequently. Just on that point, we said a while ago that we were going to buy in key markets like Sacramento, which we are glad we do now because of California and we sold four stations. So just on the TV stations alone, our revenue will be about the same but our profits will be up probably $25 million by adding one station and selling four. As far as the syndication games, in ‘06 we have some coming up again with Star Trek Voyager, we hope to do well on that, second title of Frazier. So it’s just hard to pick which quarter they will be in, but clearly the quarter to strip out all the onetime stuff from ‘04 or the negatives ‘05, we’d have been much, much stronger. Fred, do you think you could change the reporting that way, basically maybe give us stations separately from syndication or network separately from syndication? No, I don’t think so. I think what we will try and do is illuminate the issues each quarter, so you’ll see the positives and the negatives, because unfortunately there is so much interconnection between the network to the production side to the TV station side that you have to look at it in total. That’s how Leslie manages the business in total. He looks at the total flow of revenue and the cost to get that revenue. It’s like the NFL, it’s like to get comp, all the other things that we do in the programming. So I hope to be able to give you a lot of clarity as to when there are these onetime pluses and minuses each quarter, and hopefully we can help you get back to the underlying base growth. I’d just end on the third quarter; it is much stronger if you strip out all the onetime. To add to what Fred was saying, it is real important that Paramount Television is now the major supplier for UPN and CBS. In addition, our syndication companies are feeding our stations and when you figure out deficit financing, you include what the cost is to the network as well as the cost to the production company as well as your future syndication revenues. So the models in television are very different than they were even five or six years ago. [Michael Nathanson] Okay, and then can I just ask Mike on free cash flow in the quarter, it was pretty impressive year-over-year. What was the source of the improvement? And is there any likely reversal in that quarter ahead? Well, yeah, in fact, Michael, I think it was extraordinary and we are delighted but a lot of it is timing related. And we think that we are targeting somewhere between 2.7 and maybe 2.8 for the full year. Thanks. Question for both Tom and for Les. Tom, can you talk a little bit about your outlook for cable network margins over the next couple of years? And Les, you talked a little bit about network scatter. I wanted to ask more of an industry question which is how you expect overall inventory to be as we progress through the season, particularly with regard to NBC and what they might do with the make good situation they are most likely in? Thanks. You know, if you look at the margins of our cable businesses, if you lump together MTV Networks and BET, it is really a basket of markets in a whole bunch of different types of business. On one hand we’ve got networks that are a bit more mature like MTV and Nickelodeon in terms of where their margin is. We’ve got several services that still have a lot of head room on the margin side, Comedy Central, VH1, CMT, Spike TV and so forth. There’s all our digital businesses that are growing at a very high rate that currently have very small margins. But I would say if you put the whole basket together and as we look at it over time, we’re looking at our margins being pretty much in the same range that they are now, sort of in the low to mid 40s. I don’t see any huge margin improvement over that. We’re not really focused on margins as a key driver of our business. We like to keep them in that sort of pocket if you will but that’s sort of the story. I don’t know if you want to add to that at all, Mike? We have a lot of conversations about this and I think to be kind of overly focused on margins may be the wrong approach to take. We would gladly trade off a decrease in margin for extraordinary growth in revenues that produced extraordinary growth in earnings and free cash flow. So I think you have to look at all the variables, revenue growth, margins, earnings growth, free cash flow as a piece rather than focus on just one item in the mix. Let me, I will talk about your scatter question. Specifically regarding NBC, it is sort of hard to tell right now. As I said, ABC and CBS are off to great starts for the fall season. Fox it’s too early to tell because they always have baseball that sort of comes in the middle so you can’t really tell where they are at until a little bit later in the season. NBC is a bit more complicated this year because they have the Olympics. And all sorts of scatter results involve the sale of the Olympics and when make goods are done and how they are doing it. So it is sort of impossible for me to comment on where they are in terms of that because I don’t know exactly where they are in terms of their Olympics sales. Thank you very much. Tom, my question relates to the entertainment business. It looks like the business is on track to have a record year in both operating income and EBITDA, depending on how the fourth quarter obviously goes. And that reflects the dual benefit of the library and home video as well as strong theatrical performance. As we look into 2006, I was wondering if you could shed a little bit of light on both of those factors? We are assuming you can potentially grow your home video business in the mid teens where for most studios we have no growth and that is predicated on two things, one maintaining your box office share; and two, continued sizable releases from the library. So, if you could comment on your slate so we can get a perspective on the box office share and also the number of releases you’ll have in ‘06 versus ‘05 from the library in terms of units? Thanks. Okay, Anthony. We are looking at, turning around the studio takes a bit of time. We’re probably looking at a total amount of releases from Paramount next year in the 12 to 13, maybe 14 range, lower than usual. But we have got some great titles in the mix. We have got of course Mission Three that is going to open in May with Tom Cruise, Mission Impossible Three. We’ve got the still untitled World Trade Center project with Oliver Stone. It stars Nick Cage about the last two policemen to be taken alive out of the World Trade Center on September 11 and it is really a great, compelling story. I think it is going to connect very well. We’ve got a CGI animated movie called Barnyard that’s directed by Jim Oedekerk. Charlotte’s Webb, which stars Dakota Fanning and has Julia Roberts. We’ve got a comedy, it will be for a summer releases called Nacho Libre, which is about a cult of Mexican wrestlers. It stars Jack Black. So there is a range of titles. We are hesitant to really increase the size of the slate just to put movies out there for the sake of it. The slate is going to be pretty much back-loaded to the last three quarters of the year and what that means is that in terms of our home video business while we see great growth in terms of the category and we still have a lot of titles to release, our DVD business for the first half of the year anyway is not going to be probably everything we want it to be. But the studio is very much on a track for this reinvention I talked about. We’re moving towards this multi-label strategy there and feel very, very confident that we are on the right road at Paramount. Great. Then, if I could ask one other additional question. Both Les and Tom, you commented on the ad environment for cable networks and broadcast television as well as TV stations being very positive. And then I look at the guidance for a full year and you’re still guiding to mid single digit growth, which applies in the fourth quarter just around 7, 8% growth. Why not be more bullish about the fourth quarter outlook given the visibility it sounds like you have? This is Mike. I guess we are at this point just trying to be a bit conservative and to really make sure that we deliver the goods. And at this point the early signs are good, but I think we’re happy with the guidance that we have given. Thank you all very much for joining us for our last conference call as the old Viacom and we look forward to talking to you as separate companies next year. Tim and I will be around for questions.

EarningCall_233851

Here’s the entire text of the Q&A from Williams Companies’ (ticker: WMB) 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. Questions in regards to the dividend -- is there any plan, you know, over the long-term? Is there any sort of guideline that you have, how you want to grow it? Nicholas, we've certainly not provided any specific guidance but certainly it's our intention to continue to create value for shareholders in a variety of ways. Certainly, the dividend is one aspect of that. So, we will endeavor to maintain that competitive dividend and one that makes it interesting for shareholders. The absolute amount is a function of business opportunities, credit metrics, as well as what we're trying to achieve for our shareholders. Okay. Then on the production guidance, are your production from the Highlands area or the Trail Ridge, Ryan Gulch (indiscernible) midpoint, is that in your production guidance as well? Yes, we're now starting that development. But as you know, there's not much in the guidance yet for '06, because we've just drilled a handful of wells in all of those areas. But going forward '07, and then you'll see in '08 when we give out '08 guidance, really the full impact of more drilling in the Highlands. Okay. On the liquidity, you talked about how, as of 9-30-05, you have to post $1.7 billion -- or $1.7 million in total letters of credit. Related to the E&P operation, it looks like you have $1.145 billion of letters of credit posted over there. What's the total volumes at E&P that are requiring those letters of credit to be posted? Okay. On the Power side, can you talk about, with regard to the deals, what kind of capacity payments are implied in some of these deals in the West and maybe on the East? What kind of fuel risk you might have with some of these deals? Yes, we really can't comment on the specific pricing of the deal. Basically, what Don was described earlier, we previously had for over-the-counter instruments that we used to hedge our position, sell power forward kind of block sales, buy gas forward. These hedges being resales of toll are the most effective hedge that we can put around our tolling agreements and that we basically just market a premium and sell it to the counterparty. So, we really have no fuel risk associated with the sales we made going forward. Good morning. I had a few questions across a couple of businesses. The first question is high-level, but I wanted to understand, Steve and Don. The three businesses are performing exceptionally well, and the balance sheet looks very good, the cash balance over $1 billion. As we model out cash flow out through '07 and '08, the cash balance is going to build into '07 and '08. So I guess my question is, in terms of return of capital and just a little bit too Nick's question at the beginning is how much cash is going to have to be maintained as long as you have the power business in order for you guys to feel satisfied that you have enough assurance? In other words, as also a lot of these risk-minimizing transactions get done in Power, does that free up any cash that might be able to be returned to shareholders? I would say that the cash balances and the liquidity needs are primarily a function of our E&P hedges, more so than the power requirements. Certainly, when we return to investment grade, the cash and liquidity requirements will be reduced sharply. But you know, that isn't something that's on the near-term horizon. We also -- as you modeled, you see a very substantial build in cash balances; we also see it -- I think, as we mentioned, a very substantial set of opportunities in front of us for reinvestment in our core business that we believe has attractive returns and moderate to low risk. So we're very much focused on putting that cash back to work to create EVA and further value for shareholders. So, Don, is it fair to say that the majority of the free cash -- I mean, the free cash before growth CapEx is very high; we had modeled probably $2.50 per share as you get into these out years. But it sounds like a lot of that will be going back into projects where you feel you have a return on capital in excess of your cost of capital, more so that necessarily returning cash. That would be the primary focus. Again, we have enormous E&P reserves; we like to drill them up even faster. We've made great progress there. We have terrific opportunities, both in Midstream and interstate gas pipelines, and we think we can see some really terrific opportunities in those areas as well, so that would be first and foremost. From a credit standpoint, that would do a lot more for our credit as well than returning cash to shareholders. We need to continue to drive higher and higher operating cash flows in order to return to investment grade. Okay, I understand it better now. On E&P, Ralph, I had a few questions. You talked about F&D costs. When you look at the increase in the cap budget -- CapEx budget for the next few years -- is you guys are becoming more efficient in the Piceance and so your drill times have come down and your unit costs, per-unit costs are actually doing pretty well in spite of all of the inflation out in the oilfield. But how much of the capital spending increase is due to anticipated inflation? If you were to quantify that on F&D costs as you buildout into '06 through '08, what are you guys modeling the anticipation of Finding and Development cost inflation per-unit? Well, on the CapEx increase, of the roughly 200 million that we're going up, about half of that was due to increased industry costs in '06 and not quite half in '07. Modeling going out -- there will be an increase but it's slight and I don't have that exact answer to you, Scott, but I think I can give it to Travis and we can give you some modeling numbers for that. But it's not increasing substantially at all. Okay, and just a second short question is regarding some of the deeper sands and the Piceance. Has there been any update on any discussions with private owners of those deeper sands down on the Cozette (ph) and the Corcoran? No. I mean, obviously, we are interested in them. We know they are productive to the North and potentially productive in some of areas in the Piceance. They're not present in all the Valley but there's no real update. It's just that is probably an additional opportunity out there, as you know. Okay, and a real quick question for Alan. Alan, when you talked about more fee-based contracts, could you just give an update on percentage of contracts or whatever you think is the best way to frame it -- or percentage of revenues that are now less keep-hole (ph) sensitive and more fee-based or contract-based? Sure. The main adjustment -- and you can kind of see the increase primarily in the processing fee and the primary driver for that in the third quarter was we've recontacted our Cameron Meadows facility to almost all fee-based now, so that drove a lot of that. In the fourth quarter, you'll see some of that drop, perhaps, because of that facility being out now. But overall, and that is really one of the primary drivers in terms of the amount of our business moving to fee-based. You know, it's a big number, so it's moving up pretty slowly, but we continue to be at the average margin level; we continue to be at that 80/20 kind of range. Given the fact we are converting some contracts to more fee-based and obviously the deepwater fees are very large and continue to increase that, I think that will probably keep pace with some of the increased margins that we got, for instance, at the Opal facility. I would continue to see that move up very, very slightly because of those two balancing issues there. Ralph, if I could hit you again on the basis issues, I think, in the appendix, you guys are assuming 3 to 360 in the fourth quarter as basis, and then I think you said you see that coming down to around $1 in '06/'07. Can you just go through the drivers there, what you think will bring that down in the short and medium-term? Well, I think the $3 or so that we are modeling in the fourth quarter is due to $13 gas prices. What we've seen historically and what we've seen currently even this year, when the prices are more in the $8, $7 range, we see the basis coming down into that $7 range. So it's just our experience and what we've seen. I don't have any updated gas flows or anything like that for you, but currently, the basis we've modeled for the fourth quarter is off of actual markets. The basis for next year and the year after is based on an assumed market, which would drop substantially below what really is going on right now. So, to the extent the market doesn't drop, then we would assume the basis would stay also high. I got it. One thing you mentioned I think in your prepared remarks is I think you mentioned booking 100 Bcf. Was that just related to the Highland properties, or is that kind of an early estimate of the overall adds? I got it. Great. If I could just move onto Don, maybe, just to comment on the collateral slide beyond the 1.8 billion or so that you have posted now -- if there's a follow-up slide that says, under certain stress conditions, there might be another 900 million that's looking to be posted. I think you guys said 1% chance of that. Can you just add some color around that? It is Andrew. What that would look like, probably as of 9-30, would be a gas price in the fourth quarter around 23 to $25 in the front month and then that would have a correlated price decline over the period of our hedges that are marginable out into the future. So, as we've stated in quarters in the past, you take that front-month equivalent number in that range and then you kind of -- that might equal a number in the next month of 18 to $20. That's just a historical correlation -- so from extreme price volatility but you're starting on a basis at the end of September of $14 gas. So that's why the number is so high. To ask that another way, is the collateral that's posted now kind of substantially lower as gases pull back into this mid-$11 range? Okay. While I have you, maybe if we could just go through some more detail on the power business. If I noticed correctly, there was a $378 million gain that didn't flow through the income statement but went straight to OCI. I think, Don, you mentioned that the Power book -- part of the driver of the mark-to-market hit was a short gas position. Can you just talk about that? Is that a recent position you guys have entered into, hedging out the gas that perhaps you are now estimating you won't be using? Is the 378 on the OCI side a function of kind of legacy positions that you have on that gas book within Power? This is Don. I will say a few words and then I will have Andrew or Bill follow-up. Again, overall Power seeks to maintain a balanced book of derivatives. However, the intricacies of FAS 133 oftentimes don't allow some of those hedges to qualify for hedge accounting. As we noted in our press release, if you look in the Power section of the press release, in anticipation of some of these new multiyear deals, we canceled out some of the prior Power sale hedges, the forward hedges and the related gas purchases. Those cancellations of some of the prior hedges did not qualify. So again, the book was not short gas in total, from an economic standpoint, but in terms of the hedges that did not qualify, those positions which canceled out prior gas purchases did not qualify. So again, we have an apples-and-oranges situation here as a result of the intricacies of FAS 133. We work to continue to qualify such transactions for hedge accounting, but in the third quarter, as a result of changes in positions to accommodate these new deals, we were unable to qualify all those economic hedges under FAS 133. Andrew, any --? No, that's right. I think the important point to note is that the overall book -- if you take the OCI deferral plus the mark-to-market, you're talking about the overall economic book of hedges, so we wouldn't look at it as some were legacy, some were new; these are ongoing business to manage the forward Power sales we have around all of our tolls. That position changes, as Don described, on a daily basis as we manage to reduce the risk within the portfolio. So the overall book went up $200 million or more in value on the gas hedges. It's just that the accounting rules required some of that to be deferred and some of that to go through income, because of the reasons that Don talked about. All right, so if I'm -- well, just to follow-up, Don, you're basically saying that the overall book, from a gas supply position standpoint, is still net long and that is partially flowing through the OCI gain and not through the income statement and then a portion of that, if you will, legacy long position, has been closed out as you guys enter these other resale of tolling-type contracts? This is a question for Steve. Steve, we've been shareholders of the Company for a long time and through the financial trouble earlier in the decade and, you know, now looking at three of the four businesses growing pretty spectacularly. Looking specifically at the E&P business, the true value of this business, through my numbers, looking forward, is absolutely spectacular. I believe that some of this value and the true value of the reserves are being masked by obvious issues in the Power business. Have you and management and the Board ever looked specifically or discussed specifically at some sort of value asset spinoff of the E&P business to unlock the value or some sort of transaction to that nature, so that the true value of what I see and the NAV of the Company looking forward can be unlocked? Yes, thanks for the question. We have looked at that in some detail. You know, we have -- particularly given where we've been, we have looked at the options of selling each of our businesses and in some detail. At this point in time, I believe very strongly that most shareholder value can be created over time by continuing with the integrated model. So, who while we remain open-minded and we will continue to evaluate the issue and question, at this point in time, we like the model that we are pursuing today. Good morning, guys. I actually had most of my questions answered, but I had one left. I was wondering if it was possible if you could provide a little bit of color with respect to market interest in tolling resales beyond 2010 in the Power business. Well, currently, we don't have any resale to polls going beyond 2010. We have our offtake agreements off to mask Alabama position with the Georgia EMCs. Currently, the market is most active between now and 2010. My own perception of that is, when you move into 2007 and 2008, people will be contracting out to 2012 and 2013. We are always pushing to try to sell beyond 2010, but obviously we can only do what our customers are anxious to do. It appears there are no further questions at this time. Mr. Malcolm, I'd like to turn the conference back over to you for any additional or closing remarks. Well, thank you for your interest and your patience today as we went through our slides and our story. We are very excited about the progress that we've made, the growth that we've generated, and are excited about the future and look forward to talking with you next time. Thank you. 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_233852

Good afternoon, ladies and gentlemen, and welcome to the American Oriental Bioengineering Third Quarter 2005 Earnings Conference Call. At this time, all lines have been placed on a listen-only mode for the duration of today’s conference. It is now my pleasure to turn the floor over to Hayden Communications to read the introductory statement. Chris Donnelly: Thank you, and welcome everyone to the first earnings conference call for American Oriental Bioengineering. Today we will be discussing the 2005 Third Quarter Financial results. Today’s press release announcing these results has been posted to the appropriate news wires. On the call today is Mr. Tony Liu, Chairman and CEO of AOBO, as well as Miss Lily Li, COO and acting CFO, who are both with us today. For simplicity, all percentages will be rounded to the nearest percent. Today’s call will be a presentation by management and will not include a Q&A session. Given that Tony and Lily are not in the same office and that there are some language barriers, we believe that it is in the best interest of time to utilize this format. We do plan to incorporate a Q&A allocation for future quarterly calls. In addition, please feel free to contact Hayden Communications at (843) 272-4653 with any investor related questions on a go-forward basis. Before we get started, I’d like to read a cautionary statement about forward-looking information. The presentation may contain, in addition to historical information, forward-looking statements within the meaning of Federal Securities laws regarding American Oriental Bioengineering. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical fact. These forwardlooking statements are based on current management expectations and are subject to risk and uncertainties that may result in expectations not being realized and may cause some actual outcomes to differ materially from expectations reflected in forward-looking statements. Potential risks and uncertainties include product and service demand acceptance, changes in technology or economic conditions, the impact of competition and pricing, the impact of government regulation, and other risks contained in statements filed from time to time with the Securities and Exchange Commission. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressively qualified by the cautionary statements and any other cautionary statements which may accompany the forward-looking statement. In addition, the Company disclaims any obligation to update any forward-looking statement to reflect events or circumstances after the date thereof. Because forwardlooking statements are subject to risks and uncertainties, we caution you not to place undue reliance on any forward-looking statements. Forward-looking statements made during the presentation speak only as of the date of this presentation. All written or oral forward-looking statements by AOBO or persons acting on behalf are qualified by these cautionary statements. With that out of the way, I’ll turn the call over to Hong, who will speak on behalf of Mr. Tony Liu, Chairman and CEO. Hong? Hong: Before Tony Liu speaks, I would like to explain that Tony, a very experienced founder and the CEO of the Company, does not speak English. Therefore, he will speak Chinese, and I will translate or voice over to the public. Tony Liu (translated by Hong): Thank you, Chris, and thank you, everyone, who joined us today. It’s a pleasure to present AOBO’s first conference call to discuss quarterly earnings results. We believe regular conference calls to discuss quarterly earnings is an appropriate step to allow our shareholders to have greater transparency and insight into our operations here at AOBO, by hearing directly from senior management. 2005 has been an exciting and eventful year thus far for AOBO, as a number of positive developments have unfolded. We are very proud that in the last ten years, we have grown from a start-up in 1994 with about $100,000 of revenue to become a leading manufacturer of plant-based pharmaceutical products and plant-based nutraceutical products for the rapidly growing Chinese market. We generated sales of more than $31 million during 2004 and have seen our sales increase at 46% compound annual growth rate over the last three years. We operate in a large and growing market. We estimate that the total pharmaceutical and nutraceutical market in China was approximately $62 billion in 2004. Demographic trends in this market are favorable, as the Chinese population continues to grow and age and economic expansion in China creates wealth, which serves to increase the number of citizens who can afford healthcare. With the total market for pharmaceutical products in China, herbal and plant-based pharmaceutical remedies and products have an extensive history. Many Chinese consumers and doctors rely upon the use of plant-based products for treatment of a variety of different ailments, consistent with the Eastern philosophy of health and wellness. Our headquarters and manufacturing facilities are located in Harbin, China, a city with a population of approximately six million, in one of four pharmaceutical corridors in China. We utilize four proprietary technologies for manufacturing products, which provide both cost and quality advantages compared to many of our competitors. We currently have more than 100 products in our portfolio, all plant-based in formulation divided into two key categories: plant-based pharmaceuticals and plant-based nutraceuticals. PBP is the larger of the Company’s two divisions as a percentage of revenue. PBP products in China require approval from the state FDA and are administered both through over-the-counter locations and through prescriptions at hospitals and clinics. The two largest products in the PBP category are Shuanghuanglian Powder Injection and Cease Enuresis Soft Gel. SLPI, our largest contributing product, as a percent of total revenue is one of the only two PBP herbal injections approved by the China state FDA for treating anti-viral indications. SLPI has been approved by China state FDA for treatment – selected by China state FDA for treating SARS during the SARS outbreak, although a definitive decision of efficacy of SLPI for the treatment of SARS has not been determined. Cease Enuresis Soft Gel is approved by the China state FDA as a prescription remedy for chronic bedwetting and nighttime urination. PBN is the smaller of the Company’s two divisions. PBN products are not licensed by the China state FDA, but they generally require local government approval and are typically sold over the counter at the retail outlets. AOBO’s PBN division products soybean peptide products in powder and liquid forms. Soybean peptide is a cholesterol-free energy-boosting protein source that enhances the immune system and has anti-fatigue benefits. AOBO also produces a line of nutritional products through the PBN division, including the Three-Happiness nutritional drink, which are rich in vitamins and amino acids to enhance well-being and to provide energy The Three-Happiness product line is a recognized retail brand name in China. We are very proud of the success we have had in growing both our PBP and PBN businesses. For the nine-month period ended September 30 th, 2005, we reported growth in total revenues and total net income of 81% and 85%, respectively, relative to the same nine-month period in 2004. During 2005, we have considerably improved our balance sheet and have successfully integrated HSPL, the acquisition we closed in the fourth quarter of 2004, which has expanded our product line, expanded our geographic customer footprint, and enhanced our channels of distribution. In addition to a number of positive strategic developments achieved for the business, AOBO was listed on the American Stock Exchange, and in November we received approval for a dual listing on the Archipelago Exchange, accomplishments that we believe will enhance the Company’s profile with U.S. investors. The Pacific Exchange also announced this month that AOBO options will begin trading during November 2005. We are very proud of these achievements and believe AOBO is well-positioned for the next stage of growth and profitability. Our continued strong performance was again the highlight for the third quarter. We achieved record quarterly revenues of $13.4 million and net income of $3.7 million, or $0.08 per weighted average full-diluted share. The Company completed the redemption of its class “A and “B” warrants related to the November 2004 private placement, which added more than $11 million in cash to our balance sheet and increased AOBO’s total cash position to just over $19 million. In addition, we opened our first and only specialty store, Life Peptide store, as a showcase for our plant-based nutraceutical products and a means to penetrate the Hong Kong market from both a branding and a product education perspective. This is in addition to the more than 100 independent retailers or retail stores who are now actively distributing our products in the region. We are extremely enthusiastic about expanding our addressable market and product line and implications for the Company’s prospects going forward. I’d like to ask Lily Li, our COO and Acting CFO, to reveal our quarterly and year-to-date performance in more detail, and I will follow up with some closing remarks. Lily? Lily Li: Thanks, Tony. For reporting purposes, all financial results are stated in U.S. dollars. For the third quarter, we reported revenue of $13.4 million, an increase of 82% compared to the 7.4 million reported for the third quarter of 2004. Excluding the revenue contribution from the HSPL acquisition completed in November of 2004, organic revenues grew 24% for the quarter compared to the third quarter of last year. Plant-based pharmaceuticals represented 8.6 million or 64% of the total revenue, an increase of 174% compared to the third quarter of 2004. Revenues were partially impacted by continued strong sales of our Shuanghuanglian Power Injection acquired from HSPL in November 2004, which contributed 4.3 million or 50% of the division revenue, and the Cease Enuresis Soft Gel product, which contributed 3 million, representing 35% of divisional revenue. The plant-based nutraceutical division, which is primarily our soy bean peptide product, represented 4.8 million or 35.7% of total revenue, and it was up 13% versus the comparable 2004 period. Benefiting from increased marketing and field efforts to promote the benefits of this product, our Peptide product, our largest-selling product, grew in this division and represented 3.1 million or 65% of divisional revenue. Total cost of goods was 4.9 million, an increase of 102% compared to the 2.4 million from the same period a year ago. Gross margin was 63% for the third quarter of 2005 compared to the gross margin of 67% for the third quarter last year. Higher costs associated with the manufacturing of HSPL product was responsible for the decrease in gross margin. Results during the third quarter 2004 did not include any contribution from HSPL. Total selling and marketing expenses were 850,000, up 67% from 508,000 reported for the third quarter in 2004. Advertising expenses were 757,000, up 4% compared to 729,000 in the comparable period in 2004. General and administrative expenses were 1.9 million, up 117% compared to 893,000 for the comparable period in 2004. Total operating expenses were 3.9 million, an increase of 69% compared to the 2.3 million reported for the same period last year. The increase in total expenses was related to the HSPL acquisition, as well as an increase in costs necessary to support overall growth within our operation. Total continuing operating expenses as a percentage of sales for the period was 29% compared to 31% for the comparable period in 2004. We reported income for operations of 4.6 million, an increase of 75% compared to the 2.7 million for the comparable period last year. Operating margins were 35% during the quarter, compared to 36% during the third quarter 2004, with the decrease due in part to the impact of the integration of HSPL operations. Net income was 3.7 million or $0.08 compared to net income of 2.2 million or $0.07 for the third quarter last year. This represents an increase in net income of 66%, despite a higher effective tax rate of 23% for the third quarter 2005 versus 17% during the comparable period in 2004, as well as a 34% increase in our weighted fully-diluted share count, all 44,076,235 shares used to calculate earnings per share. For the nine-month period ended September 30, 2005, we announced revenue of 35 million, an increase of 81% compared to 19.3 million reported for the first nine months of 2004. Our PBP division reported 22.1 million in revenue, up 112% compared to the comparable nine months of 2004. For the nine months, 10.9 million of the revenue growth was contributed by Shuanghuanglian Power Injection, or approximately 50% of the division’s revenue, and our Cease Enuresis Soft Gel products contributed 7.3 million or 33% of the division’s revenue, representing 53% growth compared to the yearago nine-month period 2004. Our PBN division reported revenues of 10.9 million, up 13% as compared to the comparable nine months of 2004. The Peptide product line generated 8.1 million representing 63% of this division’s revenue, representing 8% growth compared to the year-ago nine-month period 2004. Total cost of goods were 12.7 million, an increase of 109% compared to the 6.1 million from the same period a year ago, resulting in gross margins of 64% for the nine-month period of 2005 compared to gross margin of 68% for the same period last year. Higher costs associated with manufacturing Shuanghuanglian Powder Injection contributed to the increase in cost of goods sold. Selling and the marketing expenses were 2.1 million for the nine-month period, up 34% compared to the 1.5 million for the same period last year. Advertising expenses were 2.2 million, a decrease of 8% compared to the 2.3 million. General and administrative expenses were 5 million, up 80% compared to 2.8 million. Our total operating expenses were 10.1 million, an increase of 43% compared to the 7.1 million in the prior year. Operating expenses as a percentage of sales were 28.9% compared to 36.8% during the comparable nine-month period in 2004. AOBO reported operating income of 12.1 million, up 99% compared to the 6.1 million in operating income for the same period last year, with operating margins increasing from 32% to 3% as the Company benefited – I’m sorry, 32% to 35%, as the Company benefited from higher yearover-year revenue and increased leverage of operations. Net income was 9.2 million compared to net income of 5 million, an increase of 85% which equated to $0.22 per fully-diluted share compared to $0.15 per fully-diluted share for the nine-month period last year. Turning to the balance sheet, we completed the quarter with 19.1 million in cash and cash equivalents, which includes the 11.2 million received from redemption of class “A” and “B” warrants exercises during the third quarter 2005. This compares to 11.4 million in cash as of December 31 st, 2004. The Company reported 3.7 million in bank loans compared to 5.1 million as of December 31 st, 2004. During calendar year 2005, the Company has generated 3.9 million in positive cash flow from operations, which has helped to improve overall cash position. Thank you. I will turn this call back to Tony for closing comments. Tony Liu, (translated by Hong): Thank you, Lily. As the AOBO story continues to unfold, we hope the progress we have made in growing and diversifying the business becomes more evident. We believe this is just the beginning of the AOBO story, as we build upon our momentum. We own a very recognizable brand in China with our Three-Happiness nutritional beverages and the soy protein peptide line, and we have developed and own two growing products within the PBP market, all of which will benefit from further market penetration and expansion. We have a clearly defined two-pronged growth strategy. We seek to grow organically by focusing on new product development and expanding the application of PBP products. This strategic component involves further penetrating existing markets, capitalizing on the favorable macrodemographic trend I spoke of, and expanding our established distribution network. We currently have more than 10,000 points of sale, and our recent move into the Hong Kong market commences a key next step to leverage our recognized brand identity for our PBN products outside of mainland China. We will also seek to grow through acquisition and believe we have numerous opportunities to consolidate a fragmented industry with many small regional and (inaudible) players by purchasing proven products and incorporating them into our large and growing distribution network. AOBO is well positioned to capitalize on opportunities created by the privatization of Chinese state-owned enterprises by acquiring strategic assets to broaden our product platforms, utilize our distribution network, and elaborate our strong brand reputation. This was a brief overview of AOBO, and I hope during the coming year we will have the chance to meet with many of you and provide a more in-depth look into our business. In summary, this was an exceptional quarter for AOBO, and we are excited about the future. We would like to thank both our shareholders and employees for their continued support and dedication. Thank you, again, everyone on this conference call. Operator: Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

EarningCall_233853

Here’s the entire text of the Q&A from Time Warner’s (ticker: TWX) 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. Thank you. At this time if you’d like to ask a question please press “*”, “1”, you will be announced prior to asking your question. To withdraw your question you may press “*”, “2”. Again to ask a question please press “*”, “1”. One moment please. Vijay Jayant of Lehman Brothers, you may ask your question. Thanks. I have actually two questions, if I may, both for Don. Can you just talk about the materiality of the US, Attorney General’s investigation on your circulation practices in publishing? And second, backing, on AOL, backing out search and advertising.com growth figures suggest that branded advertising was up just about 6%, and if that is correct, why is it lagging the industry? Thank you. Well, the first question is that just to respond to the Attorney General or whoever it was that’s investigating us, I’m not sure exactly what you are asking is it, but if you recall is it a couple of, a few months ago there was a couple of agents that were doing something that many of the publishers who were getting subscriptions from them had to discount and not allow as paid circulation. Time, Inc. really wasn’t affected by that, we really had almost none by those agents. But also, because there was some newspaper activities going on that had been investigated; I think it came as a result of that. And they’re looking at public place and some subscription agents that supply circulation to magazines, some of which the audit bureau circulation is already in the process of changing rules in order to deal with. So, from an overall perspective, we don’t think it’s significant and not a big deal for us. We are cooperating with them and that’s about all we need to say about it. Second question was on, that was on AOL. When you strip out the search and you strip out advertising.com dot traditional, you see traditional advertising growing at a slower rate based on, and what’s driving that? We have been pleased with the performance of our advertising results at AOL. One of the things that you have to remember is that a large segment of the inventory that we sell comes from our narrow-band subscribers, and as those declines run off, the first thing that we have to do is replace that inventory before we even start to have any kind of growth. So the fact that we are growing at the levels that we have is that, we’re very pleased. The reason that we’re starting aol.com, which just launched and is beginning to bring in traffic, is so that we’ll have inventory that we can monetize, we’re just now in the early stages of that. But now we feel very good about where we’re at. We think that we’re going to stick by our statement, we’re going to grow at market rates, we believe. Thanks and good morning. A question for Jeff, can you just talk a little bit about how you are seeing the DVD market? If we calculated the numbers right, it looks like your year-to-date DVD revenues were actually up 19%, which seems like it’s significantly outpacing the overall market. How much of the growth is international, I guess, versus US, and what does that number look like when you include VHS? Thank you. Thanks, Spencer. I’m not going to forecast or separate domestic from international, specifically. Generally, the international revenue has been quite strong on DVD. Overall, Warner Brothers DVD growth this year worldwide has definitely outpaced the total market. There’s a lot of concern and a lot written about where the DVD market is going. It is still growing, in general. It is slowing more in the United States, in terms of that growth, than in international, where the growth is holding up. But, as everyone expected, it is maturing. But, as you, as you stated in your question, Warner Brothers performance this year has been very strong, given our release slates that are going into the DVD window, both domestically and overseas. Hi, thanks. Two questions, the first one is for Dick, Dick, recognizing that there is a limited amount that you can or are willing to say regarding the discussions that you are currently having with AOL, could you help us understand how a partnership might help strategically increase the value of the portal business or of the entire AOL division, in light of the fact that you’d be giving up, what sounds like a substantial part of the equity? Help us to delineate, what’s the focus here? Is it more strategic or is it more financial? In other words, trying to unlock value or get an appropriate value for the AOL business? And then the second question, a follow-up for you, Jeff. In light of the fact, you’re saying DVD sales are slowing in the US, if the trades are right, Warner Brothers is about to cut staff by about 5% for the first time in a couple of decades. Does that portend a significant slow down in your expectations for DVD sales for next year? Thanks. Yes, Kathy. I’m afraid I am not going to be able to help you too, too much, because I’m not obviously, going to comment on the specifics of any of these discussions we’re having with various folks. But let me say this, what we said is it’s a priority for us to accelerate the transition to this audience based business of our AOL business model. It doesn’t mean that we are going to give up on the subscriber business. We’ve recognize that the secular trends are really favoring growth in online advertising, and we think AOL has what it needs to sort of get there on its own. The question is whether either through an enhanced relationship on the technology side and/or through enhanced relationships to drive more traffic, to the sites that AOL has and controls, we can accelerate that transition. And that’s what we are exploring. And I really can’t go beyond that at this point in time and give you any color as to, as to what a potential transaction might look like, because it may be none or it may be one. We’ll just have to wait and see how things develop and we will let you know. As a general proposition, however, I will tell you that this management and this board tend to be more strategically oriented than financially oriented. I mean we are trying to do things that are going to create value for the long-term. So you can always think of that as a prism through which to evaluate whatever we do. This is Jeff. You asked about Warner Brothers layoffs and also the overall outlook. We, I think you mentioned it was the first time they’ve had cost cuts in 20 years. That’s not really true. We do this every year. We are constantly reorganizing, certain departments being combined with others and so forth. This one is a bigger cost and reorganization effort and it has to do, really, with the digital transition in a lot of markets, not just DVD, and also with the slates that you have from year-to- year. And I think you’ll find, as you look at all the other studios, that there are going to be similar pressures on revenues and costs throughout the business. Some of it is slowing, is growth in DVD slowing, and that means that it’s still growing, it’s just growing more slowly. And that slow down in growth rate is definitely more happening in the United States because it’s more mature, whereas international seems to be going along pretty well and possibly will be keeping the pace that it has next year. So for Warner, it’s a continuation of trying to streamline for the future. You also read last week that we have created a new home video and home digital distribution arm, which essentially brings on line and home video physical distribution together, all of which is positioning us for the future. Operator? Thanks, Kathy. Operator, also, we go to the next question, but also remind the folks asking to limit themselves just to one question, so we can get some more folks. Thank you very much. My question relates to the AOL division. It looks like aol.com is really getting strong traction in top 200 advertisers, just based on our tracking of the site. Obviously, your advertising business is not growing on par with the industry. If you look out 2006, 2007, when do you thinking the leaky bucket syndrome stops, in that the growth today of aol.com can offset subscription revenue declines and lost inventory with inside the walled gardens, so we can start to put a framework around when that business can return to top-line revenue growth? Thanks. Well, we don’t even look at our business quite that way, because one of the things we’ve been talking about is the separation of the way that we look at the two pieces of our business, And one of the reasons we’ve been trying to get the focus off the net adds and things like that is we told you that we wanted to manage our narrow-band businesses for long-term profitability and match our cost to the scale of the business. And then, as we migrate some subscriber relationships into a broadband environment, as if it, we’re going to aggressively pursue all of those, and the pace and the timing at which that changes revenue, it will be what it will be. But what we’re really focusing on is playing in this fast growing market, where we believe it’s going to be growing at substantial rates for a long time to come, and moving our resources and our efforts and our energy over into, into achieving that. And one of the things we want to do for you on a go forward basis is to provide you with the metrics for success so that we can tell you how we’re performing and how we’re doing there, over time. And I think we are competitive. We do have the inventory offset that we talked about a little earlier to overcome. Because we are getting traction, aol.com is getting more profitable. You know, aol.com was the first site that was really developed as it for the broadband world, and if you go out and visit it, it’s got a lot of neat, interesting things that are video related that make it unique and different from the other sites. And so, we think it’s going to do very well at attracting traffic and, therefore, our numbers will go up. But we want you to focus that, as opposed to balancing the two revenues streams. We’ll try to separate those enough for you, so that you can get some insights into how we are performing. Yeah, hi, thank you very much. A question for Jeff. Just wondering if you could elaborate a bit on the advertising market? The numbers at Turner, particularly, looked strong, impressive. And just wondering if you could talk about scatter market conditions, what you feel like the ad market’s looking like here in the fourth quarter, as well? And maybe if you could mention trends, advertising trends at CNN, and also any thoughts on the WB network, right now? For the fourth quarter, scatter is pacing ahead of last year. It’s up double-digits at our Turner Entertainment Network. And on the news side, the hurricane coverage at CNN held CNN, off in terms of ratings, viewer ship and revenues versus last year’s election, which was a very good performance for CNN. At the WB, the fourth quarter scatter is slow and steady, but not particularly increasing. And that is essentially in line with most of the other broadcast networks. So back to Turner, I think you asked about ratings. TNT is holding the number one position in primetime for 18 to 49 adults, or 25 to 54, which is terrific. TBS for the third quarter has the top four sit-coms on cable, ‘Friends,’ ‘Raymond,’ ‘Sex and the City’ and ‘Seinfeld.’ Cartoon is doing very well, number one in primetime, number two total days. And the adult swim portion of Cartoon, which is at night, is really increasing in ratings and is way and away number one for adults 18 to 34. CNN on ratings is up 60% in total day. Headline is up 40% in total day. So, it’s a fairly strong and fairly steady performance on our ad-supported networks. Thank you. Historically when discussing cable system margins, you’ve often indicated the lack of margin expansion was primarily due to high programming cost growth. This quarter, programming cost growth slowed to 9%, while revenues accelerated to do 13% at cable. So, if you exclude the $21 million of unusual items you note in your press release, margins were flat this quarter at cable. So the question is, can you walk us through what parts of the cost structure or what service investments are holding back margin expansion now at cable? And perhaps indicate what the margin impact has been for those investments and would you expect cable to return to margin expansion in 2006? I assume you want me to answer the question or make a stab, an attempt at it? If you exclude the one-time items, we had a strong quarter still, as you’ve indicated that we’re very pleased with the growth that we’re getting in all of the new services that we’re adding on. One of the things that, that has, maybe, reduced that somewhat is our great results with our phone business. We’ve told you first year our VOIP services are sold at a loss, that by the time they’re installed and all the other things, there’s a slight loss attached to them. We breakeven in the second year and we become profitable in the third year. The great success we’ve had with that we think is a very good thing, so I think that’s probably what you’re seeing. Then still as the base grows, should we expect margin expansion to return for cable in 2006 or is that a 2007 event? It depends on the rate of growth that VOIP gets, that we, we add subs next year, because as we add them on, it’s, again, remember first year they’re a loss, so I can’t predict the pacing now. We don’t want to give any guidance on that. We also have Adelphia coming in, where we’re going to be spending a lot of time bringing them into the fold. What we’ve told you and what we continue to believe is we’re going to accelerate our rate of growth after Adelphia comes in, after that first year, and that’s what you should focus on. Thanks. Concerning what they reported in the press, that there’s a mandate for cost-cutting across divisions and, I guess, corporate as well, is there some target and will the impact be entirely in ‘06? Well, I don’t know what report you’re referring to, Jessica, because I haven’t had a chance to read the paper. But, let me expand on something Jeff said a minute ago about Warner Brothers. We are focused all the time on making sure that the cost base is the right base to generate the revenues and the profitability and we want to expand our margins. So we are looking at that, probably got some reporters because it’s the budget season. We’re putting the budgets together. I am always banging on Jeff and Don about banging on the operating guys to make sure that we don’t, or that we fail to look at the cost side and so that buzz is in the air. You can just assume that, as an ongoing matter in this company, not just next year, but next year and the year after and the year after, cost is going to be, cost management is going to be a focus. Hi. Could you just give us some sense, when you look outside the AOL walled garden, give us a sense of where page views or time spent trends? I know it’s only been only several months since you launched the aol.com portal and focused on getting all of your sites outside the walled garden, but just give us some early sense of what you’re seeing in terms of traffic and time spent? Well, it is too early to give you any specificity. What we’ve done is we’ve given you, I think, lots of examples from the Live Eight concerts that were held, that were viewed by millions out on aol.com. Is it from, we’ve had some growth in traffic in Map Quest and others, as we’ve begun to focus on that. So there’s been growth but it’s a little bit too early to give you anything that you can use to do any projections from, but we’ll be, we’ll get that to you as soon as we have it. Beyond Map Quest, can you look at sites that were already outside the web? Are they seeing significant ancillary benefits or derivative benefits from all the other sites being outside the web now? Are you seeing circulation of traffic towards sites that have always been outside the web? Yes. A couple of things is that all of our music sites, for example, that were on AOL behind the walled garden that were moved out is not only have we maintained the traffic for our AOL subscribers, but also they have increased dramatically outside, as well. We’re also seeing a lot of our current subscribers access the aol.com site for e-mail and other things from work and other daytime locations. That has increased traffic via the aol.com site. We are seeing a lot of patterns that are changing but, overall, it’s increasing and it’s growing at nice rates, a little bit too early to predict actual numbers. Yes, thank you. For Dick, the news came out today about the wireless JV with you and three other cable operators and Sprint. Could you just give us an overview as to what this is going to accomplish for you? To us here to use a rough analogy, maybe a little unfair, it looks like this is to you what sells DVS would be for the RBOCs, glue for the package. Could you comment on that? Well, as you know, there’s going to be, I think it’s one o’clock or something like that, the cable guys and the Sprint guys are all going to stand up and speak to this, at length. So, I’ll just give you top line. It’s more than just more glue for the package. That is to say what I would call the fourth leg of what’s now a four-legged table, the fourth waive bundle of giving cable a wireless solution with utilizing Sprint infrastructure backbone. It is also, and this is the exciting part of it. I think, an attempt to begin to figure out how to really incorporate the wireless platform, not just into the communications suite but also into as a, as the third screen, so called, movie screen, television screen and now the hand-held portable screen for entertainment. And so what the industry has done is agreed to work with Sprint, first on an exclusive basis for three years, but it’s a 20-year deal, to not only cross-promote each other’s products so that we can use the wireless product and now have a four-way bundle, voice, video, text and wireless, but that Sprint can use and market our product to their customers, so that you expand the marketing effort, the marketing reach, the marketing dollars and the pool that you are marketing these products to. But, also to work together, to effectively invent the future in terms of using the wireless platform for, as an entertainment and information, as well as communication platform. And Don is going to add something. One of the points of our strategy for cable and one of the things that you are seeing right now in the great results and numbers was our push to add voice in and to make that a priority. And by doing that, we think it’s lifted all boats and that we’ve driven some numbers in net adds in a lot of other areas that have slowed down for us for awhile. We think that by moving very, very quickly, and by being able to offer wireless in the bundle is it will have that same effect and we will be able to keep those great results moving forward for some time to come. It is really is part of an offensive strategy, as well. Okay, thanks very much. I have one for Don. Don, in regard to AOL, there’s a report recently of some employees laid off at AOL. At the same time, you referenced to the bulk of the network costs are now over. When you look over the next year, can you dimension for me the sizing opportunity to take out other fixed operating costs at AOL and whether there’ll be more restructuring charges needed to do that? What we told you is we were going to manage our access businesses for profitability. We were going to go only after subscribers who added positive life-time value, but we were also going to migrate a number of those over to our broadband business, and that we were going to manage our costs, so that they were in line with the scale of our overall revenue stream. And that those costs, the big buckets were network, the big savings over the last couple of years and that we are experiencing this year where we renegotiate a contract and change rates, most of that goes away. It becomes volume related on a go forward basis. There’s still some savings there, but it will be less. We still have marketing savings. As the scale of our businesses changes, it will be savings there, which we will be going after. And also on the customer service areas, we have fewer customers as we have to match up. So you can’t do all those things on like a day-by-day basis or month-by-month basis. You have to do it in clumps. Part of it is in anticipation of the drop, part of it is after the fact. But you take big buckets of cost out and we will continue to manage our cost very aggressively on a go forward basis, and we think we still have a lot of opportunities to do just what we commit to do. 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_233854

Here’s the entire text of the prepared remarks from Qualcomm’s (ticker: QCOM) Q4 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 QUALCOMM fourth quarter and fiscal 2005 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Operator Instructions As a reminder, this conference is being recorded November 2nd, 2005. The playback number for today's call is 1-800-633-8284. International callers please dial area code 402-977-9140. The playback reservation number is 21245580. I would now like to turn the call over to Bill Davidson, Vice President of Investor Relations. Bill, please go ahead. Thank you. Good afternoon. Today's call will include prepared remarks by Dr. Paul Jacobs, Steve Altman, Dr. Sanjay Jha, and Bill Keitel. An internet presentation and audio broadcast accompanies this call, and you can access it by visiting www.qualcomm.com. During this conference call, if we use any non-GAAP financial measures as defined by the SEC in regulation G, you can find the required reconciliations to GAAP on our website. I would also direct you to our 10-K and earnings release which were filed and furnished respectively with the SEC today and are also available on our website. We may make forward-looking statements relating to our expectations and other future events that may differ materially from QUALCOMM's actual results. Please review our SEC filings for a detailed presentation of each of our businesses and associated risks and other important factors that may cause our actual results to differ from these forward-looking statements. Pro forma revenues were $1.56 billion in the fourth fiscal quarter, up 14% year-over-year and 15% sequentially. Fourth fiscal quarter pro forma net income was $543 million, up 9% year-over-year and 17% sequentially. Diluted earnings per share were $0.32, up 7% year-over-year and 14% sequentially. Fourth quarter fiscal pro forma free cash flow, defined as net cash from operating activities less capital expenditures, was $838 million up 31% year-over-year and was 54% of revenue. Before I turn the call over to Dr. Jacobs, I'd like to mention that we're hosting an analyst meeting on November 8th in London. The meeting will be simulcast on our website with audio and slide presentations. Questions from our webcast participants can be submitted prior to the meeting by going to QUALCOMM's Investor Relations website at www.qualcomm.com and following the links to our London webcast. Thank you, Bill. Good afternoon, everyone. I'm pleased to report we posted record results for the fourth quarter and full fiscal year. I'd like to thank QUALCOMM employees around the world for their dedication, commitment and focus on innovation, execution and partnerships. Our fiscal 2006 guidance reflects continued acceleration of CDMA throughout the world. We estimate that CDMA hand-based shipments will grow approximately 30% during calendar 2006 as compared to 2005. We plan to aggressively increase our R&D investments in fiscal 2006 to capture the many opportunities ahead and maintain or extend our position of leadership in the market. Together with many partners in the wireless industry, we have established a exceptional track record of helping to bring exciting and innovative wireless solutions to market. QUALCOMM has put a great deal of focus on ensuring the success of 3-D CDMA network roll-outs in Europe by working closely together with European operators, infrastructure manufacturers and device manufacturers. By now I'll sure you're all well aware of the release that was issued by multiple parties late last week, alleging that QUALCOMM is violating European Union Competition Law and failing to meet commitments that QUALCOMM made to international standards bodies around the world that would license its technology on fair, responsible and nondiscriminatory terms. As we have throughout our history, QUALCOMM remains committed to licensing on fair and reasonable terms. The WCDMA market enjoys healthy competition among many handset suppliers including companies from Korea, Japan, China, the United States and Europe, As a result of QUALCOMM's proactive licensing of its substantial R&D investments, the availability of chip sets and software from QUALCOMM and its licensees. QUALCOMM's extensive licensing program has fostered the wide-spread adoption of leading edge technologies, promoted by the competition through the wireless industry, encouraging innovation and technological advancement. I want to assure you that QUALCOMM will vigorously defend against any claim of unlawful conduct in its licensing or chip set sales practices. Steve will address this issue further during his remarks. Through the support of our engineers in QCT we continue to work closely with the European operators during their initial WCDMA network deployments and ongoing optimizations. These activities date back to the spring of 2001 when we were first to market with the WCDMA test fund. The European operator infrastructure suppliers have used thousands of our single mode and dual mode WCDMA GSM handsets for the intraoperability tests and ongoing network optimization networks. To maximize the reliability of the wireless networks, we've worked extensively with European operators and their infrastructure suppliers to work through 3G and 2G hand-off issues. We support major European manufacturers in the lab with field testing. Our team continues to co-develop European network launch plans and provide dedicated engineers for handset launch activities with European operators. We work closely with handset and P.C. card manufacturers throughout development and field testing. We have also enabled the entrance of nontraditional device suppliers into the European market such as BenQ and Waway. QUALCOMM also actively participates in 3GPP standardization for WCDMA and it's evolution. We contributed to the stabilization of Release 99 and made subsequent contributions for Release 5 with HSDPA. Most recently, we've been very active with contributions for HSUPA and MBMS as part of WCDMA Release 6. We continue to invest heavily in R&D in a variety of ways with a keen focus on growing our earnings and extending the market for QUALCOMM's and our partner's products and services. To accelerate growth we continue to develop and commercialize third generation CDMA-based technologies such as CDMA2000 1x,1xEV-DO, scalable bandwidth EV-DO, WCDMA, HSDPA and HSUPA to support more efficient voice communications, broadband access to the Internet and multimedia services. At the same time, we're working hard to fulfill the growing demand for affordable, voice-centric CDMA phones within the emerging entry-level market, through the introduction of single chip solutions, streamlined test and certification processes and the application of device procurements. By integrating the modem, RF, power management, multimedia and security functions into a single chip, our value platform chip set eliminates discrete components in handset designs, lower development and manufacturing costs, reduce bill material costs and accelerate time to market. We expect third generation CDMA-based technologies will provide the most advanced, best performing and most economical solution for wide area and global networks well into the foreseeable future. To expand our market, we continue to develop and commercialize multimode, multiband and multinetwork products that embody technologies such as GSM, GPRS, Edge, Bluetooth, WiFi, USB, FLO, OEM and so on. We are also continuing to support multiple mobile client software environments in our multimedia and convergence chip sets. QUALCOMM is no longer just a CDMA company. QUALCOMM will continue to develop on its own and with its partners new innovations that are integrated into our product portfolio to further expand the market and enhance the value of our solutions. At the same time, we're very active within the standards bodies such as 3G PP, 3-D PP2, IEEE and OMA to ensure these innovations are universally implemented to support economies of scale and interoberability with existing and future mobile communications services to preserve ongoing investments. These innovations enable our customers to improve the performance of value of their existing services, offer these services more affordably, and introduce new revenue-generating services well ahead of their competition. And many of these innovations touch upon the value chain of multiple industries such as mobile telecommunications, information technology, consumer electronics and entertainment. The mobile phone is becoming the most personal electronic device and the screen that is always with you to watch movies, view television, play video games, run computer applications and simply to make or receive a phone call. As evidence in the success of data services, QIS, the division responsible for BREW, reached profitability in the fourth fiscal quarter of 2005 and revenues for QIS increased 32% in fiscal 2005 as compared to fiscal 2004. We've become successful by aligning our business model with others in the wireless industry value chain including equipment manufacturers, network operators, application developers and content suppliers. The anticipated addition of Flarion's intellectual property and engineering resources will supplement the resources that we had dedicated over the years toward the development of OFDM, OFDMA technologies and the creation of a substantial OFDMA intellectual property portfolio. The combination of Flarion's more than 100 issued and pending OFDMA patents and our issued and pending patents related to OFDM, OFDMA, MIMO and multimedia enhancements will make us one of the most active companies in these technologies. We believe that this combined portfolio of patents applies to most OFDM and OFDMA wireless being proposed, including WiMAX. Through the acquisition of Flarion, we will be more able to effectively support operators who might prefer an OFDMA or hybrid OFDM-CDMA, WCDMA network alternative for their services. We still fundamentally believe that CDMA will continue to provide the most advanced, factory-efficient, wide-area wireless networks for the foreseeable future. We've also been working on our own OFDMA efforts for many years with internal teams pushing each other to build the best technology for any given application. There's been a great deal of media speculation regarding WiMAX and the potential for it to eventually develop into an standard addressing wide-area wireless broadband connectivity, potentially completing with 3G CDMA. I believe that the IEEE 802.16 2004 or Fixed WiMAX may be useful for backhaul and possibly some fix in limited mobility applications, depending on spectrum availability and competition from DSL and cable-based Internet services. QUALCOMM has performed extensive system simulations of mobile WiMAX, EV-DO Rev A, and HSDPA performance in mobile environments. Mobile WiMAX does not offer any theoretical or practical advantages compared to 3G CDMA, will require a major investment for testing and iterations and will have to compete in a market well supported with a variety of 3G CDMA devices and services, including laptops with embedded DO and HSDPA capability. There have also been recent media reports on an technology called WiBRO. Those of you not familiar with the technology, WiBRO is short for wireless broadband, and it is jointly developed by the South Korean Information Ministry and private Korean firms. WiBRO is a homegrown Korean patented division duplex technology using nine megahertz channels. And it's intent is to provide portable broadband internet access in South Korea. Three licenses in the 2.3 gigahertz band were awarded by the Korean government last February to Hanaro Telecom, KT -- that is the wireline entity, and SK Telecom. In April, Hanaro, the second largest wireline carrier in South Korea, returned its WiBRO license, citing deployment costs and stiffer landline competition, requiring it to focus its resources. Based on recent reports, schedule for WiBRO service launch is now moved from April to June 2006. We believe infrastructure is currently being tested and there will be a technology demonstration next month. However, the larger pictures is that cellular operators, SKT and KT Freetel, are aggressively focusing their efforts on EV-DO Rev-A and HSDPA, deploying these technologies to address their core mobile customer bases. SKT and KTF have more than 12 million EV-DO subscribers today. These developments further underscore the commercial traction, support and time-to-market benefits of 3G CDMA technologies. During the quarter, I traveled to several major regions in Asia where I had positive meetings with our partners in both the cellular and broadcast service industries. In China, Japan and Korea, we're exploring trials and demonstrations of MediaFLO. Each of these markets will develop its own individual approach to launching a wireless, video service provider. In some markets, the broadcasting partners may lead, and in others, the main impetus comes from the cellular operator. In all cases, we've been able to demonstrate the increased efficiency of the FLO system and the direct impact this has on the capital and operating costs associated with running mobile video services. As evidence of consumer demand, we see the development of existing video technologies such PDMB, SDMB, DVBH, and services like Verizon V-cast and Sprint's TV service, as validation of the business case for MediaFLO. We remain on page for commercial deployment of MediaFLO USA's nation-wide media delivery network during fourth quarter of fiscal year 2006. In September, the FCC approved the request by an TV station in New York to shut down its analog broadcast facilities. This approval paves the way for MediaFLO USA Inc. to deploy MediaFLO services in the New York City market on channel 55 spectrum, adding another very important market to the long list of cities where spectrum will be available as we launch MediaFLO services. MediaFLO also took another significant step forward in the development of FLO technology with the first demonstration of streaming video delivered over the air to a wireless handset. Conducted during CTIA wireless IT and Entertainment 2005, the demonstration featured six channels of streaming video at QVGA quality running at 15 frames per second. I should note that the frame rate of 15 frames per second is a function of the decoder in the chip set not yet being fully optimized. FLO technology is expected to support up to 20 channels of live video at 30 frames per second in QVGA quality, with an average channel switching time of 1.5 seconds when commercially deployed. For the upcoming meeting of the FLO forum in Hong Kong next week, we also continue to progress towards a FLO standard. QUALCOMM MediaFLO USA Inc. belong to a growing list of FLO form numbers, including industry carriers, broadcasters, content providers and vendors, all committed to promoting development and certification of FLO products and services. Through the FLO forum's efforts, FLO technology specifications will be open and available to a wide range of technology providers and equipment manufacturers. You can visit floforum.org, their website, for more information. MediaFLO's initiative exemplifies QUALCOMM's continuing commitment to driving innovation in the wireless industry and meeting the needs of the entire wireless eco-system. We believe that MediaFLO Technologies and the upcoming deployment of the MediaFLO USA network will usher in a new era of mobile content delivery, creating brand-new market opportunities for mobile television and video while complimenting existing 3G voice and data services. In closing, we are very pleased to report our return of capital to stockholders in fiscal 2005 was approximately $1.5 billion, up 380% year-over-year. This includes cash dividends paid of $524 million or $0.32 per share and 27.1 million shares repurchased under the share repurchase program for $953 million. Thanks, Paul. Good afternoon, everyone. Let me first address the complaints that were filed by multiple parties late last week with the European commission. I expect to address this issue in more detail at our upcoming analyst conference in London. While QUALCOMM has not yet been provided with copies of the complaints, as we indicated in our press release, the reported allegations of the complaint are without merit. We plan to meet with the commission very soon to begin the process of providing the facts that disprove the complaints. And we look forward to cooperating with the commission to establish that QUALCOMM's activities are lawful, and in fact foster competition. The claim that QUALCOMM has not lived up to its committment to license it's essential patents on fair and reasonable terms, is the lie by the license agreements that QUALCOMM has entered to with 130 different companies, over 60 of which include WCDMA. Indeed our patent portfolio is the most widely and extensively licensed portfolio in the industry. Achieved through bilateral, arm's length negotiations and the operation of free market forces, the large number of QUALCOMM license agreements have well established the value of QUALCOMM's patent portfolio for 3G standards. That established value is the same for the CDMA 2000 family of standards as it is for the WCDMA family of standards. It is hard for me to imagine that each of these 130 companies, including the world's leading telecommunications companies, would have signed our license agreements if our terms were not fair, reasonable and reflective of the value of our technology. Through their coordinated PR campaign attack, these complaintants make a poor attempt to rewrite history by suggesting that if they had known what QUALCOMM's license terms were going to be, they would not have supported adoption of an standard that included QUALCOMM's patented technology. First, it is widely acknowledged that the original proponents of the WCDMA standard, including some of these complaintants, tried to design around QUALCOMM's patents, but were unable to do so. Second, two of the complaining companies, Ericsson and Panasonic, had already entered into licenses with QUALCOMM that included WCDMA before the WCDMA standard was approved by any standard-setting organization. These companies not only knew exactly what QUALCOMM's terms were when they voted in favor of adopting the standard, they had already agreed to them. Nokia was in active negotiations with QUALCOMM to expand its license to include WCDMA prior to the adoption of the WCDMA standard. Both Nokia and NEC as well as Texas Instruments signed WCDMA licenses with QUALCOMM shortly after adoption of the standard and before the roll-out of WCDMA. QUALCOMM's terms did not come as a surprise to any of these five companies. Further, the effort by these companies to diminish the importance of QUALCOMM's contributions is also inconsistent with the views they expressed when they signed agreements with us. In press releases jointly issued with QUALCOMM when we announced our WCDMA license agreements, two of the companies, Ericsson and NEC, referred to us as a, quote, 'Pioneer,' end quote, of CDMA technology, including WCDMA. It is interesting to step back and consider what the companies filing these complaints fail to say. Five of the companies now say that our intellectual property is less valuable or that they were somehow misled into voting in favor of a WCDMA as a standard. But they fail to point out that they have known our terms for many years and undoubtedly studied our intellectual property portfolio prior to signing our agreements or voting for adoption of the WCDMA standard. Further, they all consistently fail to mention how healthy and vibrant competition is, conspicuously omitting their own successes. Nokia, Ericsson and Texas Instruments publicly claim that they have each sold more chip sets for WCDMA handsets than QUALCOMM. NEC, a WCDMA licensee, claims to have very significant percentages of the WCDMA chip sold in Japan. But even with that success, I would note that NEC has now chosen to use our chip set in WCDMA handsets to be sold in Europe. Panasonic also claims to be a significant supplier of WCDMA hand sets in Japan, but it fails to mention that it does not even sell WCDMA products in Europe. Broadcom states it has been unsuccessful to date. It fails to point out that it currently offers an non-integrated two chip solution that is not competitive with the offerings of QUALCOMM and other chip set suppliers. Broadcom's decision to decline the license offered by QUALCOMM and derail the negotiations through baseless litigation has already been extensively discussed. Its participation in the complaint with the European Commission is readily understood as yet another attempt to obtain bargaining leverage. We have never refused to license our essential patent to any company to supply chips, handsets, infrastructure or test equipment. The number of companies licensed by QUALCOMM that are actively marketing WCDMA chips demonstrates that QUALCOMM has not attempted to exclude any chip set manufacturer. It is beyond dispute that QUALCOMM does not have anything remotely resembling a monopoly or dominant position on the sale of WCDMA chip sets. To the contrary, competition for sales of CDMA chips is quite intense. We have never conditioned a grant of a WCDMA license or a WCDMA discount on the exclusive use of our chips. The complainant's allegations in this regard are simply false. We have provided a small discount for using our chips to companies currently selling WCDMA handsets in Europe, which we believe to be nothing more than legitimate and lawful price examination. Although the complaintants allege that this precludes competition, it is interesting to note that many of those manufacturers, despite being entitled to a small discount if they utilitize our WCDMA chips, have chosen to use our competitor's WCDMA chips. We believe that our competitors are likewise offering various discounts and incentives to handset manufacturers that choose to use their chip sets. The allegations that QUALCOMM's licensing program is causing carriers and consumers to face higher prices and fewer choices in WCDMA are also simply false. The reality is that the average selling price of WCDMA handsets is declining and WCDMA subscriber uptake is increasing, each at a faster rate than GSM experienced during its early commercial years. Further, there are already many suppliers or WCDMA handsets offering a wide variety of products across a large range of prices and aggressively competing in the market without a large share of the market concentrated among only one or a few suppliers. These are the hallmarks of healthy, vibrant competition. This action appears to be nothing more than a case of buyers, or in this case, licensee's remorse. And an attempt by these licensees to renegotiate their license agreements by seeking governmental intervention. We will as, Paul mentioned, vigorously defend our position. And we will make every effort to help the European Commission understand the facts. Now I'd like to take just a few moments to update you on the growth of CDMA around the world and highlight a number of important achievements in some of our other businesses. We believe that the North American 3G CDMA handset sell-through remains solid. Verizon Wireless now offers 60 3G devices. Sprint/Nextel completed their merger and have already launched EV-DO services in initial markets and expect to extend the service to approximately half the U.S. population by early 2006. Cingular/ATT Wireless remain on track to launch WCDMA HSDPA service in 15 to 20 markets by the end of 2005. Popularity of the Verizon's Get It Now service continue to grow, with 4.6 billion text messages and 62 million picture and video messages exchanged during the second quarter 2005 and 36 million downloads of games, exclusive content, ring tones and ring back tones. There continues to be a healthy competition and significant growth in the Japan 3G wireless market. N.T.T. DoCoMo has announced plan to have 24.1 million 3G subscribers by the end of March 2006. Together, Japanese operators KDDI, DoCoMo and Vodafone have seen nearly 69% year-over-year growth in 3G adoption, increasing the number of 3G subscribers to 38.1 million as of September 2005. We expect the subscriber numbers in the region to accelerate in 2006 as DoCoMo continues their 2-G to 3G migration at a rapid pace. In Europe, WCDMA handset pricing continues to decrease, enabling operators to address a larger portion of their subscriber base. European operators continue to increase the number and variety of 3G WCDMA handsets. There are now over 200 3G WCDMA handsets available in the European region. The U.K. and Italian 3G WCDMA markets remain the most competitive in western Europe. Subsidization rates in the U.K. are unparalleled, with each carrier offering at least one and in most circumstances all of its 3G UMTS handsets free with a two-year contract. We remain optimistic about consumer adoption in Europe and anticipate demand in unit volume to continue to grow as we look towards the holiday season. In QTL, we converted the previously announced interim agreement in China into a permanent contract and now have a total of six WCDMA subscriber unit license agreements with Chinese manufacturers. Each of these agreements are at QUALCOMM's standard royalty rates for WCDMA handsets. WCDMA royalties recognized during the fourth quarter for licensee sales in the June quarter, has increased to 41% of royalties as compared to 36% in the prior quarter. This increase percentage is primarily as a result of increased sales of WCDMA handsets in Europe. In QIS, our focus continues on bringing wireless data solutions to operators around the world. In August, we announced the acquisition of Elata, a leader in mobile content delivery software, based in the England. Based on this acquisition, we have expanded our offering for operators that want to consolidate all their existing content delivery systems into a single comprehensive solution. We are now supporting 56 operators in 29 countries around the world with commercial BREW products and services. Thank you, Steve. Good afternoon, everyone. It is my pleasure to report on some of the results of superb execution at QCT this past quarter and the fiscal year. We shipped a record 40 million MSM this quarter. For fiscal 2004 -- 2005, our cumulative total is also a record with 151 million MSM record shipments. These record shipments in turn led to record revenues for the quarter and for the year. Only three years ago we were shipping at the rate of 16 million MSM's per quarter. This quarter we expect to ship approximately three times that amount, between 46 to 48 million MSM's. Our revenues were driven by continued demand for CDMA 2000 products, including a 95% increase in EV-DO volume quarter-over-quarter, driven by accelerating DO demand at Verizon, KDDI, SKT and Sprint. Our wideband CDMA shipments increased 43% quarter-over-quarter. Predictions of stronger second half UMDS demand in Europe appeared to be materializing. We see Vodafone, EXi 3G, Tims and O2 being particularly aggressive this Christmas with their 3G offerings. We also saw significant increase in demand for our value tier platform driving CDMA in India, Latin America, southeast Asia, and to a lesser extent, China. We intend to compete for low-end consumers in all of these regions. QCT's average selling price increased marginally from fiscal quarter '04 -- fourth fiscal quarter '04 to fourth fiscal quarter '05. In addition, average selling price showed a slight increase over the previous quarter due to a continued shift in product mix to 6500, 6550 and MSM 6250. Our operating profit margin was up 29% of revenue in the quarter, an increase from 24% versus the previous quarter. QCT operating profit for the fiscal year was 26%. Despite a substantial increase in R&D expenditure this year in HSUPA, multimedia, process and design and RF developments. We expect operating profits for first fiscal quarter '06 to be in line with this current quarter, I mean, previous quarter, the fourth fiscal '05. Over the last four years we have invested heavily in our multimedia capabilities. These investments were made after close consultation with operators and OEM's and our investments have resulted in 12 mobile handsets utilizing the enhanced multimedia platform MSM 6550 chipset. With sample in 2004 and 109 mobile handsets based on MSM 6500 chip sets which sample in 2003. Going forward, we see strong customer interest in our 7000 series platform that includes dual microprocessing for greater computing power in anticipation of convergence of the IT and mobile environments. We have continued the development of our wideband CDMA portfolio as well. More than 30 manufacturers have selected our wideband CDMA and HSDPA solutions to power more than 110 handsets, with 30 available in design. H3G is now advertising the LGE U880 based on MSM 6250 and Samsung is introducing some of the tiniest wideband CDMA phones, also based on MSM 6250 with carriers globally. Interim for those testing for our HSDPA solution has been successfully completed with a number of network infrastructure provided us around the world. Numerous launches of power devices for HSDPA networks are scheduled for the first half of 2006. We also introduced our second generation HSDPA chip set, MSM 6280 to support its data rates of up to 7.2 megabits per second and expect devices based on this chip to be available commercially in the first half of calendar 2006. QCT's gpsOne continues to be widely adopted by wireless carriers worldwide. NTT DoCoMo has launched their first assisted GPS-enabled handset by Sanlo based on our MSM 6250. Vodafone KK also launched a QCT gpsONE-enabled handset that is the first assisted GPS handset at any Vodafone property. Thank you, Sanjay. Good afternoon, everyone. As Bill Davidson mentioned, we filed our Form 10-K report today continuing our standard practice of filing our SEC report in tandem with our earnings release. In addition, our Form 10-K report includes a certification from our outside auditors in accordance with Sarbanes-Oxley Act, section 404. We are pleased to report another year of record revenues, earnings per share and operating cash flow. We achieved these strong financial results during a year of increased R&D investments to expand our engineering base and develop new products for the future. I'll begin with a brief definition of our pro forma reporting. Pro forma results exclude the QUALCOMM strategy initiative segment for all periods presented, as well as one time tax benefits. And provides a comparison to 2004 as if the 2005 method of recording royalty revenue had been in effect for all of 2004. In fiscal 2006, pro forma results will exclude share-based compensation under FAS 123R. I'll now highlight for you a number of key items in our fiscal 2005 results. First, GAAP earnings for fiscal 2005 were a record $1.26 per share, including approximately $0.05 per share attributable to tax benefits arising from our ability to utilize additional capital loss carry-forwards, $0.04 per share from one time tax benefits attributable to fiscal 2004, and approximately $0.01 per share from QSI. Pro forma revenues increased 13% year-over-year to $5.67 billion and pro forma earnings per share increased 8% to $1.16. Second, and as Paul mentioned, during the year we returned approximately $1.5 billion in capital to our shareholders through stock repurchases and our growing dividend program. Our business model continues to generate strong cash flows. Operating cash flow for fiscal 2005 was $2.7 billion, up 8% year-over-year and a healthy 47% of revenue. Third, our fiscal 2005 pro forma effective tax rate was approximately 30%, compared to our prior estimate of 28%. This increase is primarily the result of additional tax related to our one time repatriation of approximately $500 million of foreign earnings in accordance with the American Jobs Creation Act. And the resulting $35 million additional taxes reduced fourth quarter and fiscal year 2005 earnings per share by approximately $0.02. We recorded approximately $0.03 earnings per share from gains on our put-option program. I note this because some investors could look upon the one time tax expense for repatriation and income from selling put-options as nonoperating items. The put-option income included approximately $18 million realized income and approximately $24 million unrealized mark-to-market income. Fourth, R&D investment remained a strategic priority this year, as we continued to invest in enhancements of the CDMA2000 technology roadmap, WCDMA chip development, multimedia functionality and other long-term technology developments. We also continued to increase our investment in new business opportunities, including MediaFLO and QUALCOMM's MEMs technologies. R&D spending grew to $1 billion in fiscal 2005, an 40% year-over-year increase. And I'm pleased with the revenue opportunities ahead from the innovative products and services as a result of these increased investments. Fifth, as Sanjay mentioned, QCT shipped a record 151 million MSMs in fiscal 2005. QCT's operating margin improved to 29% in the fourth quarter on a higher volume and favorable product mix. Sixth, our QTL business continues to be positively impacted by the growing adoption of CDMA around the world. WCDMA royalties grew to approximately 41% of third party royalties in the fourth fiscal quarter, representing handsets shipped during June quarter by our licensees. Of the $497 million in total QTL revenues in the fourth quarter, $36 million represented intracompany royalties, $18 million were license fees and $443 million were royalties from third party licensees. QTL's operating margin was 90% for fiscal 2005 and 91% for the fiscal fourth quarter. Based on royalty reports from licensees, worldwide CDMA handsets shipped in the June quarter were approximately 48 million units, up from approximately 43 million units just in the March quarter. The average selling price of CDMA handsets was approximately $213.00 for the June quarter and $215.00 for the fiscal year. Turning to our guidance, for the calendar 2005 CDMA market, we expect shipments of approximately 200 to 205 million CDMA-based handsets. Based on the 202 million midpoint of this estimate, we anticipate approximately 158 million CDMA2000 and 44 million WCDMA handsets to be shipped worldwide. We estimate the CDMA phone market will increase to approximately 255 to 270 million unit shipments in calendar 2006, an increase of 26% to 34% over our midpoint estimate for calendar 2005. Based on the 262 million midpoint of this estimate, we anticipate shipments of approximately 176 million CDMA2000 units and approximately 86 million WCDMA units. We anticipate fiscal 2006 earnings to be in the range of approximately $6.7 to $7.1 billion, an increase of 18% to 25% over fiscal 2005. We anticipate pro forma diluted earnings per share to be in the range of $1.43 to $1.47, an increase of 23% to 27% year-over-year, inclusive of approximately $0.03 dilution from the Elata acquisition and the anticipated Flarion acquisition. We anticipate closing the Flarion acquisition very early in the second fiscal quarter. We estimate average selling prices for CDMA 2000 and WCDMA phones combined to decrease 2% in fiscal 2006 to approximately $210.00. We expect a combination of pro forma R&D and SG&A expenses to increase approximately 22% to 27% year-over-year, with the majority of the growth occurring in R&D as we continue to inch invest in the evolution of our technology road maps. We anticipate our pro forma tax rate in fiscal 2006 to improve to approximately 27%. Based on the current business outlook, our fiscal 2006 revenue and earnings estimates include approximately $290 to $310 million year-over-year improvement due to the termination of royalty sharing. This guidance is slightly lower than our prior estimate provided a year ago due to a smaller than expected CDMA market in 2005, notably WCDMA, which in turn results in a smaller base going into 2006. We estimate GAAP earnings per share will be approximately $1.19 to $1.23 for fiscal 2006. This estimate includes a loss of approximately $0.06 per share attributable to QSI and a preliminary estimate of approximately $0.18 per share for stock option expense. Turning to the first quarter, we estimate revenues to be in the range of approximately $1.67 to $1.77 billion, a 20% to 27% increase year-over-year. We estimate first quarter pro forma diluted earnings per share to be approximately $0.36 to $0.38, a 29% to 36% year-over-year increase. This estimate includes shipments of approximately 46 to 48 million MSM phone chips during the December quarter and approximately 51 to 53 million CDMA-based handsets shipped in the September quarter at a average selling price of approximately $206.00. We expect QTL and QCT operating margins to be within approximately plus or minus 100 basis points of Q4 actuals. We anticipate pro forma R&D and SG&A expenses combined to increase sequentially approximately 7% to 9%. I also want to share that we expect GAAP and pro forma second fiscal 2005 earnings to sequentially decline from the first quarter by approximately $0.02 to $0.03 per share. Due to seasonality of chip demand and expenses, as well as increased employees, principally in engineering. The QUALCOMM Investor Relation website includes a thorough presentation of the many data points shared here on this call. I look forward to sharing with you additional data points regarding our fiscal 2006 guidance, including regional handset shipment estimates at our London analyst meeting next week. The meeting will be webcast for those of you not able to attend. 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_233855

Good afternoon. My name is Corey and I will be your conference facilitator today. I would like to welcome everyone to the Xilinx Third Quarter 2006 Fiscal Year Earnings Conference Call. All lines have been place on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer period. If you would like to ask a question at this time, press the “*” and then the “1” on your telephone keypad, if you would like to withdraw your question, press “*” then number the “2”. Please limit your question to one and refrain for multipart questions to ensure that management has adequate time to speak for everyone. After each participants has asked their question their line will be muted, and they will be placed back in the conference. If time permits additional questions will be taken. I would now like to turn the call over to Lori Owen. Thank you. Ms. Owen, you may begin your conference. Thank you, and good afternoon. With me are Wim Roelandts, CEO; and Jon Olson, CFO. We will provide a financial and business review of the December quarter then we’ll open the call for questions. I will then end the call with a few housekeeping items. During today’s call we may make projections or forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are predictions based on information that is currently available. Actual results may differ materially. We refer you to our SEC filings which are posted on our website. These documents identify important risk factors that could cause actual results to differ materially from statements made today. This conference call is open to all and is being webcast live. It can be accessed from our Xilinx Investor Relations website. Let me now turn the call over to Jon. Thank you, Lori. Revenues in fiscal Q3 increased 13% from last year to $450 million. Compared to the same quarter a year ago, revenues were up 27%. Third quarter net income was $81 million or 23 cents per diluted share compared to net income of $86 million or 24 cents per diluted share in the prior quarter. The tax provision for the third quarter fiscal 2006 includes a $25 million charge related to the planned repatriation of $500 million in foreign earnings pursuant to the provisions of the American Jobs Creation Act of 2004. In addition, the company recorded a tax benefit of $9.5 million primarily related to the ability to use certain credits that were previously accounted for as usable. The net impact of these items added $15.8 million to the company’s third quarter tax provision. Gross margin of 63% increased from last quarter’s 61.4% and was at the high end of our guidance as we continued to benefit from improving yields from new products. Mix was also a factor as mainstream products grew faster than originally anticipated. Operating expenses were up 0.4% sequentially. This is slightly higher than our previous guidance of down 1% sequentially mostly due to higher sales commissions on higher revenues. The tax rate for the quarter was 38%, impacted by the repatriation and other discreet items previously mentioned. Let me now comment on the balance sheet. Cash and long-term investments increased $30 million to approximately $1.7 billion. We generated $190 million in operating cash flow and 176 million in free cash flow after CapEx of $14 million. In the last four quarters we generated $479 million in operating cash flow and spent $62 million on capital expenditures. In the quarter we repurchased approximately 5 million shares for $125 million, an increase of 50% over the prior quarter and we paid a quarterly cash dividend of $24 million. Days sales outstanding decreased 15 days to 29 days. While this may not be intuitive given our strong sales in December, let me point out that day’s sale outstanding calculation is based on shipments and not revenues. A stronger than normal shipping profile in the first two months of the quarter coupled with higher than normal collections in the month of December contributed to a much lower DSO. Combined inventory at Xilinx and distribution decreased by two days to 144 days in the quarter. Days would have decreased more but we made the decision to shift some product from die bank to finished goods in order to address the continued back end capacity constraints. In addition we expedited wafers on select devices to meet demand for this quarter and to prepare for next quarter’s backlog. I will now turn the call over to Wim to comment on our business and products. Thank you, Jon. So first let me give my own comments on the December quarter. Sales growth in the December quarter was better than expected increasing 13% sequentially and nearly reaching our record sales of $450.1 million set in the December quarter of 2000. Turns bookings percentage was 54%, higher than our original forecast of around 50% as bookings momentum throughout the quarter was stronger than anticipated, especially in the months of October and December. When you look at the quarter in more detail what really stands out is the broad based strength not only across end markets but across products and geographies. Sales from the communications end market segment increased 11% sequentially driven by a rebound in our wireless business, which was weak last quarter as well as an increase in wired communications. Sales from the industrial and other category were the strongest during the quarter increasing 26% sequentially and representing a record 27% of sales, up from 22% in the same quarter a year ago. Strength in this category was driven by test and measurement as well as defense. In defense we received a couple of particularly large orders driven by specific customer programs. We do not expect, however, to see similar strength in the March quarter. Consumer and automotive sales increased 9% sequentially during the quarter fueled by audio-video broadcast and consumer sales. Sales from the storage and server category as expected were down. New products were really the highlight of the quarter. New product sales increased 24% sequentially in the December quarter, representing 33% of total revenues, up from 30% in the prior quarter and up from 20% in the same quarter a year ago. Virtex-4, Virtex-II Pro, Spartan-3, Spartan-3E and CoolRunner-II all experienced strong growth during the quarter and are all at record revenue levels. We continue to lead the industry in 90nm sales and we continue to see healthy design win activity. Last quarter I told you that we expected our 90nm products along with our 130nm Virtex-II Pro families to drive revenues of over $100 million in the December quarter. We easily surpassed this target during the quarter. Virtex-4 sales increased significantly during the quarter as revenues from all three domain families increased in strong double digits sequentially. We are encouraged by the strong design win momentum we are seeing with this family and we expect to see similar sales growth in the March quarter. Virtex-II Pro sales after decreasing slightly last quarter increased significantly during the December quarter with strength from wireline and wireless communications and test and measurement. The Spartan-3 family continued to drive broad based adoption in broadband access, display technologies and low cost servers. Sales for this family increased in solid double digits sequentially. During the quarter Xilinx completed the rollout of the Spartan-3E family. The logic intensive Spartan-3E family delivers the lowest cost per logic cell in the FPGA industry and complements the IO intensive Spartan-3 family. Just nine months after introduction all five family members of this family are now in production. Customer acceptance of this family is promising. We are experiencing strong design win activity, not only in the price sensitive consumer market, but also in brand new applications in the low cost networking space. Last but not least, CoolRunner sales increased substantially during the quarter. For the first time CoolRunner’s largest customer was a handset manufacturer. With its low power and advanced feature set, CoolRunner is uniquely positioned to address the handset market as well as other similar portable consumer applications such as media players and GPS navigation system. There is no doubt that Xilinx has recaptured the design win momentum of 90nm. Our strong new product portfolio positions us solidly to gain traction in the next generation of consumer products. In addition to strong new product growth, mainstream products were also stronger than expected increasing 11% sequentially driven mostly by applications in wireless and defense. Sales from every Virtex product grew during the quarter, driving strength in both the new and mainstream product categories. Total Virtex sales increased by nearly 20% sequentially representing 54% of total sales. Spartan and CPLD sales also increased during the quarter. Spartan sales increased nearly 10% sequentially representing 24% of revenues and CPLD increased 8% sequentially representing 9% of total sales. Let me now briefly discuss the revenue by geography. Sales from North America, Europe and Asia Pacific were all stronger than expected during the quarter posting double digit sales growth. Japan sales were down slightly after increasing 15% sequentially in the September quarter. Now I would like to compare and contrast our quarter with the only other quarter in our history that we have reached $450 million in sales, the December quarter of 2000. First let me do a comparison by end market. If you look at the industrial and other end market segment, which also included consumer and automotive applications it represented 8% of our total sales or approximately $36 million in December of 2000. Today if you look at the equivalent end market segments, consumer plus industrial and other, these categories represent 41% of our total sales or $185 million. Sales into these applications have quintupled, representing a five year compound annual growth rate of nearly 40%. Unfortunately this growth rate has been masked by a decline in sales of our traditional areas of communications and storage and servers which represented 77% and 15% respectively in December of 2000 and today represent 48% and 11% respectively. Secondly, if you look at our customer concentration, our top 15 customers represented approximately 50% of our business in 2000, whereas they represent 34% of our business today. We serve a much broader base of customers today than we did in 2000 and are less dependent on the large OEMs. Finally let’s take a look at our product composition. In December 2000 Spartan and CPLD products represented only 16% of total sales. Now they represent 33% of sales. This is a reflection of our entry into the consumer and automotive markets as well as our CPLD share gains. In summary, I’m extremely pleased with our diversification efforts and I believe the success of these efforts can be seen in the broader composition of sales by end market, by customer and by product. Next I would like to make some remarks about our digital signal processing strategy. Last quarter we unveiled an aggressive roadmap aimed at capturing market segment share of the $2 billion high performance digital signal processing market. One key part of that roadmap was related to making it easier for system engineers and DSP algorithm developers to design our FPGA based reconfigurable DSPs. To this end we are pleased to announce the recent acquisition of AccelChip. AccelChip’s DSP design tools will enable thousands of new DSP designers, in particular, algorithm developers, to automatically generate hardware from their MATLAB algorithms. This is an important strategic acquisition for Xilinx. Almost every electrical engineer coming out of the university these days knows how to write some MATLAB algorithms and now Xilinx will make it easier for these engineers to use FPGAs. Now let me turn to guidance for the March quarter. We start out the March quarter with backlog that is up slightly from last quarter. Business for the first two weeks of January has been good. As a result we are expecting sales to increase 1 to 5% sequentially. This is somewhat lower than a typical March quarter. The reason is that we are not expecting to see the same level of business from the defense sector that we did in the December quarter as we expect these customers to move to more normal ordering pattern. In terms of end markets we are expecting communications to be up slightly driven by wireless infrastructure sales. We expect consumer and automotive to be up driven by increases in audio-video broadcast and consumer. And we expect industrial and other to be down, as declines in defense will offset continued strength in test and measurement. Finally we expect the storage and server category to be slightly down driven mostly by seasonal weakness in this sector. By geography, we expect sales from Japan, Asia Pacific, and Europe to grow sequentially and North America to decline. The decline in North America will be driven primarily by sales declines in defense and to a lesser extent, Storage. Now let me turn back the call to Jon for some final remarks. To achieve the midpoint of our revenue guidance we will require turns of approximately 55%. Gross margin is expected to be approximately 63%. Our mix in the March quarter is forecasted to be skewed more towards new products than the previous quarter. While yields from our new products are improving they are on average below the margins of mainstream products. Overall expenses will increase approximately 7% as compared to the December quarter. SG&A will be up slightly but most of the increase will be driven by R&D. Half of the R&D increase is related to one time charges associated with the AccelChip acquisition. The other half is related to increased investment in 65nm development, embedded computing and digital signal processing. Other income will be approximately $10 million. Amortization of acquisition related intangibles, which has been running around $1.5 million per quarter, will increase to approximately $2.3 million per quarter as a result of our recent acquisition of AccelChip. The forecasted tax rate for the March quarter is 23% plus or minus one percentage point. Fully diluted share count is expected to decrease by 2 million shares to approximately 351 million shares. Inventory days will decrease to approximately 139 days from 144 days. Let me also say a quick word on options expense. As you know we are not required by the Financial Accounting Standards Board to begin expensing options until our June quarter and our March quarter GAAP results will not include compensation expense. Because so many of you have asked about this, though, I will tell you that we are expecting this figure to be in the neighborhood of $18 million after tax for the March quarter. Again, this is for comparison purposes only and our March quarter GAAP results will not include options expense. Let me now open the lines up for questions. Operator, back to you. The floor is now open for questions. If you do have a question, please press the “*” and the number “1” on your telephone keypad. Once again, that is the “*” followed by the number “1” on your telephone keypad. Please limit your questions to one and refrain from multipart questions to ensure that management has adequate time to speak to everyone. After each participant has asked their question, their line will be muted and they will be placed back in the queue. If time permits additional questions will be taken. Great, thank you very much. I was wondering if you could give a little bit more detail with regards to what you were seeing in the com infrastructure market. You had commented that it had been strong. Going out for the rest of the year what are the things that you should be looking for in terms of what the growth rate would be? Thank you. Sorry, your question was about the growth rate in communication infrastructure and although I cannot give numbers for the year, our expectation is that this market in general will trend upwards, driven by strength first of all in wireless which with the deployment of 3G will continue quite strong I believe for the year. It doesn’t mean that there can’t be weak quarters hear and there, but the general trend will be upwards. The second thing is really the strength in wireline. Since several quarters now we have seen increased new developments in wireline. New applications are being readied for deployment in the areas like Voice-over-IP and especially fiber to the home. And of course that will drive strength in the infrastructure side of the telecommunication business. So overall I’m quite optimistic for the communications sector for the next year or so. Next question, please. Thanks guys. Thanks for that comparison between now and back in 2000. My question centers around that. Back in 2000 when you were close to the same level of revenue your OpEx or, excuse me; your operating margin back then was in the low 30s. And it’s in the high 20s right now. Can you just detail your plans to get back to the low 30s and what your sorts of goals are on the operating margin side eventually? Yes, Chris, happy to do so. You know, our stated goal, our, what we call our corporate model is for gross margins for operating margins to be in the 27, 28% category. Now, obviously when we see a very strong growth like we had in 2000, there is no way that our expenses can keep up with the growth and then if it moves to a higher level, but our goal is to keep it in the 28% around 28% operating margin. Depending on how fast the growth rate goes it could move higher. But in general that is what the growth, the target is for our company. Next question, please. Hi. Thanks. Wim, you talked about CPLD products a couple of times in this call which doesn’t usually happen. I was wondering if you could give us the mix. You said Spartan CPLDs make up about 33%. Are CPLDs still around 10% of overall revenue? And also when you mentioned CoolRunner products having its largest customer being a handset customer, can you talk about the volumes you’re seeing for that product? Is that higher than your normal PLD volumes? And also do you expect to have, is it one customer or do you expect to have additional handset customers? Thank you. Very happy to do so, Ruben. First of all our, the CPLDs are 9% of our total revenues so they remain around the area, maybe slowed down a little bit mainly because of the growth in Virtex and Spartan of course. The reason why I talked specifically about CoolRunner-II is that it was a product that was designed for low power and it took a while to get traction but now we see quite strong traction in the handset markets and there, unit volumes are in the millions of units per year type of thing. They are very often used for the more advanced feature phones where, you know, our customers want to interface with the specific new devices, better displays, video cameras, you name it. And we have more than one customer. In fact we have several customers are using CoolRunner-II now in their high-end feature phones for the portable market. So it was kind of significant. It took a little bit longer to capture that market but now we are very heavily used in these phones especially in Taiwan. Next question, please. Thanks a lot. Can you just, Wim, can you walk us through the dynamics of your customers that led to what turned out to be it looks like 3 surprises, obviously positive, but what was going on? Was it a forecast issue, was it believing their forecasts or just demand surprises or what? I think that Michael, there’s always several elements. You have the underlying growth rate that we see happening and then you have one deal, one time only big orders especially in the area of the defense which tend to be ordering everything they need and then you don’t hear from them for several quarters, then they order next batch. So a couple of these big defense orders came in this quarter and although we had foreseen that, it was planned to have, you always say, “Well, one of them can slip,” because sometimes forecasts are for this quarter but then it actually happens next quarter. So a little bit cautious in forecasting that. The real I think the real good news is the underlying strength of the business. And if you really look at the December quarter and the March quarter we believe that the underlying growth rate is in the 7 to 8% range. What happened in December is we got some extra pops through defense. There was also if you remember in the September quarter we believe that some customers pushed orders out of the September quarter into December because of the run up in energy prices in September. And so that was an extra order for this quarter. Of course in the March quarter these defense orders won’t repeat so we have to make up for them. That’s why we are forecasting a little bit lower. We believe the underlying trend is very solid for, at least for these two quarters and driven really by communications and the industrial area, the measurement, test and measurement area and then by consumer spending, consumer markets sorry. Next question, please. Yes. Can you elaborate a little bit on your gross margin? Was the mix towards, it looks like that next quarter is going to be primarily revenue growth comes from new products, yet the gross margin remains at 63%, but that is, I assume that that’s because of yield improvement on 90nm. How much further can we go on that? Yeah David let me answer that one for you. You got it right. It’s really the continuation of yield improvements. The biggest impact again is still on our new products versus the mainstream products and that is offsetting the, what we believe is the mix factor that’s going on. So given where we are on the curve, I’ve show this a few times when I have had the opportunity, we’re continuing to move down the curve and we’re I would say past the midpoint of the decline where we start to reach the flattening out point on many of our 90nm products so I would say there’s a few more quarters of yield improvement ahead of us but the percentage of improvement will start to decline now. Yeah, on the inventory side, I guess I’m calculating inventory is at about 117 internally and you talked about a target of 90 days. Could you talk about that target? I guess the timeframe over which you’d look to still achieve that if that’s viable? And when you see the back end capacity constraints perhaps alleviated? Yes, Katherine. I’ll take that one. So our stated target is 90 days from a long term perspective but we have been going through a period of a couple of interesting things going on here. First off, the fact that our new products, our 90nm products have been so widely adopted and that growth is so strong the cost per unit on those is higher than the average of our other products. So that has driven up the dollar content of our inventory to be a higher percentage of new products than the 90 day target would have indicated. In other words, an average. So we’re going through this period that while yields are still coming down, that tends to drive days up. The second factor is this shorter term phenomenon that I described around the back end tightness that’s caused us to want to build a few more units out to finished goods where it made sense. As we sit right now, we still see things very tight out in both assembly test and the substrate area, particularly for the capability we need for our most advanced products. That’s where the tightest area is. That would be flip-chip technology. So I think we see that ahead, at least for another quarter or two. And we’re doing everything we can to make sure that we enough product and capacity in order to be able to meet our customer demands. I think there was a third factor which is underlying that is that the days are backward looking, but when you have new products they grow very rapidly you have to put in more inventory to be able to serve next quarter and that is, we have two product families that are ramping at the same time at pretty high rates so that also increases our backward looking inventory simply because we want to make sure we can deliver these products. Next question, please. Hi. Good afternoon. Wim, can you talk about that CoolRunner-II product that’s meant for the handsets? What kind of gross margin profile you would have compared to your traditional CPLD products? Yes, certainly. You know, we, our target gross margin for all our products is around the 60% range. The real difference is really volume. You know we have pretty hefty volume discounts, and of course these handset sales tend to be very high volume so they tend to be at the lower gross margin percentage than the average and of course you make it up with either some of the older products or products sold in lower volumes where they have higher gross margin products. CoolRunner is at the moment a little bit below 60% but not that far below in average including hefty sales into the consumer space. Next question, please. Yeah, hi guys. I don’t know if you want to help quantify a little bit the, that chunky defense order. Wim, you sort of said that you felt the underlying March growth was 7 to 8% versus the 3% you guided. Is that sort of some help in thinking how much the defense contribution was in December? So are you expecting all of that to drop back down again or just partially drop down in the March quarter? Ben, we have, our defense business is a, has a regular pattern so there is customers who buy more on a quarterly basis but sometimes there is this pop that comes up and these extra pops were a big chunk of the difference between the 3% and the 7 to 8 that I mentioned. The other one is that we’re always a little bit cautious at the beginning of the quarter. You know, the last quarter we also, I think we guided 1 to 5% also and we obviously did better than that because a lot of our turns, a lot of our revenue is turns based and you never know how the quarter is going to develop and if any action will, any things will result from the higher energy prices that we’re seeing today for instance and so on. So really we’re on the cautious side in the beginning but a chunk of that caution is also because of these defense orders that we’re not going to repeat. It’s good business to have, it’s very profitable business, we love to have it but it tends to be a little bit chunky and that’s one of these things why last quarter was better than expected and the March quarter will be a little lower than expected. And Ben, maybe think about it, Wim’s 7 to 8, think of a couple of points from the defense and then a couple of points from the September effect into October as kind of the way to think about it I think. Good afternoon, it’s William Tao for Ambrish. On the last earnings call you talked about lead times stretching out. I was just wondering has that deteriorated or improved during this quarter and do you see any potential double booking related to the lead time and the back end capacity constraint? Thank you. That’s a very good question because you always worry about these things. Indeed, lead times have moved out a little bit. Or continue to move out, I would say because there is clearly a shortage in the back end. But they are still in the, most of our lead times are still within six weeks. You know, two quarters ago or a quarter ago they were below four weeks for the majority. Now they’re around, they’re below six weeks. So they have moved out a little bit but there is no sign of improvement yet so we expect that not to be a factor. The question that you can ask is if lead times push out, people are ordering more so when they will be pushed in we’ll lose business. That is not happening because like I said there is a trend to push it out a little bit further but we’re talking here about maybe one week or two weeks maximum. Double booking is something that we watch for very carefully. We do a lot of tests, and at the moment we cannot see any double booking taking place because lead times are still reasonable. I think that if they are below 8 weeks, people in general are not too much panicked yet about these things. So it’s only when they get above 8 weeks or 10 weeks that people start to consider double booking. But it’s something that we verify. We have not found any instances that there are double bookings taking place at this time. Next question, please. Yes. The last couple of years the expenditures on wireless infrastructure by the carriers tended to be front end loaded. What gives you confidence this year that wireless strength is going to continue throughout the whole year? Thank you. Yes. Steve, the main reason is the deployment of 3G. 3G both in Wideband CDMA or in CDMA2000, I mix these two together, and that’s what we’re seeing. Every month there are new contracts being signed by the equipment vendors. Now the danger is, there is always the danger that two companies or three companies are vying for the same contract and all 3 put in their forecast and of course only one happens, one receives it, but it’s an area that we’re very close, we try to be very close to customers and discount for that. But overall the growth, we see the growth continuing. It’s also driven of course by the growth in handset markets, which we believe is estimated for this year to be somewhere around a billion units for the first time in history. So both of these factors we believe will continue to see growth in the wireless area. The third area is the acceptance of data transmission over the wireless networks which is also happening even by installing upgrades to the existing, the second generation networks to provide more and more this data capability. So all of this I think will provide a pretty healthy environment for the wireless infrastructure segment. Again, it is a market that sometimes can be chunky. So it doesn’t mean that every quarter we’ll see growth. There could be some quarters that things get delayed or some contracts get pushed out. But in general we expect that market to be quite healthy for the year. Next question, please. The turns are around 55%. About the same as we did last quarter. Last quarter we did 54% turns. Next question, please. Your next question comes from the line of Mark Edelstone. Mark, your line is open. Okay. Your next question comes from the line of Tim Kellis. Yes. Thank you. Quick question about the FX family of the Virtex-4 product line. I understand you guys were ramping a few of the members this quarter. I was wondering if you’re shipping all six members of the family and if not, could you maybe elaborate on some of the issues or timeframe on getting all those members in production? Yes, sure, Tim, we are shipping at the moment. I think it’s 4 members out of 6 that we are shipping. We have had some yield issues. The demand has been much stronger than we anticipated because we didn’t expect people to do a lot of designs in gigabit transceivers but it’s clearly exceeded our expectation and that, coupled with some yield issues meant that we were, supply was limited. We have fixed the yield issues and we expect the, all the deliveries to take place in the next two quarters of all 6 families. Next question, please. Thanks a lot. Nice quarter first off. Jon, I just wonder if you had a specific dollar amount that you expect for the in-process R&D charge in the quarter and will you call that out specifically when you actually report the quarter? So, yeah, we have an estimate. I hesitate to give you more than what I already gave you which is about half of our 7%. I think you can get pretty close by using that number. And assuming we have the valuation done, you know, we would consider adding some clarity to our disclosure but it’s not clear that we’ll have that done by the time we do the Q filing. It depends. Hi guys. This is John Grols for Glen Yeung. Just a quick question on 65nm, can you guys give us a sense for timing on that? I think you previously said kind of latter part of 2007 and as a follow up to that if you can just give a little bit of maybe color around how we’d expect R&D expenses to scale with that? That would be helpful. Thank you. Yes. The timeline for the 65, the first 65nm products are planned in roughly around the middle of this year for introduction with the volume production in 2007. The big problem of course with advanced technology is the increasing cost of mask sets, and that is really the factor that will impact us most over the next several quarters. Our belief is that we can, our goal is to get the R&D spending back into the 17% range. And we think to be able to do so within the next two quarters even with increased spending in R&D, mainly driven because of higher sales, higher revenue for these quarters. Next question, please. Great, thank you very much, and sorry for the technical difficulty before. You mentioned with regards to the expense optioning, the cost for the current quarter, what was it for the last quarter if you could give that to us also? Thanks guys. Just to follow up on Mark’s question; can you just go through your expectations for gross margins and OpEx throughout the year or first few months? So we’re not going to be forecasting anything at this point into next year at this point. We’ll try to give you a better look for that at the next conference call but at this point we’re, given our fiscal year is still in process, we’re not going talking about our next fiscal year at this point in time. We would love to do it however next quarter which will be the beginning of our fiscal year and then we’ll give you our forecast for next fiscal year. Next question, please. Yeah hi. Just wondering on the design win momentum with your Virtex-4 and Spartan-3, is there a way you can quantify the first half of 2005, what was second half 2005 calendar year? How is that momentum going into calendar ‘06 at this point? Well, it’s difficult to specify that and I certainly don’t want to have comparisons with what our competition is doing. But clearly when we are in a competing design win we should, of course, not all design wins. We are winning the majority of these designs in the Virtex family. Virtex-4 I believe and customers believe also is a superior family from the point of view of power consumption and signal integrity, which are very serious problems for high performance design. In the Spartan range we have a much broader family of Spartan products with a family focused on IO intensive and a family focused on logic intensive. There again, we can position our products better and win sockets against our competition because when you have more products to offer you can target or find the exact product for the customers’ needs at a lower price than our competition can. So overall I think these are the two major reasons why we are doing so well in both of these families. Next question, please. Hi. I have a question on AccelChip. From the guidance I thought I understood that half of the increase was one off. Does this mean there is no sort of ongoing of any sort of size R&D contribution from AccelChip and also could you confirm what sort of revenue contribution you would expect from AccelChip in the March quarter assuming it’s recognized for the full quarter please? So Ben, let me go back over the expenses again. I said expenses were going to increase approximately 7%; about half is one-time charges. The remaining half was related to investments in 65nm, embedded computing and DSP. The “and DSP” part was the recognition that there will be ongoing expenses for the employee base and expenses that we’ve taken on from AccelChip. I’m not going to go down to fine granularity, but you can kind of think of it as 1/3:1/3:1/3 of those three things for that remaining 50%. And then the second part of the question was…? Was the revenue. The revenue contribution is I would say relatively minor. And that’s while the product is of tremendous value when combined with ours, I don’t think there’s really anything meaningful to tell you to put in here. It’s hundreds of, hundreds of thousands of dollars versus millions. This is a software product and you know that because we are a chip company in general it’s difficult to get much revenue from software, software is really an enabler that allows customers to use our chips and that’s how we positioned this. So there’s very little revenue associated with that. When we do acquisitions in general we acquire companies because of technology and because of the expertise of the people. That is the biggest value that we get out of these. Next question, please. Thank you. Just as a follow up regarding the tax rate. Unless I’m doing my calculations wrong when you take out the one-time taxes, the tax rate for the December quarter was 26% versus what I thought was guidance of 23%. Can you tell me if I’m off on my calculations or where the discrepancy lies in the tax rate? Sure, Tim. Back when we did the update in the quarter we talked about the tax rate change from 21 to 23%. That delta that you’re seeing when you do the actual mathematic calculation is the catch up from the previous quarters to realign the tax provision to a full year 23% underlying. Yes, hi. Good afternoon guys. Wim, I had a question for you. I understand the caution around the guidance and the impact of the loss of the defense based orders, but historically March seems to be a good quarter for burn, you know wireless infrastructure business tends to do really well. Any reason why you may not match your normal seasonal pattern which tends to be high single digits or is it just that your caution that you Inaudible? Yes, Sumit. First of all it’s not a loss. It’s a one-time business but of course we have to make up for it in this quarter. The other reason is that I tend to be a little bit nervous about the ongoing energy prices. You know if you really look at it, the December quarter, energy continued to decline and move from about $3 at the beginning of the quarter for gas prices to about $2 at the end of the quarter, now what we have seen of course is since the beginning of January we’ve seen the inverse and we are now back to $2.40 almost. And that makes me a little bit nervous. That’s why I’m a little bit more cautious in predicting the March quarter. Some people believe that gasoline prices doesn’t, or oil prices doesn’t have a big impact, but 85% of our business is in capital goods sector. So I think that the decision makers in these companies when they decide to invest in new equipment, they tend to be more cautious when gas and oil prices go up. That’s what we see reflected in our business sometimes. And since our products are on the shelf products, we see immediate reaction. So the price goes up and we see orders slow down pretty quickly after that. That’s why I’m a little bit nervous for the quarter. Up to now things are going well and we will see what happens during the quarter. I feel pretty solid about the forecast we have given but clearly we will update you in a couple of months how it actually is going. Next question, please. Good afternoon. How should we look at the price crossover from 90nm versus the larger dies, so specifically Virtex-4? And how should we look also at gross margin for Spartan-3 versus the company average at this point? Very good, Tristan. First of all the price movement, I think that when you look at the design, the price for, per logic cell that the step-over has already happened. You know, with Virtex, with 90nm yields now approaching, or are getting better and better. And of course the fact that 90nm die are smaller than their 130nm equivalent. We have seen the number of design wins in 130nm going down very rapidly and most of our design wins today are taking place in 90nm because the transition is taking place already. And we have seen certainly in Spartan-3 but now also in Virtex-4 the first production runs starting to happen. So that will continue the growth in these two families. As far as the gross margin is concerned, our goal is to have around 60% gross margin for all of our families. Now what is really the biggest, there’s two impacts on that. First of all, when a family is new, yields are not as good and then the gross margins tend to be lower. And then when yields continue to improve and the technology gets more mature, the equipment get more amortized, of course our gross margins start to rise. The second thing is the volume. Now clearly we make much more money on people who buy 10 or 100 parts than people who buy a million parts so it’s these mix factors that play a role in this but today Spartan-3 is not yet at our corporate margin level because it is still a relatively new product but it is starting to move there. And I don’t have the exact number available here but and I don’t know if I would tell you anyway but it is getting closer and closer to our corporate goals. Next question, please. I just wanted to get perspective on, Wim, on the communications end market. You illustrated between 2000 and 2005 that the quarters, what lack of growth there is. Do you think that at least we can count on those traditional markets growing at just barely 10% from here on out for the next several years? And on the defense business, if I just assume they all came from mainstream the last quarter am I approximately correct? Yes, David. First of all on the defense these are, you know, the defense designs take a long time. So the, most of the defense business came from mainstream or even in some cases from even older products than that because of the long design cycles that happened in defense and also their need for quality and stability. For the telecommunication industry, like you pointed out, our business over the last five years is declined quite dramatically in communications. We expect that is I believe is changing now. We’re seeing in the last several quarters a more stabilizing effect and even some growth happening. How much is going to be difficult to forecast but I think that 10% is a pretty good first guess at this time. It could be higher because what we’re seeing, you know, if you look back over the different components on the defense side, on the communications side, the wireline business was the worst hit because at some point there was all this new business there and now we’re seeing a growing set of investments in the area of video on demand, video servers, bigger, higher bandwidth, metropolitan area switches and things like that in preparation of higher broadband consumption thanks to fiber to the home. So I believe that we’re going to see growth in the traditional telecommunication, the wireline communications side. The wireless I think is being, has been doing stronger mainly because of the deployment in 3G or, and 2.5G for adding data to the existing GSM networks. And I think that that like I mentioned earlier will continue to grow over the years to come. Next question, please. Okay. Thanks for joining us today. We have a playback of this call beginning at 5:00 PM Pacific Time, 8:00 PM Eastern Time today. The instant replay will run for 48 hours. For a copy of our earnings release please visit our Xilinx IR website. Our business update for the March quarter will be posted after the market on March 6th. Our earnings release date for the March quarter of FY ‘06 will be Wednesday, April 26th after market close. This quarter Xilinx will be appearing at the Goldman Sachs and Morgan Stanley investment conferences. Thank you for your participation.

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Here’s the entire text of the Q&A from Nokia’s (ticker: NOK) 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. Thank you just a question on one of the product transition, that you mentioned regarding the volumes shipments in September of the 1110, could you talk a little bit about how quickly we should expect the 1110 to replace the 1100 how many quarter should that taken with the linear and also if you can just give us census what the actual margin in ASP difference for that key product update, thank you? Yeah I think SI indicate the new engine which is a base for that particular 1110 had ramped up very well from the outset, so we can expect very speedy ramp up from here on, I think a little speedier than what you would physically expect, it is very good base, the engine gives the very good base for the product and its expected only to take a couple of quarters to get very significant volumes, I suppose to significant if you look at the engine on the 1110 is both the which bypassing 1100 in the course of Q1. And that 1100 has been a huge sale, so it is a very speedy ramp up, the 1600 and 6030 are also shipping in the same way, and then accelerate the pace in contrast to what it typically would be in ramp ups for such product which about the very early stage reach volumes of tens of millions rather than millions. So I think this extremely collective to see there our delivery organization being able to ramp up that well, that not as the volumes are huge and approaching, pretty fast sort of 100 million mark, 100 million per quarter. So some of it’s key products you are getting tens of millions on a particular engine which is the base, base product, which has it’s a very good but all of the states good news in terms of margin because it has the volume margin contribution than the regular market series would have important, would do. With that combining those two in the next couple of quarters, we’ve a lot of leverage in positioning the product and its really positioned as well in terms of how we can cover the low end. In a customer, friendly way at the same time, leaving estimates, do not put the money on the table, so yes it is a good situation something to look forward to and something that really gives us perhaps a little bit of perspective I hope to be, obviously saying that couple of percentage points of ASP turned downed would be a big issue, because it is not, if we have the cottage, you are under control as we so nicely have going to the new engine and family of folks, its also being demonstrated, it was already in China with the 6L 30, which is doing very well so that part of the story, so to speak the 1110 and as you expected I understand, it’s a 18 points in how we got the couple of the low-end during the next 4 to 8 quarters. Good afternoon two quick questions firstly you mentioned already Jorma that’s you had some problems in Latin America with inventory bill last in Q2, that’s the difference, how do you between the sell off the selling in the quarter, is that correct now going into Q4 and number two Nokia network margins were quite bad given that you had 176 in the quarter if you exclude and it was down at 6%,7% in Q3, could we expect to recover already in Q4 in margins networks or is it going to take a longer time? The some of judgment we issued in Latin America which has been sorted out, we are also moving with the improved portfolio to the Latin America market so you can expect a clearly improved market share picture for us in Latin America in Q4, so that situation clearly, it is kind of typical quarterly fluctuation which you see quite a bit in Latin America, so yet we want to give you updated on those fluctuation so both on inventory as well as shipments by the Reebok and I note that our competitors typically don’t do it on a quarterly basis indebtedly in the season, and there by lot of people, want to make much more out of it, as if there was a huge build up or problem, its more of a typical fluctuation with Latin America being a case in point fluctuates more than other regions. So that sort of working out as expected and we will have a higher market share in Latin America after a better product portfolio. Nokia network yes we are working on, for any improved quarter, typically we have that on the fourth quarter, no drama expected here, but obviously we are working very hard to get that. thank you. [Ulla James] Thank you a question from both Jorma and Rick. One of the concerns that are out there is the deterioration as the gross margin declining in the last few quarters and peoples are asking at certain points, there is only so much you can squeeze from the operating margins. When we look next quarter as well as over next year how do you see you talked about some of the low-end you covered the low end that should start help the selling from the operating margins but either if you look at your high end offering did you expect to move up, did you see that those gross margins started stabilizing at certain level or is this something we should better get use to any of them offsetting with the operating margins can you give us one or two specific examples what where you can squeeze where you can get cost or product mixture that gives us more confidence because the stock is very attractive we have 18% to 17% operating margins from the handsets its probably not as attractive it is a low key operating margins so I am just curious if you could walk us through those kinds of dynamics as you see that the margin structure building growth and operating in next few quarters. Sure I can take this Rick. In the short term as you say we make sure in the very short term i.e in the quarter that when we had a little bit of gross margin pressure you manage that level with the Apex and the overall and then you see how well we can live on that in Q3 but that ‘s not the answer to a long term,. The answer to long term is product portfolio first of all I will talk about that and you want just one over in the lower end what we were a doing we talked about how the new a low cost engine works there and yes that’s half as you say but it also gets you a pricing premium when you come in with the new product like that in the 1110 its not the same price as the 1100 and the 1600 has the colors screen and that differentiated but still on the same platform you may expect the product for so that would work gross margin now in the lower end and as you know we talk about we have successive products coming there, we are going to ramp it up into the tens and millions, if that doesn’t stop we got another family that will come after that so we would be more than giving others a run for their for money. And each time you look to command a premium there as well as handle the Apex so that’s lower end, in terms of the high end I think that truth is starting to show here, as we release these products and we get great filled in the market place. The 8800 is just a fantastic device and phone, it’s beautiful, it is getting a lot of hope and that works the gross margins you re seeing what is multimedia is doing around imaging, music, coming and ES as well. We are going to have a nice product portfolio there, but again it’s is going to give some pricing there on the high. Along with that of course comes quality. That’s the other element of gross margin I think we have to bring the focus here that quality really matters in managing the warranty and thee repair cost, that cost across all product is particularly critical in the low end, you cannot afford to have anything between quality and so that s what we are working on to make sure if we work on a longer term in gross margins and not just rely good in a quarter Apex. Rick, just could you just clarify something historically you did talk about normal seasonality and you’ve done in the handsets historically there used to be over 20%, I mean there were some course of size 27 but it never was less than 20%. Is that how we should be thinking about your handset business in Q4? Yeah. When you talk about normal historical pattern in your handset business, as long as we’ve been following you guys since a while now, Q4 used to be this sort of for you atleast for handset sales, which used to be atleast 50% sequential increase. Some obviously higher but register in the market may be noticed as good these days but atleast 20% kind of, is that the right way of thinking for Q4 sequential growth. Yeah, I mean if you look at it historically you are absolutely right. So if you look at something 20%, 27% that’s where we are, obviously, so I can’t tell you whether it could be 5.2 or where it’s going to fall in. We don’t know, you don’t know, nobody knows, I don’t think the operators have decided on how they would push from second week of December, they will decide in the first week of December as some of these certain actions. So there are really are variables affecting that, but I think you look at the economy, you look at the operator behavior and then you look at the historical gross rate of about 20% to 27%. And there we are, we all get atleast, that could have been usually better. Thank you, question for Rick. With the R&D moving lower in the quarter could you talk about how you seeing that shaping going forward and may be on the SG&A side what do we expect the, the marketing expenses and holiday season to little bit lower than the sales growth or how should we look at that. [Rick Simonson] Yeah Tim, on the marketing standard they outlaid going in some details we would expect that we have the normal seasonality on the US sales and some in the Q4 and we are expecting that the absolute in marketing of course will go up in Q4, but it’s going to be more muted in the sales, so that’s looks like what I was talking about in the last question. In terms of R&D we are progressing well there, in terms of all targets we laid out little bit more than a year and I feel good about the progress that’s being made there on R&D as a percentage of sales. On absolute basis we brought that to flat running for the year. And again we have a very strong focus on both R&D and sales and marketing compared to gross margin so that’s how we get organization aligned and improvise on that I think we are in good order towards meeting our goals, that we set out on R&D. With respect to the slight decline that your predicting in ASP levels should we thing about that being same kind of percentage as it was this quarter or should we think about it more sizes and range, how would we think about that? Tim now you give me precise guidance aim, we’ve been pretty consistent here talking since the second quarter about how (3840) develop in third quarter and fourth quarter now. And I guess I will leave it at that, the point is, as Jorma talked about the somewhat decline in the ASPs really isn’t the story when you can build off the world cost platform devices and the pool what you get from the market place there so would expect that and again just get back to managing for overall, behind the same work. [Tim Luke] Thank you. Hello Jorma, hello Rick, Ulla. Congratulations on the introduction of new products especially the E61 could you comment bit on your relationship with RIM especially at you have given your license Blackberry Connect and the Nokia’s new enterprise devices will be directly competitive with BlackBerry and the second part of my question is how do you see the size of this enterprise smart phone market evolving, Very specific question about but thanks. First of all the relationship with RIM, I think that we have talked to them for a long, long time we landed with them a contract somewhat 18 months two years ago and we were first one to talk to them because we saw the potential in e-mail, then the well known and well popularized event, that will advertised NTP issue surface and thus of kind of whole to the discussion on how we can but one can implement our growth market strategy. And with all of that obviously that also made us to look at, how do we find of strategy which for long term will be customer friendly and enable us to bring value to table to the cooperate customer. With our unique capability and implementing CapEx on handsets features, so that led up during the last 18 months or so to implement the strategy where we support, a variety of email solutions not just RIM, even if we worked at a very early stage with RIM and that has been reference to many people in their mindset anyway. And we launched our own business center context, Nokia business center as well. Now obviously the RIM will (indiscernible) 42:04 we have a contract with them and we will continue to implement, we will support RIM where we see fit, and where we see the customer, customer wanting us to work with the RIM client. And have them use RIM having capability and service etc, but this when you look at the other alternatives they have a lot of traction as well, with many operators for understandable reason so RIM is not only one which has been looked up by those operators or by corporates. And there is a lot of real good food for our own business center concept because they see a lot of benefits for using that kind of capability. It is a nascent market with a lot of potential. So from our point of view if you really look at what happened here is that when we get our cup of alliance and theoretic to-date enterprise handsets into the market place in the first six months of next year. That will really be the path for us. And open the next era after what has been a very good communicator driven Nokia enterprise network. And (indiscernible) are doing just excellent work so I have a lot of expectations on what we can do next year in putting all those things, which we have in the pipeline into the market. And in the capital market today in early December in New York, we will really be looking at all of that, not just our capability but, what our offering is but also the market size and the real potential of how we see it for the enterprise solutions. But it’s just appropriate to say at this point that yes we see a lot of potential and I think one way of looking at it is just that you will really see the opportunity that series 60 provides us. When we will see the series 60 news version next year with the thing not on the with some of those multimedia things like music but think really about what we can do in the area of the enterprise. So the series 60 platform is just gives a lot of unique stuff to put not only the email client but lot of those enterprise masters into a shape which gives us very, very strong position and going towards the second half of next year. Just a quick follow up question, maybe this ones for Rick, the gross margins and enterprises were up come 46% last quarter to 50.7% this quarter is that more of a blip, because hardware sales aren’t as strong and in the future should we be expecting the software component of the enterprise business to decline over the period of time as the hardware ramps. [Rick Simonson] As we said the 9300 and 9500 really driving that higher gross margin in enterprises and that sales though has taken a higher percentage than the older messenger device in our portfolio and again we said for sometime that we’ve set the goal and the expectation based on what we believe is tip of the exploding market going to offer that the ES is going to expect the high gross margin business. And we said for sometime that we expect that in the high 40’s and that’s how we work on it and we are going to progress through the first half of next year based on the refreshment of the product portfolio, again in the small size of that portfolio, when we get a real big uptake from these great new communicator and smart phone products 9300, 9500 versus the older products in the messenger that’s what you get this talk about 50? Hi, Nokia has made it fairly clear that your newer products tend to have better margin than the older products in some sense during some of the more difficult quarters in 2004, but the issue was a an older product line, one of you if you can take, just give us idea about the, what percentage of your current shipment from products, that have been introduced in the last year versus where was it a year ago, and then looking forward you have a new design paradigm that is modular etc, would we expect then that percentage of products are new to go up, as we look into 2006. And does the new modular designed paradigm give you any certain advantages in terms of bringing products much faster reducing sort of the useful lifetime of the following so that you can be refreshing the product line more quickly, thank you? Yeah Thanks Paul, the product talk and then continue, if we look at the situation has we’ve done from second quarter to third quarter, as an example in the third quarter we had a higher share for new product revenue than what the case in the second quarter and our definition we use the slightly different definition. For us the new product is something, which has been in the market in volume for 6 months and when we go to the seventh markets in old product. And we are shooting to have 35% - 40%, in terms of new product at the particular quarter and when we get towards the higher end of that band usually you will see a pick in the margin, for that particular quarter and that just one of those interesting parameters, which we follow and gives us the very good clue and understanding, we’ve gone nicely up in the last three or four quarters and we were nowhere near, where we wanted to be in the course of 2004, so if you look at the few four and onwards we expect to go up but Q4 perhaps, not very much, rather stable or off the base and then next year again because there have been quite a lot of introductions during in the first half, you will see an up pick but we are on the trend line we are on the way up and that it’s an extremely encouraging sign with the strength in ramp up which we discussed earlier during this call, it just gives a good feel of going forward. Yeah and then you call US about the fabs market and I think we’ve started to articulate increase of turn starting to understand this strategy about speed the market but in different segment and using particular, so called S curve of the products here and you got to be fab the market on the, high spec new design, cutting edge products and we rush that into the market you take advantages of that and then you bring those as you go up the S curve and we start to hit the massive volumes you bring that across the platform and across the broader family of products to optimize there, so again the different speed to market on this products but there is a reason for it and then as you go further up the S curve, you really maximize them, your whole cost structure and the feature mix, and again, taking advantage of the platform so what we are working then I think you seeing the delivery alert with the pace and the rhythm of our new product launches and leading in the high end with the right mix of specs and yes we are making that S curve strategy working and that does bring the appropriate products faster to the market and then works to optimize that and take advantage of our platform as you go out that so called S curves. You put 18% out of sort of minimum future margin target, will that remain the margin target and also what kind of timeframe should we be thinking about to the holding to you reaching those sorts of goals? Well Paul, First of all if we look at the margin in the third quarter which Rick just announced in both mobile phones and multimedia 70% and 69% pretty close to 17 to 18 which was our target, in the last couple of months. We, that’s the target, it’s really a good target, and we have done pretty well again what you said to be some tough competition by some people. So, we clearly are well above the rest of the pack in terms of how we are performing today in terms of margins and we will be when we look at how we go forward, obliviously we would discuss that in our market days in 6 weeks time. Thanks very much. I should like to see these gross margin seen hopefully not the best. Its noticeable in the quarter that despite the sequential sales price gross profit, didn’t increase and its sounds like in Q4 we shouldn’t expect gross margin to improve and handset given stable mix of the products in deteriorating mix in terms of emerging markets develops. But the network business actually was the principle driver, disappointment like in Q3 or weakness and we haven’t told much about that, could you now just for the handset when we could expect to see improving gross margins in network and whether indeed long term margin targets in networks can be achieved without significant gross margin improvement there, thank you? Yeah. I think your observation about of the roll of networks is absolutely correct and not very many people have picked it up. Thanks for that. If we look at the networks, first of all, chasing long term targets, what we do very –very few days that our capital market day annually the forum where we look at long term targets, we fetch the target we comment on how we feel about that, why we have fetched them and what is the status and we haven’t done too badly if you look at where we’ve been after mid December of last year facts. Obliviously the market that evolved either way there are positive factors, there are negative factors both in the devices as well as in the infrastructure which impact the operating margin, the dynamics that determine the operating margin and they come from competitive situation and the effective of gross margin and then our Apex actions. On the handset obviously there are possibilities like the ramp up so that new products we have caused disposition and then in the high end including the 3G and particularly the breadth of our product trends in the negative which have effected and will be there in one form or other. First of all revise shipment to America, when one is moving to the most of the American market, the ASP’s are lower in the America, Barbados as well as Latin America than the global average. And on the 3G portfolio we will also moved to broad our price back so as the when the volumes go a real higher, so that the average 3G ASP’s is a bit low and so is the gross margin. There is some of those facts that affecting that, we will comment in a longer term if you see on the, all these in the capital markets day. Then on the infrastructure side clearly we have seen the emerging market to play a bigger role now in the last of couple of quarters. For which we should be mix of our customer base. With China and Europe being reasonably slow in investment. At the same time we have had gross of services business with the lower margin. So those are the main issues there. What’s the sustainable, a goal of 14% how do we look at that, clearly the main point, even after the articulating the all the reasons that are impacting, clearly the main point is that this is particularly, the operating margins particularly sensitive to the volume. We are at a very sensitive point, in terms of how we are as a company, because we have a very broad R&D base. We really global delivery, we are in China, we are in India. We are all over Apex, Latin America, US and our R&D across technologies is very broad. So the delivery organization R&D cost means that we have high cost operations. And that with the volumes of 1.5, 1.6 billion, yes it’s an issue, to get the 14%. It’s not easy with the current factors that are impacting. More discussion will follow on the Capital Market days. But that’s an introduction to that discussion. You have might out there, your commented that networks in terms of contribution and in terms of the overall growth profit and again going quarter to quarter networks account for more than the slight decline that we had going from second quarter of ’05 of approximately 50 million in total gross margin that you see decline, in many different networks so the device business in contributing greater gross margin on a sequential and on a year on year basis. [Ulla James] Thanks, I just want to ask kind of wondering any question and that’s a few years ago your market share in western Europe looked pretty much unpredictable, yet we’ve seen decline as since, what makes you so confident that going forward we won’t see some similar over the few years with your share in the emerging markets which is currently extremely high. [Jorma Ollila] The emerging market share is strong, but so continues the western European market share and I don’t’ think there has a been change in dynamics in western Europe fundamentally. And there has been, we have the highest share in present markets that what we had two or three years ago, we’ve done markets where (indiscernible) lower share. The basic dynamics had not changed the strength of our products let it be with brand continue to be the main drivers in this business particularly when the volumes get higher and they will continue to get higher. If you then look at the emerging markets and the dynamics the distribution has even a bigger roll in the emerging market than has been the case in western Europe so the strength of distribution the way we have build it, through the last 10-years significantly differs from anything that has been done by anybody. The strength of our portfolio, it’s not about one or two product, it may worse, and we are expanding into the higher ends and if you look at the quality, when you have the complexity of the China’s and the Indian’s and the Brazilian, Brazilian are bit well, and if you avoid the returns numbers are not correct and then you will be hit twice as a hard in the developing economies where the infrastructure to handle the repairs and other quality is much better, so and obviously if you look at the statistics today and look at the brand statistics and the brand preference particularly in the emerging markets. It is a very strong situation and the brand preference has historically had a very strong bearing to what the market share is and that indicates that who is very good. You then look at China as an emerging market, what can you do in an emerging market, in a year we have increased our market share from above 22% to well over 30% and it’s not about these emerging markets that are stabilizing into some sort of a lower level where, at play like our sales could not use the position through the distribution , which Rich just described in order to increase market share. At the expense of the players who do not have those attributes in place. So in addition if you look at the China’s on the India’s, its not about stock being low and plain, we have a leading position in China, we have a lead play in all segments and that’s gives up a quite a lot of indication about what might be happening when we go forward. So it’s the trade is safe from all these however for you the really tee structural bearing to entry in the emerging markets and incase of developed once the investments should be made in the distribution channel. Thank you Malik. Ladies and gentleman this now concludes our conference call. I would just like to remained you that during the call today we have number forward looking statement that involved risks and uncertainties. Actual results may therefore differ materially from the results currently expected. That could cause discrepancy that have been identified in more detailed on pages 12, to 22, in our 2004 announced in our press release, issued today. Thank you and have a nice 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_233857

Here’s the entire text of the Q&A from Rediff’s (ticker: REDF) Q3 2005 conference call. The prepared remarks are in a separate article. 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. Hi. This is actually _____ from J _____, congratulations Ajit, and Joy. Did you go through a series of numerical type of questions that I may have. The headcount at the end of the quarter and then also the number of advertisers that you had in the quarter? And by the way maybe you can give us an update on what _____ are. Thank you for doing this call and enlighten all those constraints? Okay Can you also give some commentary on what you were seeing with regards to the price of access both narrowband and broadband, what that is on an average right now, what might it have been a year ago? Okay. First of all we remember that roughly 60% of access in this country like China comes through Internet café. When you talk access that’s a very important element now. The typically cost of Internet access in Internet café is roughly between Rs.16 and Rs.25 per hour. It is you can say Rs.45 is a dollar roughly approximately. So about $0.30 or may be something like that. One of the interesting things is many of these Internet café, which there are about 65000 in India now approximately. Many of them at least the top 10% to 20% have become broadband, this been the major development of the last 12 months to 14 months. About we are between 10% and 20% are broadband. Reason why it’s an approximation is some have both narrowband and broadband with in the same café so basically about 10% to 20% have it. As far as home use is concerned typically it accounts for about 15% to 20% is from homes and the home use can be either be at the moment is predominantly dial-up and dial-up cost something in the order of magnitude of about Rs.500 for a 12 month connection roughly. Thats $10 for a year for a dial up connection with certain restrictions in terms of number of hours and so on. Recently there has been a push by the state owned telecom providers, BSNL to expand the broadband connection and broadband they define that is 256 Kbps lines, and they are currently attempting to marketed at roughly Rs.400 a month which is about $9 a month. This launched a campaign in the last three four month and they are getting some degree of traction for that. These are the three elements of which access from offices comes through the employees, so there is price attached to that, and the balance 25% to 30% with some multiple types of access going now. Okay and then lastly could you comment on the India Abroad, there was a pick up there, is that sustainable, is that can you comment on what made you drive in that? Well, It’s more accurate to say that some portion in the last quarter, some portion it is a seasonal dip, January, February, March quarter typically is a low quarter for all US publishing enterprises but some of it is there. But I think as we’ve mentioned in the last call If I recall correctly and we have in the good time to mentioned that our push is towards taking India Abroad Online in the much more aggressive way than we’ve done so far. None of that revenue has got reflected in the quarter at all. We expect that the project is underway and during this present quarter we should launch that and we think that is the way future attraction will come for that. So we are quite optimistic about it, it’s a profitable business and I think growth in the print media was very tough, as you know in the US. But I think it has the life of it’s own in the online world and we have early versions of the prototype will really look quite nice. And then lastly, is there a way to think about incremental margins for how much of your revenue that you generate should be resulting in the incremental operating expenses? I think we don’t have a business model there but internally what we like to do is, generally speaking more than half to two third of the increment gross margin should drop to the bottom line as the internal goal, now I must severely unconditioned it by one statement which is that the Indian internet market today is in the stage where it’s looking, when last quarter over the same quarter the last year has shown a sizable growth. And for any reason the market takes off into hyperbook period, which we can’t predict at this stage we would then not take all 60% to the bottom line but probably reinvest some portion of the two to increase the WAN visibility. But in the absence of that it’s a good way, mentally we think of it making sure more than half gross margin that you intermittently earned should fall to the bottom line. Good evening gentlemen congratulation on very nice quarter. I was hoping if you can give us break up between e-commerce and advertising for your online business? Okay I think with the break up that we have, here Joy will able to give you the breakup that we have fee based business versus online advertising business for that he is going to give the break up. Okay George, Roughly two thirds of my India online business 67% is advertising 33% is what we call fee-based revenues which includes e-commerce and mobile lender subscriptions. In number terms if you note they have both grown quarter on quarter but the same thing, lying also the same mix over the last few quarters because that it is that what we’ve seen, advertising Ajit will tell you is going very strong. And we believe going forward the mix will remain roughly at two thirds and one thirds. Okay. Fair enough. I was hoping if you can perhaps quantify the contribution from the pay-per-click initiative, both in terms of what it provided in terms of revenue, how many advertisers are presently using it? George unfortunately we don’t break it down, but at this stage it is strategic initiative, it’s very important for us for the future, it is strategic and it’s in a stage where that kind of business if you probably know requires a reseller operations throughout geography to make sure that, …reach out to us. We are in the process of establishing the reseller network unfortunately we do not presently break the advertising part, in to constituent. But it’s the minority part of the total, let me tell you that. And just one question, which is can you provide us with your cash flow from operations in capital expenditures during the quarter? Okay George, we spent something like little more than $800,000 in capital expenditure. Right and as you know my _____ was _____. And the total cash flow from operations was, it was a slightly positive figure but didn’t get capital expenditure. If you would like to ask a question please press “*” followed by “1” on your telephone keypad. We have a question from Fidale Hi guys, I was wondering if you could comment on the competitive landscape, that’s going on, how do you compete against Yahoo India and India Times? Well both those entities are good competitors and first of all I think we are the three founding members in the online association and all over worked together to grow the online advertising industry in this country. So they are good competitors, good to be with us to build the business. Each of us follows a somewhat slightly different model. The model that Yahoo and we follow is similar, more similar than the ones that we and India Times model. I think that Yahoo classic portal, and provide Yahoo concerns in India, their business is driven primarily by emailing and the messenger and they compete with us for the advertising revenue. They are not present in India at least not yet. On the e-commerce business that we do and the auctions business that we do, so far as India Times is concerned, India Times does not have a strong mail oriented franchise, so in that sense they are not a perfect classic portal. But they have a strong offering in the auctions area the execution of that is different I think our option’s execution is very similar to eBay, which is very low touch model, and there is India Times takes the principle positions in the auctions. So there are these classic differences. We operate naturally, we have ad stage team, which today I think extends to 8 to 10 cities which is a much deeper and wider coverage than both of them. And finally we have very strong pay-for-clicks initiative which is getting early tractions and it’s very important to establish it early and get to scale, as you know it’s scale business. So these are the kind of salient differences. We have a strong and flexible revenue line from the United States, which has helped us stabilize our early days, and we’ll stabilize, some of our virtually also find some of our international initiatives. India Times does not have that. So these are the salient difference between us. Great thank you, Can you give us an idea on, if you consider utilizing as a marketing pie, how much of that is taken out by all the major players and how do you guys break it down roughly if you have an idea. That could be helpful, Thank you. We don’t have an exact number for this, but I believe that they are probably the leaders in the category of online advertising. We are probably clearly the leaders, that we don’t have a number for that but I do know that between Yahoo and us, we take more than 50% of what is in the Indian market, I know that for sure, I think. And India Times is probably number 3 in that. So between the three of us we probably have about 60% of the market. If you would like to ask a question, please press ‘*’ followed by the ‘1’ on your touchtone phone. [OPERATOR INSTRUCTIONS]. You have a follow up question from Jim Fidale I just wonder if I asked one more question, I was wondering if Google, you see Google in the face, and how they are doing in India? Oh Yes I forgot I am sorry and they completely slipped my mind if they are in our space, they have as you know they operate in this market, only on the search front they have recently I believe appointed a sales operations, one or two man teams in the market in this last quarter. And they compete on one segment of our business. So they’ve just entered the market in this country signifying their interests in us. Yes they do exist. Yeah, how about Sify, do they compete at all in the space, or they are more access provider at this point? That’s our understanding, my understanding is that they are an access provider, they don’t compete and hold out in the quarter business for that. If you would like to ask a question, please press ‘*’, 1 on your telephone keypad. The next question comes from George Just a follow up on the Google question, how do you perceive your search technology which is proprietary going up against theirs and have you heard any romblings about Google trying to setup their own Indian pay-for-click business, something more specific, to work in the Indian market place? George, one of the useful things that we would try to do is open three browser windows on your screen and then put one is Venus, one is Google and the third for example Yahoo. And enter the same search term and see what happens as a result and search is a commodities business, you will get identical results somewhat and you can try this out for yourselves. So I think the thing about (indiscernible) (29:24) right now as I said today it’s a commodities business and at least 10 companies in the world can produce the same results. Now what is going to be in the future is quite something else. And we have something in the works as well. Now much of (indiscernible) (28:45) is about branding and being in the top of mind about the awareness of people come looking for you. Having said that there are competitor and they are just about setting out shop in this country, we do not have any idea whether they will customize their fish to provide local results, in a fundamental way outside the United States all states is local because what you were looking for local e-commerce offers and so on. We believe that they will be a formidable competitor and this is as much as Yahoo and us and India Times and MSN work together to bring the market and sure when they come in, they will join us to help in the market as well. We can all take a share of it.

EarningCall_233858

Welcome to E*TRADE Financial Corporations fourth quarter and year-end 2005 earnings conference call. Operator Instructions Following the presentation, the floor will be open for questions. I've been asked to begin this call with the following Safe Harbor statement. During this conference call, the Company will be sharing with you certain projections or other forward-looking statements regarding future convenience or its future performance. E*TRADE Financial cautions you that certain factors, including risks and uncertainties referred to in the 10-K's, 10-Q'sand other reports it periodically files with the Securities and Exchange Commission could cause the Company's actual results to differ materially from those indicated by its projections or forward-looking statements. In this call, E*TRADE Financial will discuss some non-GAAP measures in talking about its performance and you can find the reconciliation of those measures to GAAP in the Company's press release, which can be found on its Website at www.etrade.com. This call is being recorded. A replay of this call will be available by telephone beginning at approximately 7:00 p.m. Eastern time today through 11:00 p.m. Eastern time on Monday, February 6. This call is also being webcast at www.etrade.com. No other recordings or copies of this call or authorized or may be relied upon. I'll now turn the call over to Mitchell Caplan, Chief Executive Officer of E*TRADE Financial Corporation; who is joined by Jarrett Lilien, President and Chief Operating Officer; and Robert Simmons, Chief Financial Officer. Mr. Caplan, please begin. Thanks everybody for joining us today. 2005 was another defining year for E*TRADE Financial. A year in which we delivered on our vision of creating a differentiated global financial services franchise which champions the individual investor. As we enter 2005, we realign the Company and our financial reporting to focus on our key customer segments. Shortly thereafter, we made a series of enhancements to the three primary components of our value proposition, price, functionality and service. On pricing, we simplified our structure and expanded the ways in which customers can qualify for our best rates across our entire suite of products. This included rewarding our customers for holding assets with us, not just trading activity. In terms of functionality, we leveraged our unified technology platform to launch our flagship product, E*TRADE Complete. With this product, we enhanced our customer advocacy by providing customers with cutting edge tools to optimize their financial portfolios across all of their cash and credit relationships. We also strengthened our equity and option platforms to include advanced order entry capabilities and a broader set of trading and investing analytics. We reinvested in service by deploying leading edge technology solutions throughout our service organization while continuing to build out our brand strategy and adviser channel to bolster our asset-gathering initiatives. We opened six additional E*TRADE Financial centers, bringing our total to 16, increased the number of relationship managers to nearly 200, and as a part of our acquisitions, integrated the full complement of Harrisdirect's award-winning customer service organization. We also completed two adviser acquisitions as a part of our regional adviser strategy. Through these enhancements to our distribution network, we continue to strengthen our core service platform while improving our ability to provide broader personalized service as an integral part of our overall asset-gathering strategy. At E*TRADE Financial we recognize that at the core of every financial relationship is trust. To that end, we remain deeply committed to security. In 2005, we launched the industry's first multifactor authentication system, offering customers a secure ID token to log onto their accounts with a six digit sequence that changes every 60 seconds. More recently we built on our leadership in account security with another industry leading initiative, the launch of our complete protection guarantee. With this guarantee, we pledge complete fraud, payment and privacy protection to all of our customers. In 2005, we continued to capitalize on a business model that limits our exposure to market fluctuations. We took steps to further strengthen and evolve the franchise organically while seeking opportunities to accelerate growth through accretive acquisitions. In the second half of 2005, we identified, financed and closed two major acquisitions Harrisdirect and BrownCo. These acquisitions will result in greater scale throughout our business model and provide opportunities to leverage the best solutions from each company to deliver highly competitive value-added products and services. Equally as important we continued to demonstrate discipline by exiting businesses that we deemed as nonstrategic or underperforming, strengthening our overall operating fundamentals. While accomplishing all of this in 2005, we also remained focused and disciplined in the execution of our vision. We have created a model that maximizes the strengths of our individual businesses and leverages those strengths across the Company, generating greater operational, marketing and service efficiencies. Through these efficiencies, together with our strict financial projections we delivered record results in 2005 across our key operating metrics, driving a third consecutive year of record financial performance. I'm pleased to report that in the fourth quarter we generated record net income of $129 million or $0.32 per share, resulting in record full-year net income of $430 million, or $1.12 per share. In 2006, we will focus on executing our integration plan, including Harrisdirect and BrownCo while further seeking consolidation opportunities that create value for customers and shareholders. Through the right set of investing, trading, cash management and lending solutions and an organizational structure aligned with the needs of our retail and institutional customers, we are creating a franchise that is differentiated in the marketplace and well-positioned to deliver our long-term organic growth targets. Now, for more detail on how the execution of our strategy translates into results, I'll turn the call over to Jarrett. Thanks, Mitch. I'd like to start by highlighting some of our 2005 accomplishments, focusing on how we continue to strengthen our position within the industry and distinguish our model from the competition. I'll then conclude with an update on our integration of Harrisdirect and Brown. By expanding on existing customer relationships while attracting new high-quality customers, we generated solid growth in our business throughout the year. As a result, we remain well-positioned to deliver on our long-stated organic growth targets which include 10 to 15% top line growth, 20% earnings growth and a 40% operating margin. In 2005, we delivered on these targets with revenue up 15% year-over-year, segment income up 31%, with an operating margin of 38%. As a further proof point of the continued improvements in the scalability and leverage we have achieved through integration, 70% of the $221 million growth in 2005 revenue dropped directly to segment income, even as we spent an additional 44 million in marketing. Excluding our opportunistic upspend in marketing, incremental revenue carried an operating margin in excess of 80%, and this is even before the additional operating scale we expect to achieve as we integrate Harrisdirect and Brown. The model is working. We accomplished these goals through the strengthening of our value proposition in the key areas of the business. In investing and cash management, we launched E*TRADE Complete and transformed the way customers think about the value of their cash. We launched our intelligent cash optimizer to help them derive added value from all of their cash, depending on their liquidity needs. We launched the product in March and began to invest in marketing it shortly thereafter. We are already seeing substantial results. In the fourth quarter, we generated organic growth in enterprise cash of $1 billion, on top of the $800 million growth in the third quarter for a total of 1.8 billion in the past six months. Through this organic growth and the continued execution of our balance sheet integration initiatives, we increased deposits on the bank's balance sheet where it provides the most value by $2.9 billion during that same period. We are driving significant growth in customer cash as a result of a deeper customer engagement as evidenced by increased usage of functionality we offer such as Quick Transfer. This feature allows customers to link their E*TRADE accounts to external institutions and transfer money in and/our out, free of charge. In December alone, we processed over 200,000 customer initiated quick transfers with $2 being transferred in for every $1 transferred out. We view the engagement with this particular product and the inflow trends we are seeing as an important indicator of how well our cash management value proposition is resonating with customers. Our ability to target solutions beyond trading, such as cash, where the universe of potential growth is much larger, continues to distinguish our model in the industry. The growth in cash from our retail customers was a key factor in our ability to widen our net interest spread in 2005, despite a very challenging interest rate environment. As the spread between the 2 and 10-year treasuries flattened by over 110 basis points to single-digit levels over the course of the year and even briefly inverted, many traditional players experienced significant spread compression. By connecting with our retail investing customer through compelling cash management solutions we were able to grow retail cash and leverage that cash through our institutional segment ultimately reducing our funding costs. As we discussed on our 2006 guidance conference call in December, we are moving toward a full balance sheet integration. As a result of this, in 2006 we will discuss our net interest spread on an enterprise basis. Our enterprise spread is derived from the combination of interest-earning assets and interest-bearing liabilities formerly run as separate bank and brokerage balance sheets. We have provided historical enterprise spread data on our investor relations Website to help you through this transition. In the fourth quarter, enterprise net interest spread increased 5 basis points to 257 basis points. This increase was the net result of an 8 basis-point improvement from growth in deposits, offset by an 8 basis-point decline from the flattening yield curve, we then picked up an additional 5 basis points through growth in margin loans, both organically and deal-related. As we continue to connect with our customers through cash and credit, we grew our average enterprise interest-earning assets by $3 billion in the fourth quarter to 35.6 billion, ending the year at $40 billion. Regarding our structural balance sheet integration initiative, we have filed applications with both the OTS and the Federal Reserve. Our specific request requiring that the Federal Reserve's approval are consistent with transactions and activities that have been approved for others in the past. Neither the Federal Reserve nor the OTS has voiced any significant objection to our proposal or given us any reason to believe that our application will not be approved. The members of both agencies involved in evaluating our request have indicated that they see the value and benefits of the proposal. While we cannot control the timing of the banking agencies' review process, we expect that the proposal will be approved and the transfer completed before the middle of the summer. Turning now to trading, we also continued to differentiate ourselves through investment in our global equity and options platform. We also remain committed to our investment in the growth of our international operations. In 2005, we made a series of enhancements to our trading platforms to include more sophisticated analytics, order types, screeners and a broad access to research. We enhanced our value proposition across all products, and particularly in the area of options where we bolstered our trading interface and reduced contract fees. The investment we made in reducing our contract fees on options paid for itself in quarter with strong growth in option customers and activity. Our option DART volume in the fourth quarter increased 28% sequentially, and 64% year-over-year. Through this growth, option volume now accounts for approximately 11% of our total DART volume and just over 20% of retail commissions. We continue to see the option business as an important component for the long-term growth of our trading business. Another important growth contributor is our international retail business. In 2005, international DART volumes increased 19%, compared to 16% growth in the U.S. In addition, since 2001, our international operations have delivered growth in DART volumes at a compounded annual rate of 25%, now representing 15% of our total DARTs. We see additional growth opportunities in our international retail businesses as we begin to evolve the business beyond trading to include cash management solutions, just as we have done in the U.S., furthering our vision of managing an integrated global balance sheet. So while our options in international businesses not only differentiate us from a strategic perspective, they also differentiate us economically through favorable operating margin dynamics. Turning to lending, in 2005, we rolled out both new products and enhanced functionality. In December we rolled out our E*TRADE Mileage Maximizer Account, a credit solution that allows qualified customers to continue to accumulate rewards from their current credit card providers while paying our lower rates. While it's still early, the customer response is encouraging. We are also preparing to roll out the next iteration of our E*TRADE Complete account with the addition of the intelligent lending optimizer. Through this unique functionality we deliver value to customers in connection with their use of credit in a way that is similar to what we have done for customers in their use of cash management through cash optimizer, by focusing customers on the value of efficient use of their overall available credit, we look to drive growth across our suite of lending products including margin, home equity, and debit and credit cards. As a customer champion we remain committed to creating products and services for our customers that help them optimize all of their financial relationships. I'd like to now provide an update on the Harris and Brown integrations. Specifically with regard to Harris, as you will recall, we announced the deal on August 8, and closed on October 6, nearly three months ahead of schedule. Last week we completed the conversion of the Harrisdirect customer accounts onto our system. While we are pleased with the operational conversion process, the overall conversion did not go as smoothly as we had hoped. Conversions by definition are unpleasant for customers as most don't like change. From an operational perspective, online conversions by definition are complex. Traditional Street conversions are done on a settlement date basis. Online conversions require a trade date and a settlement date conversion. These conversions need to be bridged, and this has to be seamless to the customer. Our conversion actually went quite well except for a couple of issues. This particular conversion involved many more third-party vendors than most which complicated the process. While we take full accountability for the issues, there were problems that occurred with vendors that affected a minority of the Harris customer base. In advance of the conversion, we significantly increased the capability of the existing Harris service teams, which we believed would be more than adequate. Unfortunately, the volume of inbound calls was compounded by these vendor problems, increasing the number of inquiries beyond our planned capacity. As a result, many customers experienced unacceptable hold times while trying to reach us. In response, we staffed dedicated teams of account specialists to reach out to customers, and help them through the transition. In addition to resolving the inbound calls, our service reps placed thousands of outbound calls to customers. We also offered Harrisdirect customers a number of accommodations as an apology for the service level they experienced. The good news is that the conversion is done, and behind us. We have some making up to do with some customers, but it's important to note that we are three months ahead of schedule, and that true synergies can now begin to be realized. Further, pre and post attrition levels are running better than planned. As recently as last Friday, we saw the Harris customer base, we saw their assets, cash, DARTs, and margin all above the preconversion levels, with account attrition currently under 4% compared to our modeled 10% level. In regard to Brown, we are optimistic that it will be a much smoother process than Harris, as it is inherently a less complicated conversion. That being said, we will remain vigilant and apply all appropriate lessons learned from the Harris experience. The Brown attrition levels so far are trending near 6%, which we are comfortable with at this stage, given the level of outreach we have already achieved with these customers. Thanks, Jarrett. Our 2005 financial performance demonstrates the continued advantages of our integrated model. Total net revenue for the year grew 15% to a record $1.7 billion. We delivered this top line growth while continuing to shift toward higher quality, more recurring sources of revenue. For example, while total net revenue increased 15% year-over-year, net interest income increased 37% and rose to 51% of revenue. This is from 43% a year ago. At the same time, gain on sale of loans and securities represented just 6% of total net revenue, compared to 9% in the prior year. In 2006, we expect to continue to see strong growth of interest income. Both in terms of absolute dollars, and as a percentage of revenue. This growth will be the result of continued organic growth in customer cash and credit, accelerated by the integration of approximately $8 billion in new cash, and nearly $4 billion in credit in the form of margin loans from our acquisition of Harrisdirect and BrownCo. As we took steps in 2005 to strengthen our core operations, eliminate underperforming or nonstrategic businesses, and drive greater leverage through integration, we delivered a 500 basis-point improvement in operating margin, versus the prior year. For the full year 2005, our consolidated operating margin was 38%. Up from 33% a year ago. Through our continued financial discipline, and the additional scale afforded through the acquisitions of Harrisdirect and Brown, we are forecasting an operating margin in the low to mid 40% range for 2006, with margins and operating improvements linked to the realization of synergies over the first half of the year. Now, a few details about the quarter. Consolidated net revenue in the fourth quarter totaled $478.9 million, up 14%, or $59 million from the prior quarter. Approximately $51 million of the increase was directly related to the full quarter inclusion of Harrisdirect, and just one month of BrownCo, consistent with what one would have expected based on the revenue trends at the announced date of the deal. In the fourth quarter, we increased our provision for loan losses by $3 million, to a total of $16 million in response to the growth of the total balance sheet, and the recent changes to the bankruptcy laws. We remain extremely comfortable with the credit characteristics of the portfolio. Turning to the operating expenses for the quarter, we continued to demonstrate cost discipline and realized operational efficiencies. Clearly, we expect these efficiencies to increase throughout 2006, as we integrate Harrisdirect and BrownCo, and begin to realize the projected synergies. Fourth quarter segment results include a full quarter of operating expenses for Harris, and one month for Brown. Fourth quarter net income rose 20% quarter-over-quarter, to $129 million, or $0.32 per share. Included in our GAAP EPS of $0.32 was an $0.08 per share nonrecurring gain related to the previously announced sale of E*TRADE Consumer Finance. This gain was offset by a net $0.06 per share in field-related conversion and restructuring cost associated with our earlier than expected closing of Harrisdirect and BrownCo, as well as the incremental interest expense and share dilution from financing the transactions. Of the $0.06 related to the acquisitions, $0.04 was related to Harris, and $0.02 for Brown which closed in November, ahead of plan. Excluding both the nonrecurring gain from E*TRADE Consumer Finance and the impact from the early closing of these acquisitions, fourth quarter earnings per share would have been $0.30 resulting in $1.10 for the full year, which compares to our October guidance of $1.04 to $1.09. Also included in our segment expenses in the fourth quarter were several nonrecurring items related to the execution of our ongoing strategic initiative and acquisitions, as well as a favorable legal settlement. When taken in aggregate, these nonrecurring items and the legal settlement all netted close to zero within our reported GAAP EPS. These items included a favorable final resolution and cash settlement associated with MJK-related litigation, previously disclosed in our SEC filings, a non-cash write-off of an intangible asset, related to the exiting of our OTC floor brokerage operations on the Chicago Stock Change, consistent with our capital market integration plan, and a non-cash facility restructuring and other. From a P&L perspective, the net benefit of the legal settlement was booked in the other expenses line item, and the intangible asset write-off was an amortization of intangibles. The facility restructurings as well as $36 million of the E*TRADE Consumer Finance gain, ran through restructuring and other exit charges with the remainder of the consumer finance gain running through discontinued operations below the line. As we drive greater integration and create additional operational efficiencies, our model continues to deliver strong results in various environments. In fact, we have improved our operating margin in 2005 despite volatility in interest rate, DART volumes and average commission rates. In summary, the Company's 2005 results highlight the success of the investments we made in price, functionality, service, and marketing to help broaden our customer relationships. As we enter 2006, we are positioned to further unlock the opportunities and earnings power of our model, both organically and through continued strategic acquisitions. With that, we'll now open up the call to your questions. My first question is on the enterprise spread, Mitch. Well, the average was 257, but with the benefit of the margin loans of, significant margin loans of BrownCo, I was just wondering, what is the exit? What do you exit the year, to compare that with the guidance that you put out? Yes, the truth is, Rich, a couple things. One is we only had one-month of Brown and even with Harrisdirect, we haven't begun to see the benefit yet of margin. It's not in our numbers yet for Harrisdirect because it was needed to be post-conversion from purging over to ADP. So what I would tell you is I think you saw the guidance that we gave in December with respect to where we expected enterprise spread to be, and again, we remain extremely comfortable with that guidance we gave you in terms of the ranges associated with enterprise spread. Okay. I mean, is it safe to say you're probably, if not within the range, fairly close to it as you exit the quarter? Well, the truth is, on a pro forma basis, the answer is yes. Given the fact that you would have had the full benefit of Brown for three months, as opposed to one month, and Harrisdirect you would have had the full benefit of the margin, which we don't yet have until post-conversion, which just happened 10 days ago. But I think it's fair to say that on a pro forma basis, that's accurate. Okay. And then I was just trying to get what BrownCo, the DARTs, maybe Rob has this, what BrownCo, the DARTs were in November, just to see how the overall trend of DARTs was November to December. Yes, we're not going to give you the specifics, but what you will see, is as you know in a matter of a couple weeks we'll put out DARTs in general, for what we experienced in the month of January and you'll get a sense of how it breaks out. It's fair to say, Rich, that as we always say to you, we're going to experience the same thing the industry's experiencing. Whether you want to think of it as our core ET operations, whether you want to think of it as Harrisdirect or Brown, it's all now integrated as one. To the extent that the marketplace is doing well, we're typically doing well. If it's not, we're not. What you would expect to see hopefully from us, is just continuing to focus on gaining market share and outdoing whatever the market's doing. Okay. And last question comes to the guidance here again. December was 148,000 DARTs, I know you don't comment on monthly DARTs, but all reports are they're running up significantly. 20 to 30%, plus. So I guess the point would be, that would put you up around a 1.75 mark, as a minimum, well above the guidance. 1.35 to 1.50. Is there any updates in the guidance due or are we leaving some room for other things happening in the year? Okay, let me tell you a couple things. One is we just did guidance about a month ago. I think we gave you a guidance range, if I remember correctly, of about a $1.30 to $1.45 before deal-related expenses for both Harris and Brown of $0.05. I think we indicated that we expected to see about $0.03 of deal-related expenses in Q1, $0.01, in Q2, and $0.01 in Q3 as we went through the year resulting in GAAP of a $1.25 to a $1.40. We certainly remain comfortable with that guidance given everything we're seeing. Again, it's the 23rd of January, so we're 23 days into the first month of a 12-month year. We stated in December that to the extent that we outperform with respect to our attrition assumptions, and I think today we were very clear that we're now post-conversion with Harrisdirect and we're experiencing under 4% of account confession. I think one of the other things we have said, and I'm comfortable saying, is when you look at Harrisdirect and you look at all of the key metrics that drive revenue and profit, whether it's DARTs as you were asking about, whether it's assets, whether it's cash, whether it's margin, we're certainly experiencing either flat or up in all of those numbers. So we really have seen zero attrition in terms of the revenue-driving metrics. Brown we have not yet converted although we have, as Jarrett was saying, approached the Brown conversion differently in that we've reached out to a lot of these customers in advance and we're experiencing about 6% on accounts. But again, when you look at the key drivers in revenue and profit for Brown, whether it's assets, DARTs, margin, or cash, we're, again, equal to our greater than where we were when we announced the deal. So we feel quite good. If we continue to experience those rates, there will be upside. I think as we have done historically, as we come through Q1 and we have a better sense of what the first quarters look like, where we are on the final numbers, post-conversion with attrition, if appropriate, we'll readjust our guidance. Just on the, just the account growth was real strong in Q4. I was just curious, just given what the account sizes were when you announced the Brown and Harris deals, it looked like about 630,000. I mean, is it safe to say about, stemming from the nutrition rates, about 600,000 or so came across, and that's what's in that number of the 782 gross new accounts added? Yes, I mean, I think if you look at total for Q4, we had gross accounts of about somewhere in the neighborhood of 878,000 accounts. Okay, so that's what you saw in terms of gross. This is total. This would be investing in trading plus the cash and lending. And again, you would have seen inactivity of about 169 or 170,000 accounts, and closed of about 118,000 for a net new of 590,000 accounts. Of the 590 our 591,000 accounts, together Harris was about 424,000, and Brown was about 186. So you would actually see a net loss of somewhere in the neighborhood of 19,000 accounts for the quarter. However, there are two unique things that happened in Q4 with respect to accounts. The first is, as you're well aware, we sold E*TRADE Consumer Finance, or the Ganis business and with that went 55,000 closed accounts. In addition to which, which really hasn't happened to us before, one of our corporate services group, corporate customers, actually filed for bankruptcy, a large airline. And so as a result of filing for bankruptcy, many of the, obviously, the restricted shares and options had obviously less value, so we define them as inactive. That was about 31,000. If you add the 55,000 in connection with Ganis and 31,000, we would have had a net gain of about 66,000 accounts organically, which we felt pretty good about compared to about 48,000 in Q3, and about 55,000 about a year ago. Thanks, that's very helpful. And just another quick question. On the bankruptcies, clearly there was the bankruptcy legislation that caused kind of a one-time spike with a lot of other lenders. Do you think you would expect to see your credit cards go back to kind of the 7, 8 million range they had been trending prior? Yes, absolutely. So a good way to look at this is the increase was almost exclusively, I mean, it was entirely, in fact, due to the bankruptcy filings. You saw bankruptcies up significantly in November, a couple million dollars, you saw them up in December, again, about 1.6 million, and we have already seen the January numbers, and so what was, about 2.6, , I think in November, and 1.5 or 1.6 in January is down to 160,000, I mean in December is down to 160,000 in January. So in other words, you experienced the spike as a result of the bankruptcy legislation, and now we've returned to levels that I think are much more normalized than you'd expect to see, much more normalized charge-offs. Yes, you mentioned still having an appetite for possible deals and I'm just wondering with the integration kind of stumble with Harris, does that mean you're a little bit more cautious right now and maybe put some deals off until later on in the year? I think interestingly enough, there's always something good that comes out of something bad. So when you look at the Harris diversion, I think Jarrett and the team did an awesome job operationally. I don't think we could have ever known and expected some of the challenges that we had in general, and in specific with the vendors. It resulted in call volume being 7 to 8 times greater than expected. A good learning experience. There are a couple takeaways as Jarrett said that we learned that we've already changed in approaching Brown. Clearly, I think we've indicated that we expect to convert Brown in the beginning of Q1. What we've seen so far now post-conversion as I just went through with Rich around attrition, I still feel quite good about. Even when you look at the volumes that we're seeing at Harrisdirect in any of these metrics post-conversion, meaning the last couple days versus the preconversion we're doing better than preconversion, notwithstanding what you would define as the stumble. So once we get through the rest of Harris, we finish Brown, and there are opportunities that present themselves, I think we'd be comfortable about taking advantage of them. Okay, great. And maybe just a quick question for Rob. Can you detail those nonrecurring items, the settlement and amortization in dollar amounts? Sure. Again, they stand several line items, essentially, but if you look at the MJK settlement, it shows up in that other expense item, and it was a little bit north of $30 million or so. No, 30. You've got an offset in your amortization of intangible line of related to the CHX, the Chicago Stock Exchange item that we talked about, and then, and those are the two major items. There's some other restructuring that basically makes those two items net to zero. A good way to think about this is that if you have the core sort of operating part of the business, then I would argue to you there's about $0.13 worth of noise in the direction of both positives and negatives. Ganis generated about $0.08 of good guys, and the settlement around the MJK litigation, as Rob said, generated about $0.05. So that's about $0.13. And I can give you the specifics or even off-line in terms of the actual numbers if you would like. Of the $0.13, $0.02 we delivered in the earnings by delivering $0.32 for the quarter, and a $1.12 for the year. Deal related costs in connection with Harris, were about $0.04. Deal-related costs in connection with Brown were about $0.02. The exiting on the charge associated with the Chicago Stock Exchange which we decided this quarter to exit in connection with the overall sort of strategic initiatives, post-acquisitions and thinking more about, I think as we have talked about before, algorithmic trading was about a $0.03 charge. There were overall facility restructuring charges again that came through as a result of Chicago and otherwise of about $0.01, and then finally there was about $0.01 of charges in connection with a technology write-off that we decided to take this past quarter in connection with again, the restructuring of facilities in our mortgage operation and the move from, as you're well aware of, Irvine to Pittsburgh. If you look at all of that, it adds to $0.13 of charges, well, or $0.11 of charges and $0.02 of excess delivery against the $0.13 of good guys which came from both Ganis and the MJK settlement. Does that help, Matt? Yes, I want to follow-up on that point. If the litigation was 30 plus and the intangible offset that, in other words, you're implying that was 30, that means the intangible on a normal basis would have been zero. And it has been running, I guess, 5 million or so, and I thought that actually would have gone up a little bit with the deals. Am I missing something, or more importantly, how should we be modeling the amortization line going forward? A couple things. The one is that the 30 million, I think we were just clear that the $30 million which came through as a result of the legal settlement was not entirely offset by the intangible around the CHX. It was $0.03 of the $0.05. The other two pennies, one was related to facility restructuring and the third was related to the technology write off in connection with the mortgage operation. So there's a lot of movement going on in terms of the amortization of intangibles because you have both good guys and bad guys. And I think if you go back to December when we gave guidance, we talked about what we expect a normalized run rate to be for amortization of intangibles, and we remain consistent with that view. Obviously there's going to be new amortization that's coming in conjunction with the two acquisitions, so there's also going to be a reduction in amortization related to this write-off from CHX, so you're going to have guys going in both directions, but net-net your amortization, you should model it out going forward from the based on the September quarter. Thanks, and good afternoon. I've been looking at your balance sheet, and I've been looking at the tangible equity ratio, and from my calculations, just taking out the goodwill, it falls to about 3.3% from about 5.9%. First of all, does that look like it's an accurate calculation? Okay. And the second one is, is that going to, is there any covenants with your new debt or your old debt revolving around tangible equity ratio? There's a variety of covenants, Campbell, and obviously it's, part of that's been filed publicly so you can take a look at it. I'd say there's a significant amount of room. I think the other thing to note is we have not yet drawn on the revolver. So this having a low tangible equity ratio, you don't think is going to limit your acquisition opportunities, assuming these are balance sheet-type acquisitions? Not at all. In fact, we're running overall consolidated debt-to-equity of about 47%. We had originally, back in the third quarter, modeled that to be about 50% or a little above 50%. So we've started bringing it down just through the growth of retained earnings, just like we said we would. Okay. So are you comfortable with it at this level or do you think you're going to build the tangible equity ratio higher as the year wears on? Because if you just, by my calculations, if you throw in the amount of earnings you could generate this year, you could get that ratio back to 4.5% by the end of the year. I would agree, I think that's a fair way to look at it, we haven't been exactly specific. But I think one of the things we talked about on the call when we gave guidance was that we would anticipate EBITDA being in excess of 1 billion, 1.2 billion, 1.3 billion this year, and that we would use that to do three different things. One, reinvest in the core businesses for growth, the second is pay down debt and delever, as well as grow retained earnings both of which will help what you're talking about, and then the last thing was buy back stock. And then one final point is you mentioned your project with the fed reserve. Are they talking about this ratio at all? Is this something that they are concerned about or they've discussed with you? They're up. So Tier 1 is at about 6%, 5.9, somewhere right around there. So it's actually up. It was 5.87 for Tier 1 as of the end of 9/30, and then as of the end of the year, it's 5.93. So it's you up. Risk-based capital was about 11% or so, 11.1. And now it's at about 11 for 12/31. Again, I think we've said that we feel very comfortable over time. I guess there may be a bit of a difference of opinion between Rob and I. But I'm certainly comfortable once you exceed 10%, which is well-capitalized. Rob likes to see us closer to 11 and so typically Rob wins and we're closer to 11. With respect to Tier 1, again, I'm comfortable once you're over the 5% which is well-capitalized, but we have traditionally been running a little closer to 6% there. Both of those are ranges that we're comfortable with and you can expect to see continuing. Will the addition of margin loans change the risk lending materially or getting whether the consumer lending more than offset that? Thanks, good afternoon, guys. Can I ask a clarifying question on the conversion? Can you tell, you said it was a minority, Jarrett, I think of the accounts that were affected at Harris. Can you say exactly how many and what the expected potential financial impact is? I know you guys are going to give some sort of compensation to some of affected folks in terms of free trades or something like that. Sure. I mean, the people actually impacted by, were really impacted by the, sort of the vendor related stuff. That's a number that if I had to really take a guess, is like 10,000 customers. The real, and that lasted less than a day, and those are numbers that we got cleaned up. The real impact again though was that that just compounded and added to call volumes which impacted anybody that was trying to call. So that was the bigger impact. And that was the real impact was just long wait times that were frustrating and not acceptable to us or to the customer. In terms of some of the programs that we're doing to sort of apologize to customers, wouldn't expect this to be anything outside of what's in our budget. We had budgeted some money to be spent on the marketing side per engagement-type programs. We'll be really taking from there to spend here to give people the biggest program right now, it's some free trades. I think if you were to guess, the cost, if the, based on the distribution of accounts and who are likely to use those free trades, that might be as much as $0.01 or $6 million, but that will be something that will be taken out of the marketing budget and was really envisioned with a slightly different use but again, it was earmarked for customer engagement around Harris and Brown and effectively, we'll be trying to take what was a bad experience and try to turn it into as best experience we can and use things like the free trade offer to get customers to engage and to win back their full trust and show them how good our products and services are. Okay, I appreciate that. And then also, I also appreciate the stats you guys gave on the options as a percentage of your trades to give us a sense for how fast that's growing. A couple things. Can you give us a sense for what percentage of your clients today are actually approved to use options, I know you said it's 11% of trades, but is it a large percentage of your clients that are looking for that service now in. It's a small percentage, but one of the things that I say a lot which makes us all here feel comfortable about trading volumes going forward is that if you go back even three, four years ago, the use of advanced order types, the use of options was much smaller. If you go back a number of years ago, options as a percentage of all trades might have been 3 or 4%, now we're up to 11%. That's been a trend that's been steadily rising, and that's the number of customers using them or expanding. What's really good is that today more and more customers are using advanced order types and are using options. And as a result, are actually making more money, which is something that makes us feel even more confident about the numbers that we've projected going forward. Okay. And did the increase help your revenue per trade during the quarters, a little bit above what you are expecting for all of next year if I'm not mistaken. I'm just curious if the higher option trading may actually provide some upside, I think it was 12.40 to 12.60 is what you're looking for? Yes, it definitely helps. There are better operating margins with options as there are with international. And so, two very positive wins at our back right now are this great trend that we've been seeing and really it's been a three-year trend on options, and the same on international. It's really been a three-year trend on international with a great compounded growth rate. So yes, and it's coming from both of those sources. Mike, let me add to that just real quickly. Jarrett's 100% right in the sense that if you look at the trend line even a year ago it was about 7%, now it's about 11%. So as a percentage, to Jarrett's point, it's representing about 20% of the commission line. So obviously you know it's an incredibly profitable product because if it's 11% on trade volume, but 20%, it's very helpful. But the important thing to note is we did give guidance in December for what we thought average commission would be around trading in 2006. And that assumed, obviously, both some of the changes we were making to pricing that we had already talked about, but the implementation in Q4. Now you'll get the full impact of that as you go through next year as well as both the closings in Harris and Brown. So as we exited December, you saw us really flat, pretty much squarely in the middle, maybe a little between middle and high side as an exiting run rate for average commission in December based on what we had guided to for next year. Hey. A few questions. Do you have any update on the timing of the E*TRADE Bank and E*TRADE Clearing and sort of what the hurdles are ahead for getting those two combined? I think Jarrett did a little bit of that in the call itself earlier when he was giving his comments, but I think it's fair to say that we're through the process with the OTS and the fed in terms of the discussion and the dialog. The formal applications have been filed, I think what Jarrett said specifically was, he does not believe any significant objections have been raised. They've both indicated how they see and what they see it makes sense and the value associated with it. And specifically, I think we have said that we assumed it would happen sometime between now and the middle of the summer. Okay. And do you have any sensitivity or maybe can you give us a sense for let's say that Harris comes under 10% guidance? I guess since you're through the conversion, I would think that if you were going to have attrition, it would have occurred either by now or at some point in the next few weeks? We will be happy, when we do earnings for Q1, to give you exactly that, which is the sensitivity associated with the attrition around both Harris and Brown. But I think, I mean, the good news, and again, I want to caution, Jarrett says this to me all the time. It's too early to declare victory. But there are two things to look at. One is attrition in accounts, but even more importantly to me is attrition in the underlying stats which drive the revenue and profitability. So what I'm focused on is the attrition in assets, the attrition in trading volume, the attrition in cash and the attrition in credit or margin balances. I think what we said on the call, was when you looked at Harrisdirect, every single one of those metrics was at or better than when we announced the deal. And that when you looked at Brown, that was also the case. So, so far, although we have seen under 4% attrition at Harrisdirect and about 6% in accounts at Brown, we're seeing virtually no attrition with respect to all of the key measures that drive both revenue and profitability. But again, we'll have a much better idea by the time we finish Q1 and I think Rich asked me the question, at that point we're happy to, to the extent it's appropriate, revisit the topic of guidance and also give more of a metric around what it means in terms of the overall EPS. Okay. And just to clarify again, on the Harris and Brown, I believe you said that they go, I guess the initial dilution was six months and that the accretion begins after the six months after closing? I just want to make sure I understood that. Well, I think what we said was that we expected to see $0.17 on a full run rate basis, and $0.07 on a full run-rate basis from Harrisdirect and Brown respectively. I think our view was that we expected to see Harrisdirect the full run rate would be exactly that, six months after closing, right. And that with Brown, I think we said it was going to be closer to nine months after closing. So I think if you go back, what we said was that for this year, in 2005, rather than achieving $0.24, I think we said we thought we would achieve about $0.19. That is correct. And embedded in those assumptions were an immediate attrition rate beginning of 10% in accounts, and 15% in the assets and other key driving metrics. I wasn't sure if you said that, I guess Rich Repetto asked about trading volume in January and industry volumes are running up 20 to 30%. Is it crazy to assume that you're at least around the industry levels? What we always say is that whatever the Street is doing, whatever the competition is doing, we're plus or minus. So that's what we always say. But what I also always say, and you can go back two years ago when we had a fantastic January, and then that was the best month of the year, we're a couple months into a good trading environment, but it is very silly to make that a trend line and say that's the rest of the year. Yes. Okay. Last question. Jarrett was quoted in the press saying that E*TRADE will pursue a major deal this year. And I'm just wondering, if you were to pursue a major deal, what types of ideas come to mind, whether it's within the industry, outside the industry, whether it's banking, brokerage, outside of those two areas? Any thoughts. Some of that seems to be my good press agents working on my behalf. I actually didn't say we were going to pursue a major deal, but as we always say, we're constantly speaking with people, and that does not mean that we would not do a major deal. I mean, and we are speaking to people within the online financial services sector, we're interested in speaking to people outside of online. We're also interested in speaking with people online who are not in financial services. We're interested in the brokerage area because trades are great, but we're interested in also entities that generate incremental cash to our system, or incremental credit to our system. We're interested in advisors, and we're interested domestically and we're interested internationally. And that was not the full quote but that's everything I said to the media in regards to M&A. And when you say outside of the industry, what kind of things, maybe you could help us understand what you might mean by that, not naming names but just sort of generally? Well, I think anybody who is in the online space who believes that the concept around convergence, i.e. you have a large customer base, you see activity with that large customer base that has traditionally generated revenue and profit not from financial service products, but it makes sense that financial service products would be a logical extension. So more traditional online companies that are not financial services company? I think that's right. Just a quick follow-up. On the Harrisdirect, and Mitch, I bet you'd be insensitive to the vendors here, but from what I understand, Harris operated from a different back office, and you had to convert it to ADP, and that Brown is going to be a different story because are we going ADP to ADP on Brown? And the other thing, Rich, that made it very complicated was, again, on the Pershing side, not being willing to be flexible in terms of settlement date or trade date conversion, and also Pershing controlled the Harris website. So with Brown, we have more flexibility, it's ADP to ADP, and we also control the website. So it's much more simple.

EarningCall_233859

Here’s the entire text of the prepared remarks from Ericsson’s (ticker: ERICY) 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. Tim Boddy, Goldman Sachs Kulbinder Garcha Stuart Jeffrey, Lehman Brothers Mats Nystrom, Enskilda. Alexandre Peterc, Exane BNP Paribas Brian Moldoff, Deutsche Bank Wojtek Uzdelewicz, Bear Stearns Jeffrey Schlesinger, UBS Richard Kramer, Arete Research Ittai Kidron, CIBC World Markets Peter Dionisio, Morgan Stanley Jeff Walkenhorst, Bank of America Securities Ed Bell, Cazenove Mark Davies-Jones, JP Morgan Presentation Welcome to the Ericsson analysts and media conference call for their third quarter report for 2005. To view visual aids for this call, please log on to www.ericsson.com/press or www.ericsson.com/investors [OPERATOR INSTRUCTIONS]. As a reminder, replay will be available one hour after today's conference. Mr. Gary Pinkham, Vice President Investor Relations, will now open the call. Thank you, operator. And Hello, everyone, and welcome to our conference call for the third quarter of 2005. We're starting a few minutes late today, because we wanted to make sure everyone was on board and there was a few late people dialing in, but hopefully everyone is there now. With me here in Stockholm is CEO Carl-Henric Svanberg and Karl-Henrik Sundstrom, our Chief Financial Officer. Before we get started, I'd like to inform you that we will be making forward-looking statements during the call today and these statements are based on our current expectations and certain planning assumptions. The actual results may be different, due to a number of reasons, and the risks and uncertainties associated with these planning assumptions are described in our Annual Report, which we encourage you to read. With that out of the way, I'd like to hand over to Carl-Henric for comments about our performance during the quarter and our plans going forward. Well, ladies and gentlemen, welcome to this conference call, again. Let me start by saying that this quarter was a milestone for our industry. We passed 2 billion mobile subscribers in the world and I think we are aligned with other analysts in our assumption that we will pass 3 billion within five years or so. That is a pretty fascinating thought for us as a Company with a vision of an all-communicating world. It is driven by the fact that communication is a basic human need and mobile technology is serving this need best into every single village around the world. The primary growth drivers right now is, of course, mobile voice and data, as we know, but also broadband in general, with a lot of new services coming on board and also generally increased minutes of use, much driven also by the intense tariff competition. There is also strong momentum in emerging markets. And it speaks for itself the fact that we, as an industry, thought that 2 billion subscribers was a goal and saturation level only a couple of years ago, whereas we now think we can go 50% higher than that. Convergence is on everybody's agenda, especially in mature markets, of course, where we bring mobile and fixed telephony into one seamless network. It's not going to happen overnight, but it's certainly something that is on the agenda for technology development and positioning for future business. A couple of words on mobile broadband here, HSDPA really offers a new level of services. It is not simply that, when we download our mail, we can do it faster than before and enjoy the speed, but it's also that music downloads or music streaming or video downloads or even TV or enterprise services. There are a number of services that are suddenly very attractive and possible on the HSDPA networks. And that, HSDPA in itself is not so much of a technology as a different way of handling the signal and the system in a much more efficient way. And it's done by smart software, which means that it's basically the existing networks, if you build them smart, but you can update with the downloads of the software. And we expect all Wideband CDMA networks over time to be upgraded. And very little that is being sold from now on is going to be anything else than with that capability. We're seeing a couple of million add-ons of new subscribers every month, in the worldwide Wideband CDMA networks. Today, on 34 million as a whole. Our mobile platform company continues to be very successful. You'll find a platform for 3G in the majority of all handsets outside Japan and present in the 10m of the handsets sold this year. We are also seeing accelerating demand for services. We have a 30% increase year on year, a quite impressive number actually, and certainly coming up as one of our the strong growth drivers in Ericsson. There is a growing interest in all markets, all, from the traditional what we call support services, which is simply maintaining and updating and making sure that all the networks out there run efficiently, to hosting, is the offer we go to operators and set up contracts with different content providers and therefore, after a fixed fee down payment, an operator will pay as he grows with the usage of his subscribers. It's also about system integration, where we have very qualified resources throughout the world helping operators to make everything work from end to end. And there is quickly growing demand for that in the more complex networks. But finally, also, managed services, where we are taking over running networks with quite compelling savings that we can make. And this is an effect of that we can leverage synergies and overlaps between our own support organization and then and the network operation that the operator runs. This is driven, on one hand, in the markets, mature markets, where everybody's seeking more cost efficient models of operating, but it's also driven in emerging markets simply by startup companies, operators that need to focus on their customers and are very glad when they can offload any of the work to somebody else. Let me then go through the regional update and let me then start by saying a few words on Western Europe. Already, back in after Q4 last year, we said that we looked forward to a more flattish Europe this year, because we had so strong upgrades and the catch up investment that we spoke about several times last year, where we are comparing with pretty strong numbers last year. It has been like that in the second and third quarter. The first quarter, as you remember, was strong, but the catch up investment didn't start in the first quarter a year before, so that's more a relative difference. This is, as I said, it's an area of increased interest for managed services. We see a lot of tariff competition in Europe. And we're also seeing a lot of increase in data traffic. But also, this is maybe jointly with the U.S., a lot of focus on convergence and next generation networks. You're all familiar with the BT 21C network, but we have similar projects going on in seeing similar projects in with KPN or France Telecom or Deutsche Telecom or Telecom Italia or Telefonica. The CEMA region that grew quite strongly in Q2 has not seen as strong a growth in Q3, but the underlying business activity is stable, so there is more swings between quarters. Strong subscriber growth and network expansions. One particular milestone that we reached was 100 million subscribers, now, in Africa, and there is a obviously a lot of potential in that continent as well. We have also see, we are also seeing 3G and HSDPA deployment getting started and of course we'll see more and more of that, as well, in this region. If we then go to Latin America, that is our strongest growth region. It is clear that GSM is the winning standard. There is very little left of CDMA networks there. And 40% up is a, it's an inspiring number. It's a lot of market share gains there, but it's a strong growing region. Maybe numbers that, we can't hold up those percentages numbers going forward. That gets increasing difficult, obviously. Brazil and Mexico are two countries that are pulling the growth strongly, here, and even Argentina is actually doing well here. If we then go to Asia Pacific, that is a region where we see 20% growth, which is a healthy number, but we see a lot of variations in the region. There is a high activity level in countries like Australia, India, Indonesia, Japan and so on. But, at the same time, we're seeing China in a bit of a waiting mood. We should remember, though, there is a bit of contradictions here, because China adds on still some 5million and will continue to do so, 5million subscribers every month. Traffic is increasing. You see almost all-time high pickup rates in new subscribers on some of the operators in China. But everyone is waiting now for the green light to start the rollout for 3G. And there will be 3G three licenses for 3G is what everybody expects, for four operators. And one has to get that mathematics together and everyone isn't really sure what their role is going to be. And therefore there is this, a bit of a waiting mood. We expect that to come in the, maybe, first quarter or so. I guess we have been guessing over the years, have been wrong all the time, but I think we're getting closer and closer to the rollout green light there. But that is also holding back a bit on the 2G side, because nobody wants to spend too much if they're going to go into 3G. If we go to North America, we see a very healthy rebound after the consolidation there. It is very interesting, now, to follow Cingular's 3G HSDPA rollout, where we are the lead supplier. We just launched HSDPA commercially a week ago. And it's a very intense competition there between, primarily, I would say, Cingular and Verizon, where everybody's fighting with service quality and service offering. And with the new technology that Cingular rolls out, they will certainly be in a technology lead there. But it's all a no questions asked, no doubt kind of project here. It's really pulling the entire industry and pulling the handset manufacture and so on in the biggest rollout that the world has seen so far. Just a couple of words on the financial highlights. At sales of 36.2, we are some 15% up, year-over-year and year to date, which is a, quite a healthy number, considering where the market growth is. We are clearly taking market share. Gross margin is at 45.2%, which is 0.7 down from the second quarter, but primarily an effect of a mathematical effect from the growing service business that has a lower gross margin, but still an equally healthy bottom line. So if we will continue to see services outgrow the rest of the Company, we will continue to see a similar mathematical effect on gross margin. On the operating expenses side, I think we have, we feel fairly satisfied. We are 3% up year to date, in a year when we're growing 15% or 17%, even, in constant currencies. And that growth, in itself, is smaller than the growth in R&D, which means that operating expenses excluding R&D is actually slightly down. And that's the effect of continuous work on operational excellence and working smarter and more efficiently. Then, if we look at the income, we are at $8 billion. An operating margin of 21.6%, which is in level where we were last quarter. Cash flow is minus 1.1 billion and I'm sure you will have some questions there. We have $2 billion that is a reported effect is an effect from foreign exchange differences that affects the reported cash flow but not really the, has no real cash flow effect. There is no money leaving the Company there. We have also an increased proportion of large projects. If we go back only two years, if we go back to 2003, when we were at the low point of this industry, there was basically a business of small additions, upgrading cores quick projects, quick installations, quick invoicing and billing. Now, we are, a lot of the growth is coming from larger projects, large rollouts of networks, longer projects, and therefore tying up more working capital. That is simply a logical effect. And to some extent, also, that some of these projects or many of these projects are happening in countries with where we have longer payment terms. So that is simply a mathematical effect or a logical effect of the type of business we're running. But there is also an increasing number of days outstanding, and that is something that we're not too happy with and we'll work very hard to get back into where we were in Q4. Our net debt situation, we are debt free. We have a strong net cash position and an equity ratio that is now close to 50%. A couple of words on Sony Ericsson. We had a sales increase of 22%. Sony Ericsson is actually, we said after Q1, when we saw a bit of weaker development, where we had very few launches, that, because of few launches, there isn't really much growth. But we said that, through second quarter, we'll start to launch some very attractive products. And that has happened, with the walkman phones and the new 3G phones. And it's been received, even if we had high expectations, it's been received well above that, so Sony Ericsson is really enjoying great growth, right now, and really popular phones here. We had an income before tax of €151 million. And, for us that are working with this joint venture so intensely, it was really a milestone that we could pass positive the point of positive accumulated earnings since the start of the joint venture. And those of you that have followed us for a while know that we struggled a bit in the beginning with pretty big losses. So we're now on positive accumulated earnings. When it comes to the market outlook, we expect and we're now starting to look into 2006. We expect the global mobile systems market, in U.S. dollar terms, to continue to show moderate growth. And we also expect the addressable market for professional services to continue to show good growth in 2006. The outlook for 2005 is very much unchanged. So with those words, I will hand over to Karl-Henrik Sundstrom, here, who will take us through some more details on the financials. [Karl-Henrik Sundstrom, CFO] Yes, hello and good morning, good afternoon, ladies and gentlemen. I just wanted to comment a little bit on the sales by the region. And I think this slide here demonstrates, really, some of the key assets of Ericsson of having a very strong regional distribution of sales of basically one quarter of the sales in every corner of the world and compensating a flattish Europe by growth in Latin America, Asia Pacific, North America and CEMA. I also would like to point out that, despite that we are having lower sales in China, it's well compensated by sales in Australia, Japan, India and Indonesia. I also would like to comment a little bit by this slide, to focus a little bit what Carl-Henric said before. As you can see, the total of services, which is network rollout and professional services, has a growth year-over-year with almost 30%. It is interesting to see that the growth in network rollout is actually 35% and that is exactly what Carl-Henric said in his previous presentation. We are rolling out a number of huge projects in many markets, and that's why we've had a capital working capital increase in especially in this quarter. When it comes to the operational efficiency trends, we are having, as Carl-Henric said, an increase in DSO days. As you can see, the day sales outstanding have increased from 90 days in the second quarter to 102, which is both a function of that we have been having a lot of sales to emerging markets, where you in general have slightly longer payment terms than you have in some other markets. Also, it is a huge quantity of network rollout projects with fairly complicated acceptance criteria. But this is an area where we're putting a lot of focus on during the coming we need to improve our collections. Inventory turnover is slightly better, from 4.4 to 4.5 sequentially, but we still have to work quite hard to make sure that we get close to the target, reaching target of 5.5, which is the target that we have. I don't want to make any comments regarding the accounts payable, because I think they're in line. However, I would like to take the opportunity to make some comments regarding the Sony Ericsson. Regarding Sony Ericsson, as Carl-Henric said, they had a very strong quarter. They have a year on year sales increase of 22%, sequentially 27% and they reached a very healthy net income before taxes of €161 million. And I think this, that we mentioned that the accumulated earnings is a huge milestone for the joint venture and for its owners. With that, I would like to hand over for Q&A. 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_233860

Here’s the entire text of the prepared remarks from Netflix’s (ticker: NFLX) 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 day, everyone, and welcome to the Netflix Third Quarter 2005 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to Ms. Deborah Crawford, Director of Investor Relations. Thank you and good afternoon. Welcome to Netflix third quarter 2005 earnings call. Before turning the call over to Reed Hastings, the company's co founder and CEO, I'll dispense with the customary cautionary language and comment about the webcast for this earnings call. We released earnings for the third 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. Thanks, Deborah. Good afternoon, everyone, and thank you for joining us. Our performance in Q3 provides a clear view of the power and potential of the Netflix model. We combined strong subscriber acquisition with cost leadership resulting in large growth and healthy earnings. We have made huge progress over the past year since cutting prices. Our churn has dropped from 5.6% one year ago to 4.3% last quarter, a new record. Our subscriber acquisition cost has dropped from $38.18 to $35.69. Net adds have nearly tripled from a year ago growing from 136,000 to 396,000. Ending subscribers are up from 2.2 million a year ago to 3.6 million today. Our competitors are weakened or gone. And our earnings, while not as strong as one year ago, are positive and are above the high end of our guidance. Because of our momentum, we feel very comfortable about delivering $50 to $60 million in pretax GAAP net income in 2006. And 50% pretax earnings growth for several years after that. At the heart of our success is a superior business model and an intent focus on the consumer experience. Our large scale and deep personalization technology enable us to provide the studio a large new revenue stream, to provide investors substantial and growing earnings, and to provide consumers an unrivalled movie rental experience. Our scale and technology allow us to make money a price point no competitor can sustainably match. Dell and Southwest are two similar examples, both of which capture 100% of their industry profit. Let's talk about Q3 results in some more detail. We launched our subscription service six years ago. And over the last six years, our churn has steadily declined, except for $2 price increase and blockbuster's Super Bowl advertising binge promoting its temporary $15 price. This quarter we continued our long-term trend of churn reduction, which results from our improving service, more aggressive price points, weakening competition, and our customer base aging. At some point, this churn reduction trend will flow, but already, that low 4% churn we have a terrific economic model. In addition to the drop in churn, our gross subscriber additions were strong in the quarter. The big drivers were strong word of mouth, our variety of pricing options, and well executed advertising. One factor to keep in mind, however, is that in Q3 last year we were at a $22 price point with light gross adds, which provided of this quarter with a relatively easy comparable period. In Q4 last year we cut price and we saw large growth spurt. So we will have a more challenging comparable period this Q4. In terms of total marketing spend, and subscriber acquisition cost, we have in all past quarters had a fluid total marketing budget and managed internally to a specific average quarterly SAC. When we had room to take up total marketing spending, and still hit the specific SAC target we did so. Sometimes negatively impacting that quarter's earnings. Last quarter, we moved to managing to a fixed total marketing budget each quarter, and letting SAC float up or down. Our first quarter on this more traditional model was quite a success in terms of delivering great growth and strong earnings. Our fixed marketing budget will make SAC somewhat more fluid than in the past. SAC may well rise in Q4, but the fixed marketing spend model has the overriding virtue of stable expenses and more predictable earnings. Barry McCarthy will talk more about this in a few minutes. Combining falling churn and increasing gross additions, net adds is the best indicator of our growth. As I mentioned, we had 396,000 net ads last quarter. This acceleration in growth is very exciting to be nearly 4 million subscribers and to have net adds still accelerating I am plays the market for on-line rental is extremely large. Finally, we drove a nice increase in gross margin in Q3. This is partially due to the increased acceptance of our lower priced programs, which have higher margins than our standard program, and partially due to efficiency from our personalization efforts, merchandising catalog movies, more effectively than ever. One of the reasons our last year has been so successful is the market's elasticity in response to our price cuts one year ago. And to our offering of lower priced one and two plans this year. So naturally we want to test this elasticity further as we continue to realize cost efficiencies in the business. As we said at our analyst conference last month, we expect to run a number of pricing tests over the next six months to determine if at lower prices we can deliver faster subscriber growth, lower SAC, lower churn, higher competitive barriers, and still deliver on our earnings commitment. Obviously, if there's enough elasticity to make additional price cuts work, this would increase the economic pressure on video stores, and the additional store closures would further increase Netflix growth for many years ahead. This positive feedback loop between Netflix growth and video store closures is the tipping point for on-line rental. Now let me turn from Netflix to the broader movie industry, where there continues to be consternation about falling theatrical revenue. One view is that this is a temporary lull in compelling theatrical releases that may soon be remedied. Supporting data is the (ph) 8:39 lull in some prior years that have proven to only be temporary. A contrary view is that the low cost of large screen televisions is, family by family, changing American movie watching habits. For less than $1,000 today, you can buy a 52-inch RCA hi-def television from Wal-Mart. If home theater is the growth engine of the future, then we will see more studio heads join Disney's Bob Iger's call for DVDs to be released earlier, which has the potential to grow the DVD market substantially. The other big potential growth factor in the DVD market is high definition DVD. In the past three months, the battle over Hi-Def DVD has changed from a stalemate to one favoring blue ray. We are agnostic. We do expect the launch of high definition DVD to happen next year, and that this will be the beginning of another 10 to 20-year product cycle that will extend our leadership for many years. As we have said before, there is minimal inventory obsolescence risk for Netflix because the conversion of the 80 million existing standard-def DVD households in America will be steady but gradual like DVD over VHS. Well, DVD and hi-def in addition DVD show great promise, the near term for downloading is not so bright. TV channel, such as NBC, Star, and TNT, have been paying large sums for many years to have and maintain exclusive access to many studio films. Because of this, movie link and Comcast, despite impressive technology and management, had so far been unable to license most of the 50,000 titles available on DVD. The same holds true for apple, which recently launched their video iPod with essentially no studio movie. Of course, we face the same obstacles as movie link, Comcast, and apple, in terms of licensing for downloading. As such, we are going to hold off on a launch of our movie downloading service. We will continue to enhance our technology and infrastructure, and we will be ready to quickly launch when the content climate begins to thaw and it becomes possible to deliver a compelling consumer experience. How long will it take, and who will help us get there? Interestingly, while you might think of Comcast, movie link, and apple as our potential competitors, they are, for now, our allies. We all four want broad, nonexclusive licensing of movies, as with music today. Our shared opponents are the TV channels who pay large sums to get multiyear exclusive access to studio films. In a music context, imagine a Clear Channel, or FM, had paid big money to get five years of exclusive rights to all Warner music, and that the entire Warner catalog was then not available for legal downloading. That is the current movie situation, which is why no one has been able to license the 50,000 DVD titles for downloading. This will shift, over time, as those exclusive contracts are renegotiated and Netflix and its allies can collectively deliver more profits to the studios than the exclusive TV channels. When the content climate does shift, we will have broad camp content for downloading and the next generation of movie delivery will begin in earnest. Whether this happens in two quarters or 20 quarters is hard to say. In the near term fortunately, DVD is king, Netflix continues to grow rapidly, and we prepare for the emergence of downloading in the future. As we grow towards our 20 million subscriber goal, we are comforted by the reality that the bigger we are when the content logjam breaks, the more likely we are to be one of the leading companies in the downloading space. Speaking of 20 million subscribers, I'm often asked why we feel confident about such an enormous number. There are three parts to the answer. Part one, is that the markets that we upgraded to overnight delivery in 2002 and 2003, such as Boston, Atlanta, and Dallas, continue to follow the bay area growth trajectory. Part 2 is that in the bay area, over 11% of households now subscribe to Netflix and our net adds are still accelerating. Part three is the tipping point, we think that once on-line gets big enough, video store economics fall apart, and stores start closing, driving more people to try on-line rental. We are just seeing the beginning of the tipping point in the bay area with more and more video store closures. These three factors are what give us confidence that 20 million Netflix subscribers is very achievable in the 2010 to 2012 time frame. And we are committed to achieving it while delivering on our earnings guidance. At this point, I'll turn the call over to Barry McCarthy, and I look forward to taking your questions. [Barry McCarthy, CFO] Thanks, Reed Hastings. On last quarter's earnings call, I said we were feeling pretty good about our business. And you saw us raise our net income guidance for 2005. Then at our analyst day in early September, we talked at length about our first mover advantages and the momentum we were seeing in the business which caused us to raise our guidance in late September for third quarter subs and net income before net settlement expense. And today we announced results that outperformed our revised net income guidance for Q3 and continue the trend I commented on last quarter as key metrics like subscriber growth, gross margin, SAC, churn, and net income all beat our initial expectations. As Reed mentioned, our momentum continues to build, which gives us the confidence to increase our guidance for Q4 2005 and for next year. Because Reed has already reviewed the highlights of our third quarter performance, my comments today will focus primarily on our guidance for Q4 and 2006. And I'll close with a discussion of our financial expectations through 2006 for new initiatives like ad sales and the sale of previously viewed DVDs. But first, I want to amplify Reed's comments on SAC. Three months ago, I told you we would increase our marketing spending in Q3 as a percent of revenue and, in fact, we increased marketing spending about 300 basis points from 16% of revenue in Q2 to nearly 19% in Q3. I also told you we expected to increase SAC above the $37 intent in Q2, in fact just the opposite happened. As we increased our marking spending, subscriber growth accelerated faster than we expected, and SAC dropped almost $2 in the third quarter to $35.69. Its lowest level in five quarters. About $4, lower than we forecast in early April. So the obvious question here is what will SAC be going forward. For Q4 and for 2006 we're planning on a fixed marketing budget. And as I indicate in my guidance discussion, given this level of spending, our planning assumes that SAC rises in the fourth quarter of 2005 and 2006, but if we're wrong and growth accelerates, as did it in Q3, we'll see lower SAC than we're expecting and more sub growth. Either way, we expect to deliver the earnings we had guided to by managing the amount of our marketing spending. For the fourth quarter, our revised guidance is for GAAP net income of $4 million to $7.5 million, up from our previous guidance of $1 million to $6 million. For 2006, we're raising our guidance for pretax income to range of $50 million to $60 million from our previous guidance of $50 million. I'm emphasizing our income guidance because our plan is to deliver the maximum growth consistent with our profit objective. The new guidance assumes higher revenues and higher gross margins. It also assumes that we spend a fixed dollar amount on marketing in Q4 and next year, and that SAC increases in both periods. Of course, as Q2 and Q3 demonstrate, it's entirely possible that SAC could land below our expectations, and if SAC runs lower than forecast, ending subs will beat our guidance. And if SAC runs true to forecast, we'll meet our subscriber goals for the quarter. But either way, we plan to cap our marketing spending just like we did in Q3 and meet our earnings guidance. Our focus on achieving maximum growth consistent with our income goals also means that if we get ahead on earnings, we'll invest the incremental profit back into the business to drive additional growth. As our third quarter results make clear, this is a business in which scale delivers significant cost and strategic advantages, so growth remains an important objective for us. Today's earnings release raises our Q4 guidance to 4 million to 4.2 million subscribers, and revenue in the range of $191 to $196 million. For 2006, we expect in the year with at least 5.65 million subscribers, and at least $940 million in revenue, and with $50 million to $60 million in pretax income. Think of the sub and the revenue guidance as the bottom of our range. On a pro forma basis, if the company were fully taxed in 2006, GAAP net income would be in the range of $29 million to $35 million. As a reminder, because of NOLs, Netflix doesn't pay taxes currently. But I expect we'll become taxable, for GAAP purposes, sometime in 2006, and possibly as early as Q4 of this year, but that seems unlikely. We expect the same seasonal patterns of high marketing spending and fast subscriber growth in Q1 of next year that we 2004 and 2005. This means we expect to increase marketing spending as a percent of revenue in Q1, which will pressure profit margins in the quarter, and we may post a net loss for GAAP purposes in Q1 because of our rapid growth, like we get in Q1 of '05 and in Q1 of '04. Built into our forecast is opposed to rate increase of $0.37 to $0.39 in January 2006 for first-class postage, which is a$0.04 impact for Netflix on every round trip DVD shipment. Scale economies in our business and the automation initiatives I discussed last quarter were more than offset the increased in postal expense. I'll close with a few words about two new initiatives at Netflix. Selling previously viewed DVDs on our website, and add sales. Both initiatives will remain small through year-end while we complete consumer research, although both will become more visible to Netflix investors and subscribers during the fourth quarter. Revenues from the combined initiatives in 2006 will be in the broad range of $8 million to $16 million and neither initiative will be a material contributor to increased profitability next year. For the foreseeable future, the primary engine for growth and profitability will continue to be our core DVD subscription rental business. In summary, three-quarters ago, we said the competition would help define the on-line DVD rental market, and showcase our strength in this market. The first quarter showed we could maintain our leadership position. We grew fast despite blockbuster's aggressive pricing, and heavy marketing spending. The second quarter helped solidify our leadership position in the on-line subscription market. We remained on track to achieve our goal of four million subscribers by year-end, we returned the business profitability, and we raised financial guidance for the remainder of the year to reflect the improving economics of our model. The third quarter extended our leadership position enabling us to raise guidance again, and its subscribers net income which show cases the themes we highlighted in September at our analyst day meeting. Namely, that scale drives profitability, margin expansion, and competitive advantage. That concludes my prepared remarks and brings you to the Q and A part of the call. So, operator, we'll turn the call back over to you and take our first question, please. 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_233861

Good morning my name is Latasha and I will be your conference operator. At this time I would like to welcome everyone to the Earthlink 4th quarter full-year 2005 results 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 session. If you would like to ask a question during this time, simply press * and the number 1 on your telephone keypad. If you would like to withdraw your question, press * then the number 2 on your telephone keypad. I will now turn the call over to Kevin Dotts, CFO. You may begin your conference. Thanks and welcome everyone to our call. This morning I’m joined by Earthlink CEO Gary Betty, and our Vice President of Investor Relations, Mike Galentine to discuss our 4th quarter results. Following our comments, there will be an opportunity for questions. Before we continue, I would like to point out that certain statements contained in our earnings release and on this conference call are forward-looking statements rather than historical facts that are subject to risk and uncertainties that could cause actual results to differ materially from those described. We respect that in such forward looking statements the company seeks the protections afforded by the private securities litigation reform act of 1995. These risks include a variety of factors including competitive developments and risk factors listed in the company’s SEC reports and public releases. Those lists are intended to identify certain of the principle factors that could cause actual results to differ materially from those described in the forward-looking statements, but are not intended to represent a complete list of all risks and uncertainties inherent in the company’s business. In an effort to provide useful information to investors, our comments today also include non-GAAP financial measures. For details on these measures, including why we use them and reconciliations to the most comparable GAAP measures, please refer to our earnings release and the form 8K that has been furnished to the SEC, both of which are available at our website at www.Earthlink.net. Now let me turn things over to Gary. Thanks Kevin and I’d also like to welcome everybody to our earnings call. Earthlink had another great quarter and one of the most significant years in our company’s 11 year history. For 2005, our existing access business continued to perform well, delivering $214 million of adjusted EBITDA, $173 million of free cash flow and record net income per share of $1.02. Additionally, we started to deliver on a strategy that has been several years in the making. Earthlink began investing in becoming a total communication provider in 2003. Initially, we developed Earthlink free online calling, which enabled Earthlink high-speed access subscribers to make voice-over internet protocol or voice calls free of charge. In 2005 we extended free online calling to the mass market by creating a more user-friendly experience and offering the experience to all consumers including those not purchasing EarthLink access services. While we’re not expanding and updating our free service, Earthlink was also investing in monthly fee-based voice and traditional home phone replacement services. Both of these voice services will allow the user to call anyone, including those on public switch telephone networks or the PSTN. In 4th quarter 2005, it was a significant period for us. We launched our voice service, Earthlink True Voice. This exciting new service is a plug and play solution that can be installed in minutes. Earthlink is marketing a $14.95 plan that including 500 minutes of local and long distance call in the continental US and Canada and a $24.90 plan that includes unlimited calling in the same area. Additionally, both of these plans include enhanced calling features like voicemail, call waiting, caller ID and call forwarding, just to name a few. Additionally, all True Voice users enjoy the convenience of EarthLink’s exclusive My Voice portal where customers can view their own calling records, manage their address book and even check voicemail online. During the quarter, we marketed Earthlink True Voice through email to our existing customers, direct mail, telemarketing as well as on our website. The offer we were promoting included the first month free. Consequently, since Earthlink does not count users as customers until they become paying customers, we have more signups than paying consumers in November and d4ecmeber. We’re very pleased with results thus far and have over 4,000 paying customers as of the end of the year. Late in the 4th quarter of 2005, we also launched our 4 city trial of Covad for line powered voice services in Dallas, San Francisco, San Jose and Seattle. This offering combines the last mile of traditional telephone copper wiring with the advanced features afforded by taking advantage of the next generation V-Slam technology. This next generation technology will also allow us to offer DSL2 plus, a higher speed broadband access with speeds up to 6-10mB per second, depending on the customer’s distance from the central office. Marketing for the product initially consisted of direct mail, emails to our existing customer base and some spot TV advertising. Initial marketing offer includes the first month free, so we do not have paying customers for this service in the fourth quarter. In the 4th quarter, Earthlink was awarded the contract to implement a municipal wi-fi broadband network in the city of Anaheim California, covering approximately 50 square miles and approximately 100,000 households. For Anaheim, the exciting opportunity is the nearly 20,000,000 visitors annually that come to the city because of Disneyland. We intend to be able to offer these visitors occasional use access, which could result in revenues larger than our recurring access services in Anaheim. In the first quarter of 2006, we’ve initiated the build out of the first phase of Anaheim and expect to sign up our first customers early in the 2nd quarter of this year. Earthlink also successfully competed for and was awarded the contract to implement the nation’s largest municipal wi-fi broadband network in Philadelphia. This contract will cover approximately 135 square miles and will cover approximately 600,000 households. We expect to began the initial build in this late 1st quarter, early 2nd quarter of ’06 and begin provisioning our first customers in the 2nd quarter of ’06. In the 4th quarter of 2005, Earthlink announced an agreement to acquire new Age networks. The acquisition of New Age Networks will enable Earthlink to expand this business in the fast-growing small and medium enterprise or SME market. In 2005 this is estimated to be a $1.5 billion market that industry analysts expect to grow over 20% annually through 2009. Under the terms of the agreement, Earthlink will acquire 100% of New Age Networks in a merger transaction for approximately $144 million. Consisting of 2.6 million shares of Earthlink common stock and $114.3 million in cash, including cash to be used to satisfy certain liabilities. The completion of the acquisition is subject to regulatory approvals and customary closing conditions. In addition our exciting initiatives in voice, municipal wi-fi and SME services, Earthlink continues to effectively manage and maintain its profitable core access businesses. Over the past 2 years, we’ve had the fastest growing, most successful, value-priced internet service available, enabling us to grow market share in this space. In the 4th quarter, we grew our peoplePC service by 104,000 net subscribers. Over the past year, our peoplePC customer base has grown more than 42% to end the quarter at 1.2 million subscribers. We also continue to generate solid growth in our broadband services. For the quarter, Earthlink added 63,000 net broadband subscribers, and ended the quarter with more than 1.6 million subscribers; an increase of 17.8% from the 4th quarter of 2004. The trend of the declining premium narrowband market over the past couple of years continues. During the 4th quarter as a result our premium narrowband subscriber base decreased by 174,000 during the quarter, to end at 2.3 million subscribers. For our access business, Earthlink expects the trends of growth in value narrowband and broadband and declines of premium narrowband will continue into 2006 and beyond. These trends have translated into a relatively flat customer base for us over the past 2 years, but the composition of the customer base has changed dramatically. At the end of 2005, the Earthlink customer base was less than 50% premium narrowband subscribers. However, as Kevin will discuss in just a moment, while revenues are down markedly from the prior year, they’ve not falling precipitously as many had predicted. In addition, our gross margins before sales incentives percentage, is at an all time high. Thanks, Gary. Earthlink had another good quarter, delivering on the financial guidance that we provided. As Gary previously noted for the full year 2005 and for the 4th quarter 2005, we had strong adjusted EBITDA, free cash flow, and for the full year, record earnings per share for our access business. These results are due in large part to the growth of our broadband and peoplePC businesses and the effective management of a mature, premium narrowband business, coupled with good back office cost control. Broadband revenues were $111.4 million, a 4.9% increase compared to the 4th quarter of 2004, driven by the increase in broadband subscribers. Overall, broadband average revenue per user, ARPU, was $23.60, down from $26.78 in the 4th quarter of 2004. The decline in ARPU was primarily due to new lower retail DSL pricing and promotions and as a result of lower wholesale DSL pricing received from the I-LEX and greater growth in lower ARPU retail cable and wholesale customers. Narrowband revenues were $172.3 million, a 17.4% decrease compared to the 4th quarter of 2004. The decrease in narrowband revenues was primarily due to the decline in premiums narrowband subscribers, partially offset by the growth in lower ARPU peoplePC subscribers. One of EarthLink’s strategic initiatives has been to increase value-added services revenue without negatively impacting the customer experience through overly intrusive advertising techniques. To do this, we have significantly increased the Earthlink start page utilization, so that in December, 48% of Earthlink customers were using our total access software; almost double from a couple of years ago. Additionally, through partnerships with companies like Bank of America, which incorporates EarthLink’s search on a co-branded toolbar, we are able to increase search traffic and revenues from non-access customers. Both of these efforts drive search related revenues. For the fourth quarter of 2005, advertising, other value-added services and web-hosting revenues increased 24% to $29 million, compared to last year’s 4th quarter. This growth was due primarily to a significant increase of search-related advertising revenues and increases in revenues from our value-added services. These valued-added services now generate a record $1.20 incremental revenue per average user, per month, compared to only $.75 per user during the 4th quarter of 2004, a 60% improvement. Overall, revenues for the quarter were $312.6 million, a 7.5% decline form the 4th quarter of last year, driven primarily by the decrease in premium narrowband revenue. As Earthlink continues to evolve into a total communications company and away from a pure narrowband access provider, our reliance on premium narrowband revenues continues to decrease. During the 4th quarter of 2005, only 43% of our revenues were derived from premium narrowband services, while broadband revenues comprised almost 36% of total revenues. Importantly though, gross margin percentages for our narrowband and broadband services have improved significantly over the past few years. Narrowband gross margins before sales incentives are now almost 90% and broadband gross margins before sales incentives are now a little over 40%. Gross margins before sales incentives continue to increase and are now at a record 72% of revenues, a 210 basis point improvement from the 4th quarter of 2004 and an increase of 40 basis points from just last quarter. However, due to the decrease in overall revenues, gross margins before sales incentives declined 4.8% compared to the 4th quarter of 2004, to $225 million. Earthlink has focused on and significantly reduced its operating cost structure over the past couple of years while improving quality of service. As a result of these efforts, total support costs declined 2.4% to $85 million, compared to the 4th quarter of 2004. Sales and marketing expenses, including sales incentives, were $100.5 million, a decrease of 6.6% from the 4th quarter of 2004. This decrease was driven by a declining cost caused by lower premium narrowband and broadband subscriber additions, partially offset by higher peoplePC gross additions. Overall, gross subscriber additions decreased over 12%, compared to 4th quarter of last year. The blended subscriber acquisition cost in the fourth quarter of 2005 was $154 per gross organic subscriber addition, up over 7% from the 4th quarter of 2004. As a result of the declining gross margins before sales incentives, partially offset by a decrease in sales and marketing and support expenses, adjusted EBITDA was $47 million, a decline of $6.5 million from the 4th quarter of 2004. For the full year 2005, adjusted EBITDA was $213.7 million, down 2% from the prior year, but still the second best year Earthlink has ever had. While overall adjusted EBITDA was down slightly from prior year, our adjusted EBITDA margin increased for the full year 2005 to 16.6%, an 80 basis point improvement from prior year. The adjusted EBITDA increase was driven by the continued narrowband and broadband gross margin improvements and reduced operating expenses. Net income in the 4th quarter was $29.2 million or $.22 per share, a decrease of $6.4 million compared to the 4th quarter of 2004. the decrease in net earnings is primarily attributable to an $8.7 million increase in equity losses related to the Helio joint venture as Helio continues to ramp up its operations in anticipation of its 2006 product launches. A $6.5 million decrease in adjusted EBITDA, as noted above, and a $1 million increase in income tax expense, which is primarily a non-cash charge related to the realization of net operating loss of acquired companies. These were partially offset by a $6.9 million decline in depreciation and amortization expense and a $2.5 million increase in interest income related to higher interest rates earned on our investments in the 4th quarter of 2005. Net income for the year was a record $143 million, or $1.02 per share, compared to $.70 per share in 2004. Driving the net income improvement for 2005 was the facilities exit charge incurred in 2004, the reduction in 2005 depreciation and amortization expenses and the improvement in interest income. These benefits were partially offset by the increases in tax expense, the Helio partnership losses and the reduction in adjusted EBITDA in 2005. During the 4th quarter of 2005, Earthlink spent $11 million to repurchase $1 million shares of stock. Earthlink generated $38.3 million of free cash flow during the 4th quarter of 2005. Capital expenditures and cash payments for subscriber based acquisitions in the 4th quarter aggregated approximately $9 million. During the 4th quarter of 2005, cash and marketable securities increased $21.2 million and we ended the quarter with $422 million of cash and marketable securities. For the full year 2005, our current access business continued to generate strong cash flow of $174 million compared to $186 million in 2004. The slight decrease in year over year cash generation was primarily due to the decreased adjusted EBITDA in 2005 coupled with the $4 million of increase in external subscriber base acquisitions and $4 million increase in capital expenditures in 2005. Capital expenditures were up slightly as we deployed equipment in our data centers to allow Earthlink to switch and route voice calls associated with our strategic voice initiatives. With that I will turn the call back over the Gary for some concluding remarks before our question and answer session. We’ve again demonstrated an ability to cost-effectively manage an ever-changing business. While the product mix will continue to evolve with growth in broadband and peoplePC, and the decline of premium narrowband, we continue to believe our core ISP services will generate significant EBITDA, net income and free cash flow for years to come. We expect to use the cash flow to continue to invest in our growth initiatives, primarily associated with voice, municipal Wi-FI and speech services, as well as the Helio joint venture. The 4th quarter of 2005 was a significant period for Earthlink. Launching Earthlink TrueVoice, initiating our four market voice trials, being awarded 2 markets to our municipal wi-fi services and entering into an agreement o acquire New Age Networks. In the first quarter of 2006, we expect Helio to launch their innovative wireless products and the initial phase of our municipal wi-fi network construction will begin. Earthlink is well on its way to transforming itself into the nation’s next generation internet service provider. We believe our investments in these strategic initiatives represent significant grown opportunities, but may require significant investments over several years. These investments could be in the form of initial product development in infrastructure costs as well as sales and marketing costs to generate subscribers and recurring revenues. The operating models for these new initiatives are similar to the ISP operating model on which we’ve based our current operations. In the early stage of these products lifecycles, investments and sales and marketing expenditures are expected to exceed operating profits. Once a sufficient number of customers are added, their aggregate revenues and net recurring expenses are expected to exceed incremental investments in sales and marketing necessary to add such customers. At which point, we expect these new services to general free cash flow and operating profits for Earthlink. At our Earthlink investment community meeting in New York in February 23, we will discuss each of these exciting initiatives and provide guidance for 2006, as well as longer-range expectation for the business. At this time I would like to remind everyone, if you would like to ask a question, please press * then the number 1 on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Thanks. I was wondering if you could talk just a little bit, with the decline of premium voice…I’m sorry, premium narrowband, how successful you…is that either up to your broadband service or down to the peoplePC service. What percentage of those customers that have to go away are actually paying customers? Hey it’s been pretty consistent; about 60% of our gross ads during any given month to broadband from our premium dialup subscriber base. We never have seen much of our premium narrowband customers moving to value. That continues to be 2-3% so, you know the macrotrend is something that we’ve seen over the last 3 years. About 40% of our premium narrowband churn is people moving to high speed; of those, we add somewhere around 30,000 a month of people moving from premium narrowband to broadband to one of our broadband services. Talk to us about where relationships are and what kind of pricing and availability trends you’re seeing with your DSL and the cable partners that you have. We started a new deal with Verizon mid-last year; we just announced and put out a press release earlier this week that we’ve signed a multi-year deal with Bell South. We’ve had a deal with Quest for sometime and we continue to give very favorable pricing for SPC. So, from an availability perspective, we don’t have any issues at all. It still is a very competitive marketplace. SPC continues to lead the way on that front. Interestingly, because of how aggressive they are on the retail side, we also get the lowest wholesale prices form them and that’s where we’re seeing the greatest growth. So even despite the fierce competition that we’re seeing in that area, we’re seeing the best success we have for DSL in the SPC territories. Cable continues to be a consistent performer. We continue to do very well with Time Warner and I don’t think our underlying business trends are going to continue on a broadband front a whole lot until we start seeing us rolling our some of these new services like home phone service with DSL and starting to sell this one megabit symmetrical product associated with our muni- wi-fi buildup. Then we should see some acceleration. Thank you. And I guess just a last question, with the regulatory discussions seeming to be picking up this year, are there any issues that you see coming from a regulatory standpoint, either positive or negative that you’re going to be keeping your eye on? I don’t think it can be any worse than it’s been fro the last three years. Hopefully, it’ll be a little bit better for us. I don’t think anything’s going to happen in 2006, but the debate about what’s going to happen to the telecomm rewrite will be held this year prior to something probably being done in 2007. the only things I can tell you that I feel strongly will take place is universal service as a concept will continue to remain in effect in some form, but I don’t know how that impacts us. But, they have to be able to find alternate ways to fund USF other than long-distance, as that revenue stream declines. The issue of net neutrality is going to be front and center. Just yesterday or the day before yesterday, the senate held hearings on net neutrality and I think there’s going to be a lot of interest in some of these alternative broadband schemes. Other than that, I don’t see anything really changing from the status quo as it exists today. At least over the near term. Yes, good morning. A couple of questions. One for you Kevin. So your gross margins are at a record high, just as we think you guys are maxed out on gross margins you continue to eke out, to get out a lot more out of that line item. How are you thinking about it now, with all of these different moving parts… is 71.5% a sustainable level going forward? And for you Gary, AOL recently announced the signing of a DSL availability with pricing somewhere between $25 and $30. How does that change the competitive landscape? Do you expect kind of an acceleration in the rate of decline of their subscriber base and therefore having a potentially negative impact on yours and then I have a follow up. With regard to gross margin, I would continue to suggest that it would continue to go sideways. We could anticipate some slight pressure on it. I think where we’ve seen the benefit Yousef has been the fact that while we’ve anticipated primarily a DSL product, that we’d have greater price pressure as our customer base moves off they’re rolling over price elements to newer prices, closer to the $39.95 that we’re offering in some of the markets. We’ve actually just been able to get the wholesale prices better than was anticipated and we’re not having really the pressure on the pricing side as much as we had anticipated. So I don’t expect to see that expanding whatsoever, if anything it goes sideways or slightly down. And then on AOL, I’m happy to see that they’re doing this. They’re obviously trying to stem…I think they lost 650,000 net subscribers during the quarter. And, their announcement is, I think, an attempt to try to move some of those customers they’re losing to a paying relationship with AOL. As I understand it it’s a little bit of an oddball deal where they do a split bill and they aren’t’ actually providing the underlying access services. It’s more like a BYOA option. So if you sign up for AOL’s broadband service, you get a bill for $15 from SPC and $15 from AOL on the same bill. I don’t think it’s going to impact us. Hopefully it’ll help AOL. I’d like to see them continue to be a strong and viable competitor. And, perhaps this latest foray of them offering broadband services, we’ll see them starting to build a platform that they can leverage for the next several years. Okay and then on the New Age Network acquisition, how is the business so far? I know you guys have not closed on it. What’s the timing on that? And, in that business, growth was somewhat hampered by just a lack of cash. Is that changing? Have you extended any funding to that division? We haven’t yet. We filed our S-4. We will file our S-4. We’re currently in review with the SEC at this point. We’ve filed the S-4, it’s in review with the SEC, we don’t know when we’re going to be able to close. It will depend on the SEC either doing a formal review or not. We could close as early as the end of March or it could be as late as sometime early May. A lot will be…it depends on what the SEC comes back and says to us. Other than that, we filed all the necessary regulatory paperwork to assign their status agreements to Earthlink. That process is well underway. We’re having some preliminary meetings, but until the thing closes, we really can’t exercise much oversight or control over that business as we don’t own it. And, you know, their business continues to operate as it had been and we are anxious to be able to get started to help accelerate that buy, providing them some additional capital and start trying to take advantage of some of the synergies. But it really won’t happen until after the close takes place. Hello. Two quick questions. On your last conference call you mentioned 20-25 municipalities representing about 10 million households were contemplating wi-fi networks. Could we get an update on where that stands? And I believe you had submitted proposals to Long Beach, San Francisco, Milwaukee, Minneapolis… We’re close to finalizing something in Milwaukee. That looks pretty good. We’re one of two finalists in Minneapolis; we’re actually in a technical trial against another smaller firm. We’re both building out one square mile area to show the technical sensibility of our designs. We’re one of two finalists in Portland and we expect a decision to come down on Portland sometime mid this month. We had responded to a RFI in San Francisco and will actually submit our RFP, again later this month. Long Beach had pulled their RFP, but expect to re-submit it, again, I think in February. We’ve responded to an RFP in Aurora, Colorado and Alexandria, Virginia. I think we’re looking good on those fronts. And there’s a whole host of cities who have expressed interest now in submitting RFP’s during this year. The three largest of those are Chicago, Los Angeles and Atlanta. So, a lot still happening on the RFP front. We also submitted a proposal to a small city outside of Boston, who…I can’t think…Brookline, Mass. Okay. Also one last quick one. Where do we stand with the share repurchase authorization? With the current availability right now? The current availability right now is $180 million. And that’s about…that’s a little over $100 million related to our 10(b) 5. Hi, this is actually Jennifer Connolly in for Anthony this morning. Broadly speaking, I know you guys will address this in more detail in New York on the 23rd but, is there any indication you can give us of the timing that you’re expecting for the payback of the increased investments that you’re planning in ’06 as far as when you think that you’ll get to the point where you’ll have enough subs to overcome the sales and marketing costs? I mean, Jennifer, you can model it based on what we’ve done with previous businesses. All of these subscription businesses, you have to put the sales and marketing dollar investment up front and you earn that money back over time. So, it’s going to be no surprise the faster we grow, the more our losses will be in the short term. But, the quicker you’re going to get a payback because you’ve hit some type of scale. The good news is all of these leveraged the existing infrastructure we have across many…we’re providing services across many of our products and the relative investment it would take if you were doing it on a standalone basis should be better than not. But, as you suggest, we will provide a lot better visibility and insight into these issues when we meet on the 23rd and hopefully you all will feel very comfortable with the direction that we’re taking and be as excited as we are about the opportunities that we have in front of us. Okay. And then also just with True Voice and voiceover IP products in general, what do you think is the biggest obstacle to getting people to adopt that type of technology? Well both are different. Earthlink True Voice the big challenge is somewhat, it’s very early in the adoption stage. I think Vonage filed their IPO this morning and indicated they have 1.4 million subscribers and they are by far the largest of the voiceover IP providers. But, when you talk to a consumer about an ATA or putting some device in and it doesn’t work when your power goes out…for a lot of consumers, their eyes start glazing over. But it does provide a very compelling solution for users who can get naked DSL or use it on top of their cable platform versus having a land line, if you’re comfortable with your mobile phone as a backup. Which, increasingly, there’s larger numbers of people who are comfortable with that. Line powered voice is much different. This is a very compelling product offering and I think it’s just a matter of us getting the message out. Hopefully being able to expand the footprint from which we offer it and under that scenario you’re talking to consumers in terms of real benefit. I mean, an 8 megabit DSL solution is the fastest connection that anyone’s been able to offer to date and you combine that with the convenience of a voice solution which is integrated with a computer that provides unlimited local and long distance without you having to change any of your dialing habits from your home or the CPE, that’s a very, very nice product. And we have a range of prices from entry level at $50 a month to $70 a month. So I think that as we get this message out and consistently start telling it in the areas where it’s available, we’re going to see pretty good success with that. OperatorAgain, I would like to remind everyone, if you would like to ask a question, please press * then the number one on your telephone keypad. Your next question comes from Jim Friedland of SD Cowan. Thanks, two questions. First, on peoplePC, if you look at your results compared to NetZero, you’re adding a meaningful amount of subscribers and they’re actually in decline. So I wonder if you could address sort of why you think that is, what marketing channels have been effective for you and sort of the subscriber acquisition costs. And then I just had a quick accounting related question on your NOL. I think, I’m not going to take a shot at NetZero. They’re continuing to do a good job on many fronts. Part of it’s the law of big numbers. NetZero has a larger number of customers and larger churn means they have to add a lot more customers just to stay even. We have been very successful on a number of fronts. We have affinity relationships with organizations like AARP which have done well for us. We continue to expand the availability of our services through the 20,000 retailers, which have traditional sold EarthLink’s premium dial services. We effectively use direct response television. We’ve had great success in the Hispanic arena so, peoplePC is executed extremely well and we’re bringing subs in for what we’ve traditionally targeted, that’s in the $80-$90 range and I don’t see that changing through 2006. We expect peoplePC to continue to grow nicely as we think are gaining share in this marketplace. So we’re pretty happy with what they’re doing. We had a very good quarter and that’s significantly one of the reasons why we believe we’re going to continue to generate a significant amount of free cash flow from this business. Because even as premium dial declines, we’re keeping our customer base flat through the growth of peoplePC in broadband offsetting losses in premium narrowband. And on peoplePC the churn was down overall. How about the churn on peoplePC, has that been coming down as well? About the same. When you have early…when you have a lot of growth, you’re going to have a lot of early lag churn. So until the base gets larger, you’re not going to see meaningful decline because a significant number of your customers have been with you less than 12 months. Okay great. And then the question on the NOL. As you continue to offset the NOL with profits, but now you have the equity losses coming in from the SK/Earthlink/Helio venture, will those equity losses – can you use those to offset the gains from just general profitability or are they not used for deduction for the NOL? No, those…the impact of the …our share of the losses of Helio will definitely be part of our impact to our tax, to our deferred tax assets. So we will be able to use those to shield further income tax payments. Good morning, I have a couple of questions. First, just a quick one for Kevin. Can you tell me what the number of shares outstanding were at the end of the quarter? Okay. And can you guys comment on line-powered voice, particularly with respect to the potential timing for rolling out to additional markets? All we can say at this point is that we expect to be able to offer it to a significantly expanded footprint. Those discussions and work is under way. We wanted to get our feet wet with these four markets. We’re now starting to provision customers. I think we took orders for almost a thousand customers in January. So it’s off to a good start, we’re getting a lot of learning. We didn’t want to go too fast because it does require line number portability and all of these new processes that you provided interfaces to the lex provisioning systems, there’s plenty of places where you can go wrong and we didn’t want to get way ahead of ourselves. So we’re pleased with how it’s doing and we will, I’m sure, provide you some greater color on the 23rd. By year end. I can’t tell you which month yet, but certainly by year end we expect to have a much, much bigger footprint. OperatorAgain, to ask a question, please press * then the number 1 on your telephone keypad. Please hold while we compile the roster. At this time, there are no further questions; I will now turn the call back over to you. Alright, thank you all for joining us today and we look forward to seeing all of you up in New York on the 23rd. And, thank you for joining us this morning.

EarningCall_233862

Good day Ladies and Gentle man and thank you for joining us for the Genesis Microchip Third Quarter Fiscal year 2006 Earnings Conference. Today’s call will be recorded. We ask that you to remain online in the total duration of today’s call when we begin conducting a question and answer session. Instruction on how to participate will be given at that time. And now for opening remarks and introductions, I would like to turn the conference over to Tonya Chin, please go ahead. Good Afternoon and thanks for joining us today. With me today are Elias Antoun, President and Chief Executive Officer and Micheal Healy Chief Financial Officer. Today’s discussion contains forward-looking statements including without limitations forward-looking statements regarding the company’s revenue, gross margins, operating expenses and unit shipments. The forward-looking statements are subject to risks and uncertainties that could cause actual results will differ materially from those projected. Those risks and uncertainties include the company’s ability to gain design wins and ramp into production volume, growth rate of the flat panel TV and LCD monitor market, seasonal consumers demand for flat panel TV’s and LCD monitors. Rate of customer transition to the company’s new single chip solutions from legacy dual chip solutions, competitive pricing pressures, availability and pricing of panel’s and other display components, customer inventory levels and foreign exchange fluctuations, tax credits and other factors that affect tax rates. Other risk factors are listed in today’s press release and the company’s SEC’s report including but not limited to the company’s quarterly report on Form 10-Q for the quarter ended September 30th 2005 and it’s annual report on form 10-KA for the fiscal year ended March 31st 2005. The forward-looking statements made today are the company’s target and not projections for the actual performance. In the past, the company’s performance has deviated from its targets as of the beginning of the quarter. Participants are cautioned not to place undue reliance on these forward looking-statements, which speaks only as of today’s date. The company does not undertake to publicly update or revise these forward looking statements even if it experienced or future change make it clear that any projected results expressed on slide during in this discussion will not be realized. Any statements made by persons outside the company, speculating on the progress of the quarter or other aspects of the company’s business will not be based on internal company information and should be assessed accordingly by investors. During the call, the company will refer to both GAAP and non-GAAP financial information. The reconciliation of GAAP and non-GAAP results in accordance with the SEC’s regulation G is included in today’s press release which has been posted on our company’s website. Please note that today’s broadcast as well as an archived version of the broadcast are available on the company’s website at www.gnss.com in the investor events in webcast section. Additionally, a replay of this conference call will be available through January 25th 2006 by dialing 719-457-0820 and replay access code is 4051745. And now I would like to return the call over to Ellie. Thank you Tonya. Good Afternoon everyone and Thank you for joining us today for fiscal year 2006 Third Quarter Conference Call. I will begin my remarks today by recapping the quarter’s highlights. I will also review some of the company’s major accomplishment’s during the quarter. Then I will turn it over to Mike to cover the company’s financial results and guidance in more detail. I will then close with an overall summary. Our fiscal third quarter revenues were $74 million, this represents a 1% decrease from revenues of $74.9 million in the September quarter. And a 53% increase over the prior year fiscal third-quarter. This revenue was slightly below the midpoint of our guidance primarily due to lower shipments of LCD monitor units to our largest end customer. I will elaborate on this and other factors a little later. Gross margin’s increase for the third quarter to 48.9% from 46.5% in the prior quarter. This improvement was substantially the result of a further decrease in our product cost during the quarter. GAAP operating expenses were $26.7 million representing a slight increase from the prior quarter. The increase in the operating expenses reflects our growing investments in Digital TV product development and in our customer support organization. Finally, on a GAAP basis, our earnings were $7.4 million or $0.20 per diluted share down from $9.3 billion or $0.25 per diluted share in the prior quarter. This drop is largely due to a higher effective tax rate in the December quarter. On a non-GAAP basis, earnings were $10.2 million or $0.27 per fully diluted share compared to $11.8 million or $0.31 per diluted share in September quarter. Now, let me address the company’s performance in both our key markets. In the TV controller market, revenue’s grew 4% sequentially to $44.4 million, our TV controllers contributed 60% of the revenue this quarter, up from 57% in the previous quarter. Unit shipments of flat panel TV controllers grew 5% to 4.5 million units during the quarter. This modest growth in units was inline with our expectations, especially following the significance surge in our unit shipments during the September quarter. In addition, the moderate growth in unit shipments was slightly impacted by the beginning of an anticipated transition away from shipping a two chip solutions mainly Malibu and FLI2300 into many of our flat panel TV design wins to shipping the single chip Cortez. The successful ramp of Cortez is our second wave of customers, particularly in China will accelerate this transition going forward. This effect which will continue into March quarter, will exert some pressure on unit growth in this market. In the LCD monitor controller market, revenues were $29.6 million, which represent a decrease of 8% from the September quarter. This decrease was due to a couple of factors, first, while unit volumes grew 2%, this was lower than our expected growth of 5% for the quarter. This was a result of the measurable decrease in shipments to key Taiwanese ODMs who are supplying our largest end customer. This decrease in unit shipments was partially offset by market share gains of other customs. Second, the average selling prices in the LCD monitor controller market declined 11% during the quarter primarily due to the shift in our product mix. As anticipated in our product road map mainstream LCD monitors are transitioning rapidly to the Phoenix family and the multifunction monitors are transitioning to Oak. Phoenix and Oak both continue to grow as a percentage of our total LCD monitor units. In fact Phoenix units increased nearly 100% quarter-over-quarter. The impact of Phoenix is relevant to the transition away from the higher priced GM5321 in mainstream monitors. While Oak is replacing Malibu in multifunction monitors. Going forward, we expect LCD monitor unit volumes to stabilize in the March quarter, when we anticipate that the product transitions will continue to put pressure on average selling prices. We expect that this product mix shift will largely be completed by the end of our current fiscal fourth quarter. Now let me highlight some key developments in the area of products and technology. Earlier this month, we attended the CES show in Las Vegas. We were very pleased to host approximately 400 visitors in our technology suites to view our latest products and next generation technologies. The response from our customers was overwhelmingly positive. In advance of the conference, we announced four new products that we demonstrated at the show. These product’s have already been designed in by early access tier one customers and have also in some cases ramped into production. I will take a few minutes to quickly discuss each product. First, we recently announced Cortez Plus, the newest edition of the Cortez family. The FLI8548 is a single chip LCD TV controller which supports 10 ADP displays, 10 bit capture, Picture-In-Picture functionality and have integrated HDMI input. In addition, we now announced our entry into the LCD panel timing controller market with the introduction of our GM7746. This product is targeted at providing enhanced image quality for panels upto WUXGA resolution and full HD with a 10 bit processing pipeline. The GM7746 allows us to sell directly to panel manufacturers and opens up a new revenue stream for Genesis. This product is central to the company’s strategy of offering solutions that enhance image quality end-to-end in the TV system. We also introduced the newest member of the Oak family of controllers, the FLI5962 which offers DCDI by Faroudja video processing for multifunction LCD monitors as well as LCD TV’s. The FLI5962 also incorporates ACM-3D our latest advanced color management technology. The FLI5962 is ready for production and has already been designed in at several major customers. And finally we introduced the newest product in our Phoenix family, the GM5766 controller. It is a low cost memoryless solution targeted for mainstream SXGA and performance LCD monitors up to UXGA. It also integrates ACM-3D color management technology. We expect the GM5766 to play a key role in expanding the company’s market share in LCD monitors. We also demonstrated at CES the complete Genesis digital TV solution for North American and European markets. The demonstration highlighted the full range of benefits in enhancement image quality for both digital and analog signals that are derived from pairing Cortez and PurVIEW together. These platforms are targeted to be ready for production on schedule in the second half of calendar 2006. Additionally at CES we demonstrated display port, the new digital display interface being finalized by the VESA organization. The proposed standard is currently under the VESA general membership review, which is expected to be concluded this month. We believe that VESA is on track for issuing display port as an official standard in March. Development of the related content protection system is on schedule. At Genesis we plan to release our first display port enabled component in the middle of the year and to follow up with a broad range of ICs for PC and consumer applications. Now let me highlight a few of the designs that we announce during the quarter. Hisense the largest LCD TV OEM in China and one of its largest TV OEMs chose Cortez and Hudson controllers for their new 32, 37 and 43 inch LCD platforms available in China’s domestic market. In addition they are using our FLI8120 and FLI2300 controllers in their new 29, 32 and 34 inch CRT TV platforms. Additionally Westinghouse selected Genesis as its primary supplier of video processing controllers in its 27 and 32 inch LCD TV’s, as well as their 37 and 42 inch ADP video monitors. Westinghouse, which has become one of Genesis key customers, continues to successfully grow it’s LCD and TV market share worldwide. TPV the world largest flat panel integrator selected our Cortez controllers for use in several of its new high definition LCD TV platforms, which it designs and manufactures for both popular TV and leading PC companies. These new TV’s range is in size from 23to 40 inches and supports both NTSC and PAL formats on a single platform for use in multiple regions worldwide. And finally Skyworth, China’s third largest TV manufacturer designed Cortez into its new high definition 32 and 37 inch LCD TV models which are now available in their domestic market. In addition Skyworth also designed our Hudson controllers into its high volume 15 and 20 inch entry levels LCD TVs currently available in Europe, Hong Kong, Indonesia and Australia. Finally let me address our revenue guidance for our fiscal fourth quarter. We anticipate revenues to be in the range of $62 to $67 million based on the following factors. In the TV controller market industry data forecast that the flat panel TV market is expected to decrease in units by close to 20% from the December quarter. In addition the digital CRT market in China will also experience it’s normal seasonal decline. Finally our customer’s transition to Cortez from Malibu Plus FLI2300 will also contribute to the lower guidance on our revenue and units in the TV controller market. In the LCD monitor market we expect that the continuing product migration from our mature higher ASP products and the seasonal decline in worldwide monitor shipments will have an impact on revenue. I am confident that these market and product trends are temporary and I reiterate that our design wins portfolio and customer penetration will allow us to resume our growth in the following quarter. With that I will turn the call over to Mike to review the financial details for the quarter. Thanks Ellie. Before I begin I want to reiterate the comments made regarding the split of revenue units and ASPs between our LCD monitors and TV controllers product lines that we discussed during the call and in our press release, are our best assessments based on our customers input during the ordering process. Just to be clear we continue report all controllers use in multifunction monitors as part of our LCD monitor business. Now I’ll discuss our financing and operating results from the September quarter. Total revenues for the quarter was $74 million, a decrease of approximately $900 thousand or 1% from the prior quarter and a $25.7 million increase over the last year. The revenue is divided between our two primary markets as follows. Total LCD monitor controller revenues were $29.6 million, down 8% from the prior quarter. Total TV revenues grew by $1.8 million or 4% to $44.4 million. Our TV business now represents 60% of our total revenue. Now let me turn to unit. Several TV controller shipped in the quarter were 5.1 million units of which our flat panel TV controllers shipments were 4.5 million units. This reflects a 5% growth in our flat panel TV shipments from our prior quarter and was consistent with our expectation. We continue to see excellent growth from all of our new products as the Cortez, Hudson and Oak families, all showed significant quarter over quarter growth. In terms of unit growth Oak grew over a 100% and Hudson and Cortez grew at close to the same rate as the overall flat panel TV market in the December quarter. The Oak unit ramp in TV was primarily due to the Samsung LCD and Plasma TV design wins moving in for action. Once again we saw excellent growth in our other TV category, which is mostly comprised of the digital CRT TV marketing in China. We shipped over 600 thousand units, an increase of 20% of the prior quarter. We continued to make excellent progress with several top Chinese TV manufactures in the quarter, this product line continues to become a larger piece of our overall TV revenue. In terms of ASPs we saw some declines in the digital CRT TV space, which was mostly offset by a 1% increase in the flat panel TV ASP. Now I will cover the details of our LCD monitor business. We shipped a record of 11.7 million LCD controllers monitors during the quarter up from a 11.4 million units in the second quarter. Our unit increase of 2% was slightly less than we anticipated primarily due to softness with some of our ODMs in Taiwan that supply our largest end customers. The impact of that one ODM customer did reduce our monitor unit and revenue during the quarter, but we were able to offset some of that impact with increase from other LCD monitor customers. As we expected ASPs in the LCD monitor product line declined us by approximately 11% with most of that decrease about 9% coming from shift in our product mix. As been the case for several quarters our part for part ASP decline was a minimal 2%. Our Phoenix family continued to ramp nicely. And we expect it to continue to grow as we gained new designs with the controllers from the Phoenix family. There are really two product transitions occurring in the LCD monitors space simultaneously that are effecting our ASPs in the monitor product line. The first is the ramp up of our Oak multifunction monitors controllers in place of older Malibu products, which have a significantly higher ASP. The second is our customer’s transition from our older higher price 5200 and 5300 series to the Phoenix family. Again the story here is ASP, where we are transitioning from older significantly higher price parts to the Phoenix family, which are generally under $2. This transition really took place in the December quarter as Dell and other customers adopted Phoenix into their current monitor model. This transition is inline with the company’s strategy to maintain its leadership position by delivering cost competitive high performance product. Another item of significant dimension that will affect our revenue going forward is that one of our largest South Korean customers has decided to stop manufacturing LCD monitors for their OEM customers and instead will focus on producing monitors only under their own brand name. The impact of this reduction will be mostly felt in our March quarter and factored into our guidance Gross margins improved to approximately 49% up from 46.5% in the September quarter and slightly above our guided range of 46 to 48%. The increase was mostly related to sale of inventory with lower wafer cost. The improved product cost together with minimal ASP degradation on a part for part basis in both TVs and LCD monitors enabled us to expand our gross margins in the December quarter. GAAP based operating expenses were $26.7 million within our guidance of $26 to $27.5 million. This includes an aggregate of $23.7 million of R&D and SG&A expenses. And $3 million for the amortization of intangible in stock based compensation. As planned the modest in growth and operating expense in the quarter was the result of concentrated hiring efforts to augment our customer support and digital TV organization. We increased our headcount during the quarter by slightly more than 30 employees. Incomes from operations on a GAAP and non-GAAP basis has steadily grown over the last year as we continued to leverage our operating model. Non-GAAP income from operations was $12.5 million in the December quarter or 16.9% of revenue which a significant improvement from our 1.2% ratio in the December 2004 quarter. On a GAAP basis the provision for income taxes was $3.6 million during the quarter, reflecting an effective tax rate of 33%. Last quarter’s GAAP tax rate of 10% was significantly lower than our expected GAP tax rate primarily because it was favorable impact of the increased value of the Canadian Dollar tax attributes in the September quarter which did not re-occur in the December quarter. We posted GAAP net income for the quarter of $7.4 million or $0.20 per diluted share, down from $9.3 million or $0.25 in the prior quarter. The decrease in the net income in EPS quarter over quarter was in entirely related to higher tax rate this quarter. Our non-GAAP net income was $10.2 million or $0.27 for diluted share compared to last year’s net income of $3.2 million or $0.09 per share. Next let me comment on a few balance sheet items. Cash and short term investments increased significantly to a $175.2 million primarily reflecting cash generated from operating activities during the quarter. Trade accounts receivables decrease $2.7 million to $37.2 million on an relatively flat revenue while DSO improved by 4 days to 46 days. As expected we managed the inventory to keep system although estimates of current and future revenue. As a result the inventory decreased by $6.2 million to $23.2 million or 21% from the $29.4 million at the end of last quarter. This represents approximately 8 weeks of inventory on hand. Next let me give you an update on our employee equity compensation plan. During the quarter we began issuing restricted stock units along with a number of stock option. The combined amount of shares granted under this new program was significantly less in what we have traditionally issued under our parts stock option plan. As you know the accounting for stock options expense under FAS 123R goes into effect for us in June 2006 quarter. The expense impact of FAS 123R is subject to a number of assumptions in variables like forfeiture and the stock price at the time of grant. Therefore it is difficult to give you an exact estimate of the expense impact on our June 2006 GAAP earning. Please refer to our 10-Q SEC filings from the September 2005 quarter, which should give you a starting point for the expense impact of FAS 123R. Now let me move to our guidance for the fourth quarter. We estimate revenues will be in the range of $62 to $67 million. We expect the unit shipment for the LCD monitor controllers to be relatively flat in a market that displaces the estimates to decline about 2%. Due to product transition discussed earlier in both the multifunction and mainstream LCD monitor line, we expect LCD monitor ASPs to decrease 10 to 15%. In the March quarter we expect our total TV units will decrease slightly, of that flat panel TV units and ASPs are expected to decrease slightly as our customers shift from a two chip to one chip solution. In the digital CRT area we expect to see a more pronounced unit decline of 20 to 25% due to seasonality in the China digital CRT TV market, just like we experienced last year. We expect gross margins to range between 46 to 48% mainly as a result of lower revenues and some ASP decline. Total GAAP based operating expenses are expected to be between $26.5 and $28 million with approximately $2 million expected for the amortization of intangibles and stock based compensation expenses. As noted in our guidance on the press release the amortization of intangibles is dropping by $1 million in the March quarter as most of our intangible assets acquired through our SAF-T (ph) acquisition are coming to the end of this four-year amortization period. After backing out that decline you will notice we are expecting an increase in non-GAAP operating expenses ranging from approximately $1 to $2 million from Q3 level. The increase in operating expenses is due to a number factors including increased labor cost due to the expected hiring of additional customer support and engineering resources, the acquisition of licensed technology and cost associated with our year-end audit and Sarbanes-Oxley certification. We feel it’s important to add additional headcount resources now in order to support our new product roll out, accelerate the product development around our digital TV technology and to continue provide our customers with excellent customer support, especially if they begin to move into digital area. Now let me turn the call back Ellie for closing comments. In summary this quarter we delivered on our revenue and earnings despite the well known softness in the LCD monitor market. We have outlined the factors that will be resolved and lower revenues in our fiscal fourth quarter, but we are on track with our strategy. Our new products are rolling out on time, with tier one customer design wins committed in advance of volume production. The flat panel TV controller market is anticipated to grow more than 60% in unit shipments to calendar 2006. And the LCD monitor market is also expected to grow a healthy 21%. I’m confident that we have product portfolio, customer penetration and talented and motivated employee base to resume strong growth beyond the March quarter. With that I’ll turn it over to the operator for questions. I was wondering, you mentioned about the multifunction monitor market, it seems like you have, some nice traction there, I was wondering if you guys could size it for me, what your expectations for the overall market is in this year for multifunction and may be in ’07. And just give me an idea how you see your customer’s positioning it in the channels, is it going to be a IT Channel, or is it going to be a PC Channel, or is it going to be a (indiscernible) as we can going to see these products in? In terms of the size of the multifunction monitor market from a unit perspective compared to the total to total monitor market that is somewhere in the 4% to 6 % range or to 7% range, it varies by quarters to some quarters it is on the higher end and some quarters it is a bit lower than that. And we have a pretty good market share in that area particularly because the largest end customer in the United State that’s a significant market for them. Positioning is varying, part of the caveat as Mike puts in his comments is that, some - today we put all the multifunction monitors that we know of in the monitor market but we are seeing with customers design wins, if they calling multifunction monitors are coming close to TV’s and TV’s that are really coming close to multifunction monitors, it is varying by customer, it is really hard to well first - speak about this specific strategy that each customer has but it is clear to us sometimes that the customers we have are in the IT business and to position them as monitors, the customers that we have with them who are in the TV business, tend to position them as TV’s without Tuners. And I don’t know that’s going to change very much as we go forward. In terms of the growth of the market itself we certainly hope and expect that share of the bulk of monitor markets will grow but I don’t think we expect to become 20%, even in 2007. Certainly growing from 4 % to7% of the total market may be up to 7%, 8% or 9% in the later part of this year but at this point it’s conjecture. Okay and just to shift gears little, you mentioned that, you saw, one of your biggest customers I guess already, or is your biggest end market customer in flat panel, they had significant weakness in the December quarter. Now what do you suspect happened there and what should we expect on going forward from this particular customer? Yeah, so to clarify that the customer is in the LCD monitor market, it’s not in the TV side of our business. So it is on the monitor side, it’s our largest OEM customer and what we are suspecting is going on there are, partly gyrations in the overall PC business, partly the segmentation between Desktops and Notebooks and partly, may be our some - our customers expected a significant growth in their position during a certain quarter that did not pan out and as we saw the effects of that. Other than that honestly, we cannot comment because they haven’t commented themselves, so we kind of leave them clarify beyond that. So - do you, assuming that, you have stated that you are going to have flat unit number for the March quarter, are we to assume that, there was an inventory situation in the channel and that’s over at this point or do you think that there is still some risk of inventory not clearing? Yeah, certainly, I think, it is Mike, there is still some inventory in the channel, visibility that is not easy to get at sometime, certainly that is the one factor backed into our guidance so that, I think that doesn’t influence next quarters numbers. Okay, just the last question here, I just wanted to know, obviously you are seeing nice measure of success in China with Hisense or Skyworth etc., who do you believe you are up against and who do you think displacing there? So, in China actually, you don’t mind me reiterating, our measure of success is actually with all of the top 6 manufactures there. This current quarter, we announced inline with Skyworth, Hisense. We feel pretty good about our position in that market both in the flat panel side as well in the digital CRT across the board. From that perspective in China our typical competition remains, our traditional competitors, Pixelworks and Trident and it seems like we are doing pretty well from that perspective. Just want to get a little bit color on your guidance for March. When you talked about the product mix shift in the TV controller revenue, can you give us a sense of, what is the relative contribution among Cortez, Oak, Malibu and Hudson and how that mix might trend through the year? Yeah, Heidi, all the new products are doing extremely well, as we said this quarter Cortez and Hudson grew close to the market, which was 40%. Oak and TVs is doing well with Samsung, all the new products will continue to grow, we don’t give specific percentages of revenue contribution but we are really pleased with the progress that they are all making in penetration, they have gone beyond, kind of, first tier customers into Taiwan, into China, into Europe, different places, so the penetration is really good. Heidi, that we expect Oak, Phoenix, Hudson, Cortez by the end of fiscal year ‘06 which were coming upon to contribute more than 40% to our revenue and we are well on track with that. Great, regarding your gross margin, this quarter expansion seems to have mostly due to cost control, how much more room to we have, in terms of gross margin expansion from that, again to speak or, most of the expansion to come from mix shift going forward? Yeah, I mean wafer cost certainly influenced gross margin significantly, that was influence us over the last couple of quarters so as we continue to get better pricing there, that will have influence, ASPs are obviously have an influence as well as the shift. But I say wafer cost will probably use can influence that number more than the other two. Although for the rest of 2006, we believe that, it’s safe to model that improvements in wafer cost will be modulated by ASP as we go forward because we are heading into the period now with the market that you have to compete on ASPs also. So I think where we are guiding now is a reasonable place to be for now. Okay, lastly regarding operating expense guidance, I think, there is a little bit of jump that you mentioned because of the customer support increase, is that mostly in R&D and should we also look at that as a good range for the rest of ’06 in terms of the percentage of sales? Let me, clearly in our fourth quarter we have some, onetime event relate to year end cost, they want to repeat themselves before we are in head count and in other technology and the head count is really been in a kind of a customer support areas in Asia and engineering resources, application engineers and product development engineers to support a lot of product and in the digital TV space. Okay and in terms of your inventory comedown back to a more of a normal level at a less cost, did you give us a sense of what’s the mix between TV controllers and monitor controllers are in the inventory mix? Typically dollar impact is close to our revenue mix, units are obviously more heavily weighted towards monitors than TVs, I don’t have the exact numbers here for you but I think, that’s pretty close. We have as always we try to manage that inventory to 8-10 weeks, it’s a kind of our targeted ranges, so it’s been there for the last two quarter. I had another quick question, a follow up on the TV product transition, is that often supposed to be completed the transition to Cortez in the March quarter? No that, based on what we have seen right now Jennifer that transaction will probably continue over two to three quarters it’s got of course the contribution at each quarter will get slightly smaller but, and also by the way I like modulate that with sometimes these transitions are faster than we anticipate and slower than we anticipate particularly with this one because it spread over quite a few customers and customer programs sometimes move at a certain pace that are as a bit different what we have forecasted but in general we expect that this would last 2 to 3 quarters. Okay. And then you talked a little bit about PurVIEW and how that is still on track, is there any more details, update that you can give, any feedback from customers or any traction that you are seeing? We are seeing tremendous traction of interest particularly after CES and the demo that we showed with PurVIEW working with Cortez and the image enhancement that’s possible from the paring of these two chips plus the fact that we showed that on one form factor board that actually go to production in the near future so that kind of interest is ramped up significantly since CES. We have a design win that we will be able to share with the world probably in the not too distant future but other than that we cannot elaborate other than to say we are on schedule to go to production, derive some revenue by the later part of this calendar year and go forward. Okay that’s great and then when you look at the TV and monitor forecast for calendar year ‘06 how do you see your product mix between two business shifting in the last year you went from monitors accounting for about 50% of sales down to about 40%, do you see that trend continuing could it be monitors accounting for 30% or even less by the end of this calendar year? I mean, I think generally the trend will continue I cannot at this moment blending our planning’s for fiscal year ’07, I cannot tell you whether it will goes as low as 30% or not. We do have a both desire and plans to increase our market share in monitors and go after it aggressively so it represents a growth opportunity for us but generally the trend will continue. I just have a couple of questions than the likely target coming out, but in terms of gross margins I know you talked about wafer cost being the primary driver there but obviously the mix overall tilted more towards the TV and also I think we have seen some continued product transitions towards some better gross margin products into Phoenix monitors etc., if you were to handicap that like maybe you know 30% from wafer cost and 15% for the other two, would that be fair assessment or how do you think about them in terms of being component for gross margin increase and other things? September to December? Yeah, I would say the majority as wafer cost, we did do a good job and there is going to be lower wafers as we built up and all of those flush through cost of sales this quarter that mix certainly helps us but the mix within each product line may or may not make that much difference so I would probably say 80% wafers that you at least in terms of what drove the gross margin. Okay, fair enough and then I guess talked about looking forward basically gross margin in whatever improvements in wafer cost, basically stemming the time for ASP, should we think about it anymore again towards tilting towards TVs being benefit to you, in this last quarter obviously that 46, 48 gave us a little bit conservative and would you characterize 44, 46 is a little bit conservative or pretty much right on target. Just to answer the second part I don’t think we have any conservative guidance in their particular with regards to gross margin its really hard to put concrete numbers on the combination of mix and the trend right now, I think mix should help us benefit a little bit as we go forward particularly the fact that Oak is still ramping, couple of the new products are still ramping and of course yields get better as we ship much higher volumes in the future but still we anticipate that it will still be overwhelming modulated by the ASP that we are anticipating in the market. Okay fair enough and then Michael, Opex that talked about rising here into the March quarter and obviously where it is in the components headcount and in your year end cost, really think about which component is that really is an yearend cost may be half of that 30% of that increase? Yeah. I think I would say, kind of a one-time thing where you have $0.5 million to a $1 million of the increase. Okay and then a last question here so in the inventory that was down sequentially and you talked about being in the 8-week sort of the lower end of your target range of 8 to 10 weeks and margining against future expectations, should we think about that as probably come down a little bit in the March quarter or should we think about any building ahead of ramps maybe in June and September? It obviously it depends how we are looking towards June and beyond, our wafer ordering is still 8 to 12 weeks out, so we certainly got to lookout by the time March we are looking into June this past June into July at that time and it will be reflective of the business we seeing at that time and our customer forecast. Well, I think generally, as Ellie just said we expect June to show growth so following that thing you would expect inventory would be rising to support that growth absolutely. Just trying to get a better gauge of some of your design momentum on the TV space, may be to that end can we talk generally about what portion of you design log or design backlog will enter production in Q1 and how that looks as you move the year? Wow, that’s a tough question. Jason we have so many customers that are moving into production almost every quarter now it’s really hard to answer X percent of design wins are going into production we have, let me just give you an example we announced Cortez in advance in very early October we have 12 design wins for it already. We announced Cortez Plus just ten days ago we have three designs wins for it already and then we continue to win design wins for Cortez and Hudson for example in China market so its - all I can say is our design wins movements into production is at a pretty healthy pace should absolutely track the market it a lot of which is driven not can we get five up in January and five more up in February is driven by market windows that the customers determine they have to release product into the market on certain dates and we just have to follow those and that’s how we have to track. Okay now I think in your commentary you mentioned some new wins were TPV I think you said you were in multiple platforms was that with one or multiple top Q1 customers? TPV is a definitely one pretty major tier one customer plus their own business of ODMs, to other customers but its significantly driven by actually two fairly major customers one on the CE side and one on the on the IT side. Okay. Maybe you can just address briefly the opportunity that you see with the new timing controllers that you are launching I believe mid year, any meaningful revenue in the second half or was it just more of an ’07 story. Good afternoon, thanks for taking my question. With respect to Opex growth beyond the March quarter, I guess one of the questions kind of hit me, trying to Starbox stuff back, what’s kind of your headcount growth plan as we move throughout the rest of the year? Greg, our headcount growth plans are going to be driven primarily by design wins momentum and product development efforts to take DTV to the next level. It is no secret that we need to move DTV solution very quickly to a single chip which is actually already in progress and it’s not a matter of IC design, it’s a matter of system level design at the firmware, the component combining, our analog TV and digital TV solutions into one. And we expect fully to be successful in the market place, that means we need to ramp up our customer support for organization for digital TV in that area. Those will be the two major drivers. And going forward, looking a little bit beyond that we consistently said that our goal is to enhance image quality end-to-end in a TV which means we are working on technologies, not just on the video processing side but on the incoming signal, the demodulation of the signal and ultimately on the display side, all of these will require investments by us in order to continue to grow our opportunities inside the TV. With respect to the single chip digital TV, I know you guys said you are working on that, is that something that could drive revenues in the second half of this year or is that a 2007 story? PurVIEW again, we have consistently said we’ll be ready to go to production second half of this year. We are pushing super hard to derive some revenues from it by the December quarter of this year, we do not expect them to be appreciable but it would be tremendous goal to achieve. Excellent. With respect to the monitor market can you talk little bit about the competitive dynamics there, what’s going on with MStar, ITC shipments being stopped. Are shipments being stopped at customs and can you extend any additional details you can provide? Yes. Well as you know MStar remains our most, our largest and most important competitor in that space. Their product line in that are is called the TSU. It is shipping into the United States, the reason it’s shipping into the United States because customs apparently believe that the TSU does not fall under the exclusion order. We believe strongly that it does fall under the exclusion order, the pattern there is very strong, there remain several options available to us in that area and we continue to evaluate them. Other than that as we also have said in the past we believe that the competition in that space is on product and technology and that’s what we do day to day internally in product development, in product bring up and customer design wins. Everything that happens outside of that vis-à-vis the ITC is a factor that we work out separately but it does not effect our approach to the business. Okay and then just finally the monitor ASPs for March down to 10 to 15%, are you pretty high confident that the mix shift to Oak is going to be finished in the March quarter or can I extend it to June or beyond. On the multifunction monitor side, also will be done in the March quarter, but you know will see some stragglers there. The conversion to Phoenix have much faster because of the mainstream monitors, the ramp ups and the ramp downs are much faster, multifunction monitors are little bit slower than that. But most of it will happen in the March quarter. Hi thanks. Just wanted to first follow up and then clarify it. I think you said Oak, Hudson, Phoenix and Cortez would be 40% of revenues or is just Oak, Hudson and Cortez? Okay so March. Okay. So following up on Craig’s question about competition in MStar’s specifically can you comment to whether you have seen them win any designs of your largest customer? We can comment that we have not seen them win any designs of our largest customer. And there is no indication of that happening as far as we can tell. Okay so moving on now into the TV space. You know looks like you are starting to see FLI and Malibu products being replaced by Cortez so the units per TV are going down, just want to make sure that transition will happen over two to three quarters and then be mostly be wound up, sort of exciting calendar 06? Yes, we believe that and that clearly we will keep be updating that but certainly by calendar ‘06 we expect that to be totally complete. Okay. Obviously Cortez carries is a higher ASP can you talk about, I don’t think you have given in the guidance you gave any ASP guidance for the TV side of business, just wondering you’ve give this transition from two lower ASP chip to one single higher ASP chip, can you give us some comments on what you think the blended ASP will be doing over next few quarters in the TV business? For the next quarter, I said we expected the flat panel TV ASP to be just down slightly so the mix will continue with this two to ones, beyond that we got to see how fast this transition happens between Malibu and 2300 Cortez and frankly every customer is different, there is longer design cycles, China maybe, it will move a little bit slower than Iran or Korea. So it is really hard to peg how quickly that will move around. Okay guys, a follow question on that. I mean your going for Malibu and the FLI products which are again lower price than say Cortez, I guess I am at loss to see how ASP trends down. I mean is it not necessarily transferring to Cortez, maybe it is transferring to Hudson and that is part of the mix shift. I don’t know if you can provide anymore light, shed anymore light on that? But the combination of Malibu plus FLI2300 is the transition to Cortez. The Cortez ASP is higher than either Malibu or FLI2300 individually but the Cortez ASP is lower than the combination of Malibu plus FLI2300. You are right. I mean if you go from two chips at lower ASP to one chip that should be a blended ASP increase right? There are other factors. Okay right. Just the last question. Sounds like Phoenix will be most of the year going into the monitor business by the March quarter did I hear that right? Okay. And you said that Phoenix is sort of a sub $2 price and Phoenix is quickly replacing the older 52, 53 family products. Can you give us a sense of where the 52, 53 products family products were priced? Yeah, in general they are much higher than the Phoenix product line. We had to move that way with our customer or you wouldn’t have those designs wins moving forward. So there is atleast 50% higher, the gross margin percentages are very comparable though. I don’t feel we are loosing much, in terms of margin, that’s where the industry is moving. So operator we have time for one more question. Hi guys. Couple of things I want to clarify, you talked a little bit about a customer in Korea that has chosen to basically pull its manufacturing in-house. Is that for the monitor market and were you loosing market share as a result of that or gaining? So again to clarify as far as we can tell they are exiting the OEM business, which means that only monitors they are going to put out as we can tell are the ones that are branded in their name. So what that does is they are building monitors for one of our largest OEM customers and also monitors for a couple of other customers. The largest OEM customer that will stay with Genesis we expect that business to just transfer to another integrator who will build those monitors. But we expect that the other piece of their business that was not automatic, that was Genesis but not necessarily automatically going to be there anymore, we have factored that in as going away. Although it’s not, we don’t know for sure. But if you just look at that piece of it, yeah, you would see we lost market share but I think what I would like to focus on is that, eventhough our largest ODM lost market share in the December quarter, we regained some of that through other accounts, so if you look at it globally, eventhough we didn’t make totally for their, for the loss from them, we did make up substantially from other accounts. Okay, I got to sticking on the monitor team here, there is obviously a lot of interesting map done over the several weeks, the past couple of months with regards to monitors, I just want to make sure that I am understanding the map for December as your guys are reporting it. You said, unit volumes in monitors was actually up 2% not down some massive amount that came in about 11.7, is that correct? Okay and the ASP decline sequentially was a 11% but 9% of it you said it is attributable to the product mix, i.e. a shift towards Phoenix, is that also correct? Okay and as we go into next quarter, we are actually looking for flattish units but the product mix again affecting this ASP erosion? Right now, it is 2% in last quarter, our expectations are similar to those, for the following quarters for the March quarter. Okay and just again I am clarifying a bunch of points, as I am not going to get hammer with them tomorrow, Daniel has alluded a number of rumors stating that Mstar was taking shares from you guys that, you guys are having flat unit volume with the market forecasted to be down that to me implies that, you guys thinks going to actually gain share in monitors in Q1, is it fair to say? Okay, good. And as we look going forward with taking into the account the transition appeared what March appears to be can you give us some expectation for what we can expect in kind of June, September, December timeframe given the backdrop of the industry which you described to be very robust. And given the backdrop that you described on your design win activity, can you give us some parameters for what must be your growth forecast? So Brian, we typically shy away from talking about following quarter and then multiple quarters out and lot of that has to do because of the nature of that business we are in. I just want to say again, we are pretty comfortable from our design win portfolio and from our product portfolio. We are quite comfortable in terms of the company’s prospect for growth in both of it’s markets both in terms of units and ultimately revenue. So we will put out the right indicators at the right time for each one of those and move forward, we just, we feel pretty good about the company’s position in the market place but we are not able to forecast that far out. And that concludes the question and answer session for today, I will turn the call back over to Ms. Chin for any final or additional remarks. Thanks again for joining our call today. As a reminder a replay of this conference call will be available through January 25th by dialing 719-457-0820 and replay access code is 4051745. In addition to today’s earnings release is available on our website at www.gnss.com. Also I would like to add that we will be attending the following upcoming conferences. The Thomas Weisel 2006 Tech Conference on February 6th, The Deutsche Bank Small Capital Growth Conference on February 16th and the 2006 Display Industry Conference on March 15th. This concludes today’s call, thanks very much for joining us.

EarningCall_233863

Here’s the entire text of the Q&A from Ericsson’s (ticker: ERICY) 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. [Operator] Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. [OPERATOR INSTRUCTIONS]. As always, please limit yourselves to one question at a time, and please keep your questions at a broad level. Detailed information is provided in the report and Ericsson's Investor Relations and Media Relations teams will be happy to take additional questions and discuss further details with you after the call. We will take our first question from Tim Boddy from Goldman Sachs. Please go ahead, sir. [Tim Boddy] Yes, thank you very much. I'd just like to pick up your growth guidance for 2006 and just ask if you wouldn't mind highlighting, on a region by region basis, how you see that moderate growth unfolding. Also, whether you continue to expect to grow faster than the markets. I'd also particularly like to ask about Europe, where I just was interested in whether you think there's some kind of pent up demand developing. We did see, in the second quarter, a significant increase in the minutes of use in Europe, for the first time in a while, and it does seem surprising that operators, in that environment, are able to suppress CapEx. Thank you. [Carl-Henric Svanberg] Well, let me walk you through a little bit how we see things, although remember that we are early here and this is just our initial views on 2006. And I think what we'll see is continued high activity level in U.S., especially on the Wideband CDMA side, where Cingular is doing another rollout and where we are active, of course. I think we will see Latin America continue with a lot of activities, although just mathematically it gets increasingly difficult to beat last year's numbers. I think the growth numbers, in percentage, may come down a bit. I think the CEMA region will continue much as we've seen this year. It's a lot of growth opportunities. And we can see that, on one hand, Russia is probably going to a the end of this initial 2G rollout. And then they will start looking at rolling out 3G and so on and there will be fill in investments and so on, but not as active, maybe, as this year. On the other hand, we have similar starting activities in the surrounding countries there, neighboring countries. We have activity levels in Eastern Europe and Africa also. CEMA region continues much as before. APAC, I guess, we expect also similar development. And, of course, we should have increasing activities in China and the longer things are waiting there the more pent up demand there is. Europe is, I think we have more of a flattish outlook right now in Europe, but I think your question is well put, because Europe has the position of having had the highest tariffs in the world and therefore also the lowest minutes of use. Five times higher minutes of use in U.S. and a fifth of the tariffs. I think this is a development that we will see also in Europe, over time, developing. And as that happens, traffic goes up and capacity is needed. The problem is, of course, that the operators are sitting there and seeing no growth on their top lines but increasing traffic and then capacity needs. So they do everything they can on getting efficiency out of the networks and working as smart as they can. Of course, that will, over time, be followed by equipment raise. That's an obvious. It gets the other effect, as well, and that is that services get even more in focus, because if you can get the savings that we provide, for example in managed services, then you have to go for that. Every single idea to lower operating costs are in focus. Your final question whether we can continue to take market share, that's obviously our ambition and we believe we should be able to do so, although I think one has to be clear that this is a highly competitive industry. And, unless we are really working hard and doing our best in every single aspect of the business, we won't do so. But we are optimistic that we can continue and gain market. Thank you very much. And just to follow up within that, 3G in China, how much of the growth do you think that would contribute? How much are you relying on 3G coming through in China to achieve this moderate market growth? [Carl-Henric Svanberg] Well, in reality, from a more overall point of view, not necessarily talking about the first quarter or second quarter or so on, but if they build out their capacity for more traffic through 2G or 3G doesn't really change the picture. I think what happens, if you buy 3G, is that you may have some additional spend simply because you're rolling out another network and it positions yourself for more higher value added services and so on in the networks going forward. But if you continue with 2G, that is less cost efficient technology and means more spend from that point of view. It's not making a very big difference. Thank you. Could you please give us a comment on how you see your positioning in your fixed business? And in particular, there seems to be continuous speculation regarding potential acquisitions that you might make. Do you think your fixed line business requires acquisitions in the long term or do you think you can organically grow that? Or do you think it will remain relatively small in your overall sales? [Carl-Henric Svanberg] Well, we have pretty robust ambitions, actually, on the, I'm not sure whether one should call it the fixed side, more the converging side, with the new wave IP based technologies, where we will probably see the same core networks dealing with both ways of access and the same thing in transmission. And as we're coming into converging networks, it's essential for us to play a leading role in that field. And that is a field that migrates both from the fixed and the mobile, with a lot of the mobility behavior driving the services that people want to see. But, at the same time, it's being much built on fixed network technologies and migrating from those platforms. And our basic strategy is always to do the necessary R&D and build our position through internal growth. We are well positioned to do so and, as you know, we took the BT 21C contract and we're taking a lot of contracts of that kind right now. And I think you will see growth whatever we do in call it the fixed line side. And because of our commitment to this strategy, we're seeing also more traditional fixed business coming our way, because we seem to be an interesting partner to be with. Should we then do acquisitions? Well, I'm sure that there are areas where products or technologies or even an install base customer relationships can add value, but we are certainly not dependent on doing such. [Kulbinder Garcha] Okay, thank you. And just one very quick follow up. On your position within India, we know that there's going to be a very significant tender coming up. And I know Ericsson have done very well so far in avoiding some of the very low margin contracts your competition have accepted. Now, I'm just wondering do you feel the need to involve to bid more aggressively on that and could that have any could that inject any further volatility into your gross margins going forward? Or are you happy with your market share in India today? We have an over 40% market share in GSM in India. We're the leading player. We have more people on the ground and are stronger than anyone else there. Because the tender that you talk about is an open tender, because that's the government business, that gives it a lot of attention, but that's just one part of all the business that goes on in India. We are certainly not going to lead prices down in auctions or tenders on that kind, that is not the role we play. Remember, though, that we are a large supplier into that operator's network and still are, and even got quite a significant portion in the existing circles we're in, in the former tender that came out. [Kulbinder Garcha] Hi there, I have two questions really for Karl-Henrik Sundstrom. In the cash flow, I'm still a little bit confused around the changes in other net operating assets. I think Karl-Henrik mentioned that the $2 billion FX effects weren't leaving the company, so I was hoping you could perhaps go through a little bit more detail as to exactly what's happening on that line, how much of that is really coming out of the company and how much might come back in future years, or future periods? The ForEx thing, it is the following, and what is happening is, under the IAS rules 39, you have to market-to-market valuate your hedge portfolio before the contract portfolio, which means that the balance sheet is increased and in that sense the counterpart in the funds flow will be the working capital. But that explains only part of the working capital increase, and that's all in all about 2 billion. However, in the other part, I said it is receivables, work in process, but also around these timing difference on the big roll-out projects, you are building up working capital, but we are working to get down in the fourth quarter when we get acceptance of a number of big networks. [Stuart Jeffrey] Because part of it is in other receivables. Part of it is in, as you've probably seen also that we have taken costs against provisions, like you do in any big timing difference in any big roll-out project, and these are the things that add up, all in all, to the slightly more than 8 billion that you have in the total working capital build-up in the quarter. [Stuart Jeffrey] So your net change in provisions is about 1.5 billion, is that the amount that's also gone through the cash flow? [Karl-Henrik Sundstrom] Yes, hello. Firstly, was there an element of increased pricing pressure in the slight decline in sequential gross margin? And secondly, on R&D expenses, I heard from the press conference this morning that R&D costs may increase above the 24 billion target due to the U.S. dollar development, but how do you look at '06 there? Should we model at least 26 billion there on R&D? Thank you. [Karl-Henrik Sundstrom] No, R&D is not exceeding its targets, and there is, I wouldn't say that there is any change in the price pressure. I think that's rather stable, and if anything, I think over the year back or so on it, it was even more intense than it has been historically. I think we're back on historical trends. Our overall ambition in R&D is two things. We believe that we can do R&D work more efficiently, not because people are not working efficiently, but by developing our ways of working and our processes of workflows, as we've done in all other parts of the company, but R&D is slightly more complex, and we have an ambition to dramatically reduce our lead-times and get faster with products to market and so on. That would free up resources, so if the only thing we did was that, we should actually see a decline in R&D expenditure without losing output, that's our ambition. At the same time, we have needs to expand and accelerate our investments in next-generation networks, and if we play it right here, I think we can keep R&D costs reasonably well under control here. Yes, thank you. I was just wondering if you could elaborate a little bit on India again? You said in the last quarter you experienced some lumpiness in that market and I wondered how that was moving ahead? And second question was related to North America, if you could explain how the Cingular contract is going to work out in India coming quarters? Are we still going to see such strong traction or will there be some slowdown that you have predicted for this quarter for this region? Thanks. [Carl-Henric Svanberg] Regarding India, this is a market like China. It has a very steady subscriber growth, presently, I think, around 65 million subscribers, although that's a moving target, obviously. The government wants to see 200 million, 250million within a few years, and it's certainly going to happen, and there is a steady activity level that's just steady growth. Of course, that can still mean that there can be more or less of invoiced larger projects, in particular quarters, but principally, a steady growth and an interesting market. When it comes to North America, the Cingular project is rolling well. We are well on par with all our commitments and the major rollouts are really still ahead of us, and we are coming into Q4 and next year they will continue to grow there. Hi, yes, I was wondering if you could course your outlook both on '05 and '06 between your GSM and your WCDMA businesses? Can you give us growth trends that you would see in both businesses this year and next? [Carl-Henric Svanberg] Well, it gets increasingly difficult, actually, to comment on the difference, because I think we're seeing more and more of an evolution, actually, and we are where we are building and migrating the networks more step-by-step. We're having more wide-band CDMA in larger cities and so on, and you are tying the efforts more closely together. We're even introducing radio base stations where you can basically provide both functions and so on, so they are not that easy to split apart. But basically, we see, continue to see good strength in the GSM market. It's so far one third of the world's market have started the migration to 3G, and that will continue for more years, and we are more or less the only vendor that continues to invest in R&D and cost rationalizations and so on in GSM. So I think we have a good outlook for GSM for somewhat more time. On wide-band CDMA where we still are in an early phase of a new technology, small differences can make big differences in numbers here and percentages, and obviously our leading role in the Cingular contract alone, for example, which is the largest roll-out the world has seen so far is going to change the numbers in our favor. I think it's important also to remember, this is Karl-Henrik Sundstrom speaking, that HSDPA will be part of our WCDMA offering, but it will not be, so to say, an upgrade. It's just like EDGE on our built-in tool, basically on our deliveries of GSM. [Carl-Henric Svanberg] Thank you, one just clarification, and then more of a macro question. In Sony Ericsson's statement on the Page 22, the sales to Sony Ericsson more than doubled year-over-year and royalties from Sony Ericsson also almost doubled. But if you look at the Sony Ericsson sales, they were up about 9% sequentially, so I was just curious. What would be the reason for such a significant jump? And the second question, more of a macro level, I was in a meeting with management of Vodafone, and one of the things they are kind of insisting that over the next couple of years they will bring down the CapEx revenues below 10% and their share of spending will shift from 70% of base stations to more of 70% in a core, in the backbone of the network. How would you see other operators trying to bring down, how realistic do you think that the carriers can bring down the CapEx so low given that the traffic is growing? And second, if that shift from the base stations is more to the backbone of the network, are you looking at some acquisitions, or are you shifting more of your focus on R&D more towards backbone? Can you give us some sense of the direction? [Karl-Henrik Sundstrom] Hi, this is Karl-Henrik Sundstrom speaking. I will answer the first one. The reason for that movement between Ericsson and Sony Ericsson is that we have signed a new IPR license and in the third quarter for Sony Ericsson it is actually two months included of two quarters of IPRs, which is basically €15 million, €16 million, and then that will continue of a quarterly charge going forward. [Carl-Henric Svanberg] When it comes to Vodafone, I think that particular comment, I guess, they should answer themselves, and I'm sure you ask them. But in general, they are, first of all they are the operator that have invested the most, so they have a new 3G network on the radio side, and they have some capacity that they can use there. Obviously as in every technology shift, with more capacity, we soon come up with new services and learn how to use that, and traffic increases so, so there is obviously expansion around the corner somewhere. But I think you're also right there that it is an interesting comment that you're making, and it's well in line where we are, that the heavy build-outs that have taken place, and are taking place on radio access, broadband access, is creating significant growth in the core networks and I think we will see a bit of shift in investments towards, or not necessarily away from radio. There is a lot of potential in radio, but more investments in the core area and maybe even more so in the transmission area. It is clearly an area of growth, and maybe an area of under-estimated growth here, so give it a few more years. I would be surprised if our transmission area hasn't grown in significance. [Wojtek Uzdelewicz] Do you plan to invest or look into more acquisitions that would give you more like a fiber or more of a switching IP capabilities? [Carl-Henric Svanberg] It is clear that, as we said, as I've said before, that our strategy is based on growing what we have to internal means, but it is in the transmission area and it is on the fixed line business where we can, where it is of interest for us to add the capabilities. It is not, this is something that is in our R&D plans anyway, but if something comes by, of course, we'll always evaluate it, and that's how we got internet speed and access it and so on. That also adds value so yes, somewhat right there. Thank you, Karl-Henrik Sundstrom. I just want to clarify a comment you made on your 2 billion because of the IAS rules 39. Was there any impact in that? You said it was all balance sheet, there was nothing on the P&L. I just want to clarify that, but also go back to the provisions, the 1.5 billion that came out of provisions. You said that was all on the P&L. Is that correct, or was some of that in the cash-flow statement? Thank you. Thanks very much, a couple of quick questions. First, since the start of the year on various websites, EKN, IFC, Hermes, we've seen that Ericsson's got well over $1 billion worth of export credit financing for its various customers. Can you talk us through how that might impact both the P&L and overall profitability and perhaps soften some of the moves in working capital that we've seen? And then could you comment at all about any plans for cash returns to shareholders in the coming months or into next year? You're still sitting on a substantial amount of net cash on the balance sheet, that would have effectively return on capital not employed. Can you talk about any plans you might have for that, barring any major acquisitions or other uses for the cash? Thanks. Well, let me just start by a couple of comments and I think Karl-Henrik wants to add here as well, but financing is not as big a matter as it was in the 90s when there was a lot of operators starting up Greenfields with basically just an office and a bank account. Most roll-outs are today done by profitable catch and rating operators. It's not that big a deal but it is still a matter of importance, especially in emerging markets, and it has always been extremely helpful to our business. It's fractions that we have lost over many, many, many years, because as networks are being rolled out, there is an asset that is traffic that is cash-flow, and if we don't get paid, we don't serve the networks, so we basically end up first in line when it comes to get paid, so that is very unusual that we lost anything, and it tends to be also in markets where profitability is not, not every competitor is able to work and have established all the resources and so on that are needed. So our proportion of the sales is, we have higher market shares simply in those markets, so it's a positive. So there are really no negative effects on the P&L there, rather the opposite. But when it comes to our cash position, we are sitting on a pretty strong cash position, but it's well in line with Notecase or Microsoft is, or Cisco is, so I think it is a helpful position to have. There are different things that could happen here. Theoretically, the market could take off. It's not our basic scenario but assume that new services come in and tariffs go down and traffic increases, and the market takes off, that would probably require some additional working capital investment. It could be, if we have political problems or anything else unexpected, we could have a downturn. Also there, a strong cash position, I think, has proven historically to help. It could also be bolt-on acquisitions or so where cash position is also useful. Should nothing of this happen, and we continue to generate profits and cash in the way that we're doing, of course, we're getting to the point where we have to talk about increased dividends or buybacks or something, but that's not really where we are right now, and it's also board matters. When it comes to the ECAs, or the world and in particular EKN, that is the way where we can give credit to our customers without taking any risk ourselves, and basically offload it with a guarantee from the ECA of the world and then put it in the bank world. This is a great help for us and that has been fueling some of our growth in the emerging markets. [Richard Kramer] And what might be the profitability benefit that you would get from now having to attach risk provisions, for example, to business in those many markets, EKN helps you with? [Karl-Henrik Sundstrom] It's actually depending on the customer profile. So you can't talk generally, but I can only say one thing. Both the EKN, which is the biggest one, and Ericsson, has had very little credit losses in emerging markets, as Karl-Henrik said. We have actually had bigger credit losses in the U.S. and in Europe. Hi, good afternoon. I just had a follow-up question to Wojtek's on the transition to more core-end transmission. How would that play into your gross margins? Would that be a positive, at least from a directional standpoint, to your gross margins? [Carl-Henric Svanberg] Okay. And a bit more of a macro question, there are some concerns about the macro environment specifically here in the U.S. going into next year. What are the risks that you're seeing of the macro environment to your business? The American situation for us in particular is very much now dominated by the Cingular business. Other businesses that we have in the U.S. represent more opportunities to us and I would say there are very small risks for anything particular happening to us in the U.S. That is such a forceful project going on right now. [Ittai Kidron] Thanks. My other questions have been answered but just a follow-up question, to what extent do you think Ericsson mobile platforms, outside of Sony Ericsson, can have an impact on Ericsson's operating margins over the next year? And my second follow-up question is that could we assume that given the growth in your emerging market related sales, that we'll see a convenient lengthening in your DSOs as we saw in Q3 over the coming quarters, and hence a tying up of greater working capital in the future? Thanks. Well, on EMP, EMP is a very research driven organization that has therefore high gross margins on the deliveries they're making, so if they, I think in general that EMP enjoys a strong position and has great opportunities to continue to expand and grow as basically the only really big independent platform provider in the world. They are still not incredibly big here, and whatever they do, has a positive impact but not dramatic on Ericsson, at least where they are right now. When it, what is it for? Oh, DSO. I would say that what we are, we have come back maybe to, even though we think we can, but we have ambitions in basically every area, and we are a little bit irritated that it has gone a few days up more than we thought it should have gone, but we are more returning to a normal situation. It was more of an unusual situation in 2003, with basically no big roll-out projects and more just capacity add-ons and so on. Now we're back into more of a normal mix of larger projects, smaller projects, add-ons and services so I don't think there is a particular reason to expect that, to expand further. I don't know what to say, Karl-Henrik. Hi, good afternoon, it's Jeff Walkenhorst for Tim Long at the bank. A question on the other operating revenues and costs, we saw a huge spike this quarter, up 70% year on year and over 90% sequentially, and over 2% of your revenue or up margin. Can you talk about the dynamics in the quarter and how we should think about this on a go forward basis? What's the evolution and was there any impact from Cingular turning on their networks in the U.S.? Thank you. No impact on Cingular turning on their network, and it was basically coming back to Wojtek's question. We had signed a new IPR agreement with Sony Ericsson where you actually get two quarters in one, and then, for the guidance that we have said before, between 300 and 500 on this item here, it's going to remain with a usual tendency of a little bit more in the fourth quarter. [Jeff Walkenhorst] Okay, and so on a more normalized basis, as you look out into '06, how should we approach that? Thank you. [Carl-Henric Svanberg] Yes, I've just got one question on the tax charge. It seems to have been creeping up. Why is that? What's your long-term tax rate? Is there anything you can do to reduce the tax rate going forward? [Karl-Henrik Sundstrom] The tax rate is actually a little bit of a mix between the countries where we make the profit, and of course, we are trying, but it's a little bit hard if you get a lot of profit in a high tax country and a little bit low, so you shouldn't judge that really on a quarter by quarter basis. We are trying to be good citizens, but also to make sure that we don't pay too much tax. Hi, thank you. Sorry, can you hear me? I just wanted to ask a question on the profitability of services. I know you've always said that lower gross margins but comparable operating margins, but are you seeing any tougher terms on taking on new managed services businesses now, because you were clearly early to focus on that area but most of your competitors are now chasing business as well. Are your operator customers getting tougher on the terms on which they let that business? The margins that we are creating there are really dependent on how we can leverage over-last with our own organizations, and the fact that we can also utilize certain other revenue opportunities like we tend to have right-to-use sites where we take the sites of the operator and we have the right to with a bit of split of profit there, we can rent that side to also other operators, and there tends to be a big demand there. There are many reasons for build-up to the margins beyond the radio operator can do it himself. The fact that others go into this segment doesn't really impact us, because primarily, you operate networks where you are the main supplier or going to be the main supplier. So the alternative is not another vendor, it tends to be more often the in-house alternative, and therefore I would say that if others enter into that market, it's probably more positive because it means that you increase credibility for this type of outsourcing. Okay, before we finish today, I would like to inform you that our next management briefing is scheduled for November 10 in New York. The agenda and registration information is available on our website. If you have any questions regarding this interim report, please don't hesitate to give us a call, and thank you again for attending today. 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_233864

Here’s the entire text of the Q&A from Level 3’s (ticker: LVLT) Q3 2005 conference call. The prepared remarks are in a separate article. 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: Robert Huber, UBS Jason Armstrong, Goldman Sachs Anthony Klarman, Deutsche Bank Bill Newberry, Newberry Consultants Vik Grover, Thomas Wiesel partners Steve Randall, Bear Stearns Vinson Walden, Thornburg Anton Anikst, Morgan Stanley Anna Goshka, Banc of America Security

EarningCall_233865

Good afternoon. My name is Sharilyn and I will be your conference facilitator today. At this time, I would like to welcome everyone to the CNET Networks' Third-Quarter Financial Results 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. Thank you. Ms. McLaughlin, you may begin your conference. Thank you and good afternoon. Before we begin our formal comments, I would like to remind you that in the financial news announcement release today and also on this call, CNET Networks is providing specific forward-looking statements, including guidance related to our expectations of future financial performance. Any forward-looking statements made as part of our news today are subject to risks and uncertainties that could cause actual or predicted results to differ materially. These risks are outlined in our third-quarter news announcement, as well as in the Company's Securities and Exchange Commission filings, including its 10-K for the year 2004, which can be obtained from the SEC's website or directly from our Investor Relations website. All information discussed on this call is as of today, October 24, 2005, and CNET Networks undertakes no duty to update this information. Last but not least, you can find a reconciliation of the non-GAAP financial measures that we use in our news release and on this call to GAAP financials on the last page of today's news announcement, as well as in the slide presentation that accompanies this call, located at our Investor Relations website, www.ir.cnetnetworks.com. Hosting today's call are Shelby Bonnie, CNET Networks' Chairman and Chief Executive Officer, and George Mazzotta, our Chief Financial Officer. Neil Ashe, Executive Vice President, will also be available during the question-and-answer session. Now let me turn the call over to Shelby. Thanks, Cammeron, and thanks, everyone, for joining us. We're pleased with the growth exhibited during the quarter and believe that we're well-positioned as we enter the fourth quarter and on into 2006. User and usage trends were strong, with CNET Networks reaching over 110 million unique users per month, up 24% year-over-year, turning close to 100 million page views per day, up 61% year-over-year. Total revenues were $86.3 million in the third quarter, up 22% from the same quarter of '04. Interactive revenue was up 28% from the third quarter of 2004 to $78.6 million. Overall strength in interactive revenue was a result of growth in both marketing services and licensing fee and user revenue across all categories. Our strong top-line growth and minimal operating expense growth drove better-than-expected profit trends. Operating income before depreciation, amortization and asset impairment was $15.4 million, with margins increasing to 18% during the quarter. It was also a good quarter for our industry, and specifically for the content category, which continued to give us confidence in our strategy and in our momentum. With that, let me turn it over to George to cover the financial highlights, and after that, I will provide some more insight into the operating results and outlook. Thank you, Shelby. We're very pleased to report continued growth across all key financial and operating metrics during the third quarter of 2005. We generated $86.3 million of total revenue in the third quarter, which was 22% above last year. Total revenues were driven primarily by strong growth in interactive revenue offset by a year-over-year decline in publishing revenue. Supporting our total revenue growth is a strong advertiser base. Across the entire network, our 100 largest customers represented 55% of total revenue, which is similar to previous quarters. We continue to experience a very high renewal rate from our top advertisers. 97% of our top 100 advertisers in Q2 renewed with us in Q3. Our interactive revenue for the third quarter was $78.6 million, which was 28% above last year. Our growth in interactive revenue reflects a 30% growth in marketing services revenue and a 16% increase in licensing fee and user revenue. On a pro forma basis, as if we had owned Webshots during all of the third quarter 2004, our interactive revenue increased 26% compared to last year. We're particularly proud of the 30% growth we achieved in marketing services revenue, as we believe that this is an important measure of the success of our business model. Our growth in marketing services revenue reflects our Company's ability to gain market share and extend our customer base in both existing and new categories. Our marketing services revenue was driven by growth across all businesses, including games and entertainment, personal technology, business technology and Webshots. We continue to experience growth from existing advertising clients as we gain further share of their marketing budgets. While still a small portion of total revenue, we are encouraged by our ability to successfully expand our advertiser base into more consumer-focused categories. Our 16% growth in licensing fee and user revenue was driven by expansion of our Webshots premium services and our data licensing business. Underlying our revenue performance during the quarter was strong growth in user and usage metrics. Monthly unique users increased 24% year-over-year to over 110 million. Average daily page views increased 61% to almost 100 million pages per day. Our games and entertainment and personal technology properties were the largest contributors to this growth. Our growth in usage translates into interactive revenue per thousand page views, or RPM, of $8.79 during the third quarter. Variations in business mix and revenue growth will cause fluctuations in this metric. For example, our year-over-year change in RPM is influenced by the growth in Webshots traffic, which monetizes at a lower effective RPM than other properties. We recognize that we could experience downward or upward shifts in RPM as we expand into new categories with different monetization rates. As we have stated in the past, CNET Networks remains focused on overall growth in revenue and accelerating user and usage growth ahead of the overall opportunity in the online advertising market. Publishing revenues of $7.7 million declined year-over-year by 16%. This decrease was expected and consistent with long-term trends of media consumption and ad spending in our category shifting towards interactive media, both in the U.S. and international markets. We're also pleased with the level of operating leverage achieved during the third quarter, particularly given the efforts made across the network to enhance overall user experience and launch new product features. Total cash operating expenses of $70.9 million in the third quarter increased 12% from last year. This increase was driven primarily by investments in additional personnel for our fastest-growing categories. Our ability to effectively manage the growth in cash operating expenses to a level significantly lower than the revenue growth drove very strong margin improvement during the quarter. Our third-quarter operating income before depreciation, amortization and asset impairment of $15.4 million increased 118% from $7.1 million last year. Margin reached 18% compared to 10% last year, and as a result, we achieved a 52% incremental margin for the quarter. This margin expansion translated into strong profitability metrics for the quarter. Excluding asset impairment and investment losses, net income for the third quarter equaled $7.5 million or $0.05 per share diluted, compared to net income of $1.1 million or $0.01 EPS last year. During the third quarter, we generated $12.7 million of cash from operating activities and invested $5.3 million in capital projects, which resulted in producing $7.4 million of free cash flow, compared to a $3 million usage last year. The free cash flow we generated this year represented a conversion rate of operating income before depreciation, amortization and asset impairment to free cash flow of nearly 50%. Our ability to effectively convert profits into cash also strengthened our balance sheet during the quarter. Our cash position at the end of Q3 2005 increased $19.1 million from last year to $12.7 million. This increase in cash was driven by free cash flow from operations and proceeds from stock options. Now let me take a moment to review the items that affected our third-quarter results. In total, we reported $10.8 million in non-cash charges, $8.9 million of which is associated with asset impairments and $1.9 million represents investment losses. Of the $8.9 million of asset impairments, $7.3 million is related to the impairment of Computer Shopper Magazine and $1.6 million is attributed to the impairment of our office building in Switzerland. As a result of our annual testing process, which examines the fair value versus the carrying value for each of our businesses, it was determined that the Computer Shopper Magazine should be impaired. As a result, a $7.3 million non-cash charge is reflected on our income statement as an operating expense labeled asset impairment, and goodwill was reduced on the balance sheet by the same amount. Our U.S. print operations remain profitable; however, similar to other off-line publishers, this businesses is experiencing declining revenue as a result of the secular shift towards online media. As discussed earlier in 2004, when we integrated the management of our channel services data business, which operated in Switzerland, into our U.S. operations, we classified our Swiss office facilities as assets held for sale. Based on our periodic review of the carrying value of this real estate, we determined that this asset should be impaired to its fair value. This resulted in a non-cash charge of $1.6 million, reflected on our income statement as an operating expense labeled asset impairment, and reduced other current assets on our balance sheet by the same amount. In addition to the non-cash asset impairment charges, we reported $1.9 million loss on the sale of investments. This charge reflected the full write-down of our investments in two private companies, which we do not expect to recover. This charge is reflected on our income statement as a non-cash, non-operating expense labeled realized loss on investments, and on the balance sheet as a reduction to other long-term assets. The aggregate effect of our $10.8 million of asset impairment and investment losses resulted in a reported net income loss of $3.4 million, or a loss of $0.02 per share diluted. Now I would like to provide you with CNET Networks' guidance for the fourth quarter of 2005. We expect the following results, total revenue to be within the range of $102 million to $109.5 million. This translates into interactive revenue of between $95 million to $100 million, representing a growth rate of 19% to 25% and driven by continued growth across all properties. Publishing revenue is expected to be between $7 million and $9.5 million. Operating income before depreciation, amortization and asset impairment is estimated to be between $29 million and $34 million. And earnings per share is expected to be within the range of $0.13 to $0.16. For the full year 2005, we expect the following, total revenues to be in the range of $347.5 million to $355 million; interactive revenues to be in the range of $319 million to $324 million, representing an annual growth rate of 24% to 26%; publishing revenues to be in the range of $28.5 million to $31 million; 2005 operating income before depreciation, amortization and asset impairment of between $65 million and $70 million. We expect to achieve above a 50% incremental margin for the full year 2005. Excluding asset impairment and investment losses during the third quarter, full-year 2005 earnings per share will be between $0.23 and $0.26. Including the third-quarter unusual item, this translates into an EPS range of $0.16 to $0.19 for the year, and capital expenditures will be in the range of $23 million to $25 million. For 2006, as we had stated previously, we're focused on long-term, sustainable 20%-plus interactive revenue growth. In addition, we remain committed to expanding our profit margin and target an incremental margin rate of approximately 50%. However, we are equally committed to expanding our existing brands and building brands in new categories. So the incremental margin we may achieve could be less than 50% during the period in which we pursue strategic investments. To summarize our third-quarter results, we're very pleased with the profitable growth we have achieved thus far in 2005, and we believe that these results demonstrate the potential of our business model. The strong fundamental growth trends we have experienced in the size of our audience and their usage of our properties makes us very confident in the future. I would now like to turn the call back to Shelby. Thanks, George. I would like to provide a little color on the quarter and then spend some time on the industry overall and the implications for CNET Networks. Overall, this was a good quarter, characterized by strong growth in users and usage, revenues and profits and the further expansion of our brands. Similar to what we've seen over the past nine months, we see positive trends with respect to our ability to attract new users and drive increased user activity. CNET Networks users and page views growth of 24% and 61%, respectively, continue to outpace the growth rates experienced by many of our online peers. The sheer size of our audience ranks CNET Networks among the top 10 global Internet sites, according to comScore Media Metrix. We know how to build engaging and rich content properties, and these trends reflect that expertise. The further engagement and growth of our user base is due to a variety of factors, one of which is our focus on continuing to improve our products on an ongoing basis. As an example of this, you will hear about a number of site redesigns later on in my comments. For an overall network perspective, we continue to focus on making the sites richer with more audio and video. Video presents a unique opportunity for interactive content environments to deepen engagement with their audience and further monetize users and traffic. Our effort in this area has resulted in a 100% increase in the number of video streams across the entire network since this time last year. This is a network wide initiative, and the growth in streams is reflective of our ability to leverage in-house editorial as well as licensed content to provide relevant and engaging features. Examples this quarter included more video at TV.com, MP3.com, the launch of a new video category in CNETdownload.com, in addition to the efforts being made at all of our different sites. While video advertising remained immaterial as a percent of revenue, advertiser interest continues to increase. Advertisers such as Showtime, Wrigleys and Dodge were advertisers in video format during the quarter on our games and entertainment properties, and Best Buy, Volkswagen and Cannon advertised in video format on our CNET-branded properties. Additionally, we have significantly increased our audio content offering across the network. In the third quarter, we rolled out a series of new audio podcasts at CNETnews.com, CNET.com and Gamespot and ZDNet. And the network growth you see in this quarter is reflective of our strong position with our in category and contextual advertiser base. At the same time, we continue to focus on extending our offerings to an even broader consumer-focused marketing community. We continue to see traction in this area, though similar to what we said last quarter, the percentage numbers remain small. As we look into next year and beyond, we remain encouraged that this will become a much more material component of our growth rates overall. Let me take you through some of the specifics of our individual properties in this quarter. Our CNET-branded properties continue to extend their footprint and provide an even richer overall experience. CNETnews.com recently relaunched with new features and an even broader focus. From an editorial perspective, CNETnews.com has continued to gradually broaden its coverage to focus into areas that are seeing the impact of technological innovation in putting biotech space in science. Additionally, the redesign took a big step forward, embracing our role as both a generator and aggregator of news. There was a nice write-up in FORTUNE online that used this redesign as an example of how a new media company can embrace technology to create a better, more useful user experience. At CNET download.com, we also relaunched the service with a cleaner, better-designed user interface. It focused on improving the experience for both users and marketers. So far, we've been very pleased with the results. At CNET.com, we continue to add more how-to content, expand our car technology coverage and increase the amount of audio and video. Let me turn to our games entertainment properties. Earlier this month, Gamespot and MP3.com also underwent redesigns to match the look and feel of TV.com. The redesigned sites enhance the user experience on each individual site while providing more user and marketer consistency across the three major games and entertainment properties. This is the first step in an ongoing effort aimed at providing users the ability to follow their interests across the video game, digital music and television genres through universal search and navigation. In addition, marketers gain the opportunity to launch targeted yet scalable advertising campaigns in a rich, authentic online environment across all the Company's games and entertainment properties. As a side note, great interactive properties need to continually reinvent themselves, and redesigns are a critical part of that. Our experience has shown that there's a certain amount of temporary dislocation of traffic when the redesigns are released. This is normal and to be expected. At TV.com, the fall television season proved to be a strong contributor to growth in traffic and usage. Since launch in June, TV.com continues to add more features, which have helped drive the increased user activity and time spent on the site. During the quarter, TV.com launched Personalized Listings, a suite of free personalized features that allow users to quickly get local TV listings by typing in their ZIP code and cable or satellite provider. Given what is happening in the television industry, this site is in a very interesting position to take advantage of some of the changes that are occurring. Our business properties are evolving with the changing nature of the medium and are broadening out into other network audiences. We continue to serve the most influential people in the enterprise space with a directory of over 130,000 white papers and web-casts related to IT and broader business topics. This is over four times larger than the next closest competitor. Our business properties also benefit from the engagement of the most knowledgeable and influential people in the enterprise. TechRepublic is a great example of our ability to blend content and community for essential work interaction. As a result, the TechRepublic user base is one of the most engaged on the web in all sorts of activities, including profiling, filtering, tagging and downloading content from us and our marketing partners. Our international business continues to grow, and we continue to increase our online exposure in key markets. We're pleased with the progress of both ZOL and PC Home in China and are encouraged by the results in future prospects for that market and business. We plan to launch brands like CNET from the U.S. into China in the near future. We have an outstanding portfolio of assets in China and remain encouraged by the future growth trends. In Europe, we launched CNETFrance.fr during the recent quarter. The site leverages the look and feel, as well as popular features, of CNET.com in the U.S. Let me briefly touch on Webshots. This quarter marks the one-year anniversary of the Webshots transaction, which was completed in August of 2004. The Webshots community continues to rank among the top online photo sites. Traffic and user growth since the acquisition has been strong as we have made significant progress in regards to enhancing the technology capacity to help scale the site and meet a high level of user demand. On the one-year anniversary almost to the day, 250 millionth digital photo was uploaded to the site. The number of photos in the White Board has nearly tripled in the last year. We've added resources to our dedicated sales effort against Webshots. Advertiser interest is picking up, but it still remains early. As we look forward towards 2006, we made some organizational changes to make sure that the organization can scale as we grow with our opportunity. We have organized around key brands and key categories with an eye towards adding more. Barry Briggs was promoted to President and Chief Operating Officer and made acting head of the CNET-branded properties, a new role for the Company bringing together CNET.com, CNETNews.com and CNETDownload.com under a single head. Neil Ashe has been promoted to EVP and has picked up additional operational responsibilities, including international, our business properties and the community group, which includes webshots. He will continue to report to me and is also charged with continuing our strategic expansion and moving us into new categories, both through builds and acquisitions. As I said in my opening comments, this has been a good quarter for the Internet and the category, the content category specifically. For all of those folks who have been around the industry for awhile, there's a certain aspect of what is going on that is reminiscent of the late '90s. What's different is there are real business models now and real businesses. In one of the most important bellwether announcements, Ford said it will spend 15% of its overall marketing budget on digital advertising. What is notable about this announcement was it was based on real research, a lot of great work done including the cross-media research study done in cooperation with the IAB, which is commonly referred to as XMOS. You see mainstream media companies beginning to make serious financial commitments to this area. Whether it is the newspaper or television companies, they're starting to make significant investments into the media. Much of the focus and buzz has been on the content area, which validates a theme we've been talking about for a long time. What is really important is that it is being driven by what mainstream media companies are hearing from their advertising customers. Imagine if you were a major TV company and you hear a client like Ford, one of your largest, making an announcement like the one they did in this quarter. If we look a little bit more specifically at that Ford announcement and the XMOS research which played a key role in their decision, there are some interesting implications for how that money can and should be spent. As part of the XMOS research, Ford bought a series of keywords on search engines which performed quite well. Someone who searched on one of these keywords was four times more likely to purchase a Ford F-150 than other Internet users. But, importantly, these keywords only reached 0.6% of Internet users and 3% of Ford F-150 buyers. So given that search does not reach 97% of Ford F-150 buyers, you have to think about where those Ford dollars will be going. This underscores a theme that we've been talking about for a while, drawing the distinction between dollars spent to generate demand and dollars spent to fulfill demand. This points to the need for marketers to spend significant dollars in environments that generate demand with a key participant being content. Another significant move in the quarter was the announcement by Disney that they will be selling versions of both Lost and Desperate Housewives over the web. Currently on iTunes, you can buy a copy of either show the day after it airs for $1.99, and they will roll this out more broadly to other places in the future. This is not simply the ability to watch video on a small screen iPod because it is available to watch through any iTunes-enabled device, like your laptop. I encourage you if you haven't done it to download it to your computer and watch it on your next plane flight. The file size is about 240 MB and the quality is quite good. This is an important event for the industry on a couple of levels. In doing this, Disney put into motion more widespread distribution of video via IP on a pay model basis, a significant departure from the current model. Disney was in a unique position because they were both the producer and distributor of these two shows. With Disney taking the first step, we're likely to see a lot more activity, as with both TV and movie product, companies looking to position themselves ahead of what is inevitable change. This has real implications for how value is captured between producers of content versus the distributors of content. IP distribution can provide a great deal less friction in cost, allowing content companies to capture more of the value. For content producers, this shift in the balance of power has enormous ramifications beyond just the producers of TV shows and movies. Clearly at the most tactible level, it is interesting for us with our games entertainment properties. But also foretells a media world not dependent on a traditional distribution platform, providing more opportunities for content brand and new players with economics weighted more to the content producers like ourselves. We continue to believe that all of this is positive for us and how we're positioned as a company, and if anything, we need to be more aggressive in pursuing our path. We are unique as a content producer with journalists, editors, video and audio producers, catalog production, augmented with aggregating content for both professional and the highest-quality users. In the future, your ability to own unique content is that much more important. We also focus on unique brands against individual verticals, focusing on what we refer to as the passionate third, the top third of the audience, defined by their passion for that particular vertical. We also look to partner with other media companies through content licensing and other commercial relationships, often horizontal players like portals, so they can more effectively serve the other two-thirds of the audience. We need to look at more category coverage like we did with TV.com, MP3 and ZDNet. Unlike many other companies, we have shown an ability to build things ourselves or take sites that are small, underleveraged and unknown and make them quite attractive. This focusing on broadening our business not only diversifies our customer base, but also increases our awareness with a broader set of agencies and marketers, making each incremental dollar that much easier. As we look towards the fourth quarter and into 2006, we like what we see in the marketplace and believe that we are extremely well-positioned. We don't see any real changes in our strategy. We will continue to focus on a multibrand strategy anchored around verticals that we think are attractive for both users and marketers. As we've done over the last three years, we will continue to add more brands and more categories, and investors should expect that they will see us being more aggressive in this strategy in 2006. We will focus on increasing both users and usage ahead of our ability to monetize it, and will continue to increase engagements through richer offerings of audio and video. As we've said many times over the last couple of years, we remain focused on delivering attractive growth of between 20 and 25% over a long period of time. We've demonstrated an ability to grow our margin, translating revenue growth into cash flow. And as George mentioned, we continue to target around a 50% incremental margin, but will continue to evaluate that over time as we look at opportunities to reinvest into new areas. The long-term financial picture of this business is an attractive one, composed of sustainable top line growth, margin expansion and significant free cash flow generation. That wraps up our formal comments, and we'd like to turn it over to the operator so that we can open up for questions.

EarningCall_233866

Here’s the entire text of the Q&A from Kroger’s (ticker: KR) 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. Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone phone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Again, it is star one if you wish to ask a question, and we'll pause for a moment as questions queue up. And your first question will come from Mr. John Heinbockel with Goldman Sachs. You may proceed, please. Dave, a couple of things. With respect to your consumer research, what has that told you with regard to the differentiation of your franchise? Meaning, in this business it's tough to get recognized unless you're at the extremes. Wal-Mart gets recognized. Whole Foods. You guys are kind of in the middle. What has it told you with regard to what your franchise is built on and how recognizable is it to your customers? I won't answer very specifically, because I don't plan to give that kind of information out broadly, but I will tell you that the research that we've looked at essentially says about our franchise what we would intuitively think. For instance, those stores, individual types of stores, pockets of stores, and even brands of stores that would be viewed more as either upscale or positioned differently than just a mainstream store, do tend to come across that way in the research. Those that are more price oriented similarly come across that way. And the combo store, much like what we would expect, seems to attract a very broad audience and appeal to a wide variety of different kinds of customers in that it seems to address those customers on their terms. And we often refer to the fact that you win one customer at a time. And I think that's real important in thinking about store formats, how they address customers, because rarely do you get the same customers coming into any one store. You've got to address multiple different kinds. So the combo store really works quite well for that and the research certainly confirms it. The value for us in the research, though, as I pointed out, is that it really helps us identify areas where we can improve better, where we can differentiate ourselves better, and then some areas where we have been successful. I don't plan to identify those particulars, but I think it is responsive to what you were asking. So I take it that you're able to benchmark the strength of your franchise against competitors and, I assume, you're coming out above average in the strength of your franchise versus your competition or is that not right? I don't plan to discuss where we come out on the research. We're using it for our own internal purposes. And for competitive reasons, I don't see any reason to describe that. John, the other thing it does, this is Rodney, as we make changes, it identifies whether the customer sees those changes and whether it's something that's important to the customer or not. Right. The second thing, you talked about balancing and you've done a good job this year balancing investments in the business and bottom-line return. How do you think about the appropriate total return to shareholders over whatever timeframe you want to think about? Do you think about a total return? Do you think about it over two years, three years? How do you think about that in terms of what you want to deliver to your investor base? I think we've described how we see the business and how we see our long-term success will be driven by an overall strategy that addresses the customers on their terms and works hard to reflect that in showing our improved sales. We believe, at the starting base, that our sales really will drive all of the future results and that earnings growth comes from that. And I think, in terms of our future projections on earnings and our expectations there, about as far as we're going to be willing to go today is -- are the elements that Rodney described which is much the same picture that we've described really all of this year as to what our focus has been. We'll give you a little bit more specifics come March when we wrap up the year, but I think we're going to leave our future earnings just at the portions that Rodney covered. Rodney, you want to add anything? I was just going to say, certainly, from looking at shareholder value, we would look at it at a one year perspective, a three year and a five year and really focus on all three of those, trying to make sure that we keep them all in balance. Obviously we haven't given specific objectives publicly, but we do understand we have a responsibility to improve shareholder value. Two questions. The first one is in general terms, we haven't had a lot of experience about this recently, but how do you think the FTC is going to treat potential combinations of supermarket chains in market going forward? I mean, obviously, there's a number of properties up for sale right now and we're trying to think about what happens to consolidation in markets like, say, Phoenix or Dallas or whatever. What do you think the FTC thinks about competition like Wal-Mart, for instance, and whether they're really including those in thinking about market share limits. Over the years, we've had a variety of conversations with the FTC and they shift their view time. I can't actually tell you right now what they're thinking. And so I can't offer any guidance as to what they would suggest in those markets. Maybe you can talk about the depreciation charge and the share count as well. Considering there was a share buyback, I was surprised the share count was a little bit lower. The second thing was depreciation. You're managing to leverage the depreciation charge quite well here, but I'm surprised again that it really wasn't bigger than it was. Are you writing off assets in the depreciable base? Is that why it's not going up? I mean, the depreciation would be -- the write-off periods would be the same now as what they would have been previous quarters in previous years. Obviously, if you go back, you really have to go back over the last five or six years on the level of capital spending. And until we have a steady level of capital spending you would expect to see some increase in depreciation. And finally on gas stations, we've seen some super gas margins in the convenience stores and presumably your margin expanded quite significantly in the quarter. Would that have a meaningful effect on the gross margin? And also maybe you mention manufacturing. Sometimes you talk about how well they're performing, too. On fuel, what we said was that we had a good fuel quarter. Our convenience stores had a wonderful quarter. And for a variety of reasons, one of which is that their gallon sales were up strongly, not just the retail price or just the margins. And the same's true in the supermarket fuel area is the gallons there also were up strongly. And we made it a point to indicate that over the course of the year, year-to-date, that our gas margins are more normalized because it illustrates that with gasoline margins at retail, you tend to have times when you make a little margin and times when you don't make much margin. And they do tend to offset over a little bit of time. This quarter happened to catch the one period of time where the margins were a little higher than other times in the year and so you saw a little blip up. But it got smoothed a lot when you look at the full year effect. So we would say that there was good impact for the quarter, for the shareholders, for all of us in our return from gasoline. We identified in gross margin for you our gross margin with and without fuel, which helps you illustrate what that impact was. And I'll leave that math, I think, to you. Mike or Rodney, you want to add anything to that? Oh, manufacturing. Manufacturing had a good quarter, although we had a couple of moments where we had some supply cost issues. In fact, if you look at the whole Company, embedded in our OG&A numbers, we saw some supply issues in terms of costs mostly related to energy costs one way or another. Sometimes petroleum, sometimes just general energy costs. And so manufacturing did have some of those issues. But generally speaking, manufacturing is a strong tool for us and contributes real well. Through the course of the year, we're quite pleased with their results. I would just add on top of that, as Dave mentioned, we were very pleased with manufacturing given some of the opportunities they had. Obviously the opportunities were more difficulties this quarter because of the hurricanes and the effect on some of the supply. They just did a marvelous job managing their way through that and keeping our stores in stock and everything else on key products. So when you look at the hand they had dealt, they just did a marvelous job. Good morning, everybody. Question for Michael. Michael, obviously, I think bondholders will be very pleased about the comments you made this morning with regard to your desire to maintain investment grade trading. Many thanks for retrading that stance. One quick follow-up if you don't mind, Michael. If you were to do something with regard to, let's say, a medium or larger size acquisition, is it typically the practice of Kroger to first clear that with the rating agencies? A little bit more color on that I think would be greatly appreciated. Thank you. I don't think I'll speculate on any type of an acquisition and won't go any further than reiterating Rodney's comments that our investment grade rating is important to us. We continue to paydown debt and focus on increasing our coverage ratios. It's just something that we think is fundamentally important is to have the investment grade rating. Hi, guys. Couple of questions for you. This Wilson housekeeping, could you repeat what you said about fuel? Did it positively impact the operating margin or negatively? Are you talking about it from the retail standpoint or from the cost standpoint in terms of the effect on the business? Okay, yes. The operating margin, we estimate it, and obviously this is an estimate given the information that we have, but we think in total it's about 17 basis points. 8 basis points of that showed up in gross margin, primarily transportation costs, and 9 basis points was in OG&A. And that would be related to supplies and the flow through effect on supplies and a few other items. Yes. The business of selling fuel was what I was trying to answer. That's a totally separate question. And we look at them separately here. What Rodney was describing is the fact that energy costs, in particular gasoline and diesel, but also just -- . Natural gas and utilities and other related costs, some supply product, supply packaging, other products that are related to the energy field, those increases, as best we can capture them, are in that general range that Rodney described. That has really nothing to do with our retail selling of fuel. Our retail selling of fuel was a real plus for us in the quarter. Well, the two items that we've identified, which we'll leave to you to look at how important that is, we identified the identical sales growth with and without fuel. We've indicated to you that our gallons were up strongly in both supermarkets and convenience stores. And we've shown you what the impact on our gross margin was with and without fuel. So you can see essentially what fuel represented as you do that math. Meredith, just one other thing, just so everybody's clear on the 17 basis points. That 17 basis points is the effect on our operating margin without fuel sales and fuel gross and fuel OG&A in the numbers. That's how much operating margin was affected negatively by the higher energy costs we incurred, be it in fueling trucks, higher utility costs or higher bag costs or other related supplies. Got it. Could you talk a little bit about southern California? And anything in specific about why you guys are not making the progress you want? You talked about opportunities. What exactly does that mean? Well, let me describe it this way. Our sales were up over last year on an identical basis. When you Ralphs and Food 4 Less together, 2.9%. That's the same that we were up last quarter from the year before. So we actually see that as good progress, because we continue to be up. We continue to have decent sales. But the disappointment, if you felt any in what I said, was that we believe that there are more sales and operating profit opportunities and that there's more available than what we have achieved. So that's why we used the phrase we would have liked to have had more. But we have made progress because both our sales and operating profit at both Food 4 Less and Ralphs are improved versus last year's third quarter. So on that basis, we actually are quite pleased at the progress. It's just that we thought it would be a little quicker and we're pushing ourselves really to make that happen. And the division is, the divisions, plural, are very focused on making that true. We highlighted it because southern California, of course, is a major part of our business, and we just felt that the additional insight would be helpful to you. But I guess I'm wondering is it external or internal factors that you think have held back the progress maybe a little bit versus what you had hoped? Well, the single biggest impact on holding back our growth in operating profit in that market was gross margin. And that gross margin was, in our view, primarily because of mix and some things that we're addressing, but it was a gross margin question more than it was expenses or other issues. Great. That's helpful. And maybe you could just comment real quickly on the competitive environment more generally. Have you seen any -- on average any big change in the competitive environment, better or worse? Actually, no. I don't think we've seen much change. Now, that's not true, in some individual markets you will see some changes. But I think the answer I'm giving now is essentially the same answer I've given for several quarters in a row that, while we see some markets better and some worse, on the whole it's a very competitive business and it gets stirred in a variety of ways. Some of it is traditional competitive openings. A lot of it has to do with the additional growth that Wal-Mart is adding with their super centers. As you know, they've increased the rate by which they open those. And roughly half of whatever they open we compete with and so there have been a lot of openings there. And it just makes for a very competitive market. And in the face of that competitive market, we are very pleased at the results we achieved. They thought our sales were good. We thought our earnings were good. And overall felt that we positioned ourselves quite well, particularly in this kind of environment. Couple of questions. Obviously your sales have been very good. You've really pulled away from your peers with your non-fuel IDs. I know you'll speak to next year in March, but how do you feel about how you're going to do -- you've built up this momentum. What are your thoughts in terms as you start to comp the comps, so to speak, what level do you think ends up being sustainable. And do you think you'll be doing a year from now non-fuel identical store sales that are quite at these levels? I was wondering if you could speak to that a little bit. Yes, Steve. We continue to see opportunity. And as a result keep focusing ourselves and realizing that identical sales really are the core of our strategy. And we have repeatedly said it's not sales at any cost. It's sales at profitable long-term growth and sales that can produce a profit in the long-term. But those identical sales are the core and we are focused on making sure that we get what we can get and improve where we can improve. We base what we think that objective is for us in part on what we feel our customers can and will respond to. So it's really evaluating what we think is the opportunity, comparing that with what we think is our capability and asking ourselves what can we achieve. And so we have set targets. Of course we set targets for this year, we've set targets for next year. We don't plan to announce those targets at this point. But our objectives really do focus around what can we do to improve our position and acceptance of our franchise in each of our markets to our customers. We still do see opportunity out there and I want to make sure you sense that, because we think we've had a good quarter, but we also think that there's more opportunity out there for us to get. The only other comment I would add, the comment that Dave and I both made was that growth was broad-based. If you look in some of our markets where it was broad-based, those are on top of strong results a year ago. So we really do think it's all of the things that our associates are offering our customers in terms of improving their shopping experience that's causing the customer to enjoy shopping with us more. That's helpful. Just on the share math if you look into next year, on a three-year stat basis, technically those identical store sales could be in the 1.5% and 2% range and not the 3.7 maybe that you reported this quarter. I guess that type of range, from your standpoint now, that type of range would disappoint you. You're cutting in and out a little bit, Steve, so I'm not sure I heard the whole statement. But I think what you're doing is hypothesizing what our idents may be next year and we're not going to be able to address that. I think what we've said on that subject is probably as much as we're going to be able to say. Separate question on, I guess, the buyback. And hopefully you can hear me all right. The last two quarters your buyback has dipped down to pretty low levels in terms of share repurchases. Is that -- in fact, this quarter I think was the lowest it's been in a while. Is that is a function of the stock price being where it is, now that it's higher than it has been previously? What's your mind-set with some of your share repurchase activity? Steve, as Rodney said, we continue to buyback shares. There are a few factors involved in that. One is we've continued to lower our CapEx goal or target or expectations for the year. So we wound up with a little more cash than we had originally expected for the year. We also have continued to try to balance our one-thirds, two-thirds over the long-term. And if you look at the accumulation of what we've done so far this year in stock buyback and what we've done in debt reductions, the combination of those two with this year, when you track it back to January of 2000, puts us right on the one-third, two-thirds target. And that continues to be something we monitor over the long haul and make adjustments to our plan going forward. Rodney also mentioned that our investment grade rating is important to us, so we have continued to paydown debt as we've gone this year. One last one, maybe for Mike. Your operating cash flow for three quarters has been growing at a lower rate than EBITDA and it looks like some of this has to do with the lower benefit that you're getting in deferred taxes. And that's been pretty beneficial on a gross basis in the past. Can you speak to what that benefit might look like into the end of the year and what the sustainable rate might be maybe going forward? Well, certainly our cash taxes are up this year if you look at the supplemental information we've disclosed. We paid cash taxes of 112 million so far this year and just under 4 million last year. Actually a bigger driver of use of cash, when you look at cash provided by operating activities, is we've contributed $247 million to our Company pension plan this year compared to 35 million last year. We have used some of our strong operating cash flow this year to contribute to our pension plan to keep it in the properly funded position so we don't run into any reporting requirements with the RISA and other issues that could be out there in a Company plan. So I think, if you look at it purely in this year from an operating cash flow and the growth of that, those contributions have as much to do with taxes. We have said over the last couple years that the tax provisions that were out there that have since expired for the accelerated depreciation, we enjoyed that the last couple of years. And we told everybody at the beginning of this year that those would turn around beginning this year and you can start to see that in the increase in the cash taxes we paid. If you may recall, after 9/11, Congress passed a bill trying to get companies to spend more on capital. You could accelerate the tax depreciation of your assets. And with a significant amount of capital during that period of time, we were able to take advantage of that. As Mike mentioned, we did mention at the beginning of the year that cash taxes would be a lot higher in 2005 and 2006 because of being on the other side of that. Yes. I think that's what I was speaking to. But I think once we see the effect in '05, it doesn't get worse in '06. This is kind of the run rate. And then it starts getting smaller after that. And then it'll be driven by whatever capital we've spent over the last couple of years. Good morning, everyone. Dave, you mentioned here that you see holiday sales off to a strong start. Can you elaborate on that to some extent? Well, we are pleased with how we've started so far out in the quarter. We just used the word "strong" to try to give you some degree of emphasis. We have a number of programs going that I think have produced some of those results already and will likely produce, I believe, a good holiday selling season. We have, for instance -- and I just spoke with Ciconia Madlinger, who's in charge of our general merchandise and seasonal areas among other responsibilities, today and I see a good holiday selling season, at least started. And pleased with the work we've done and the role that -- our GO staff here has tried to make some improvements on an already good program. One of the things we've talked about in our organization over time is the expanded space we've provided for general merchandise -- seasonal general merchandise. More and more we've allowed space in the stores so that we can display this product and sell it better than in the past. And I think we each holiday season seem to get some better emphasis from that. So I think that's somewhat contributing, but "strong" is really the word I'd use so far for the start that we've seen in the quarter to date. That includes food sales over the Thanksgiving weekend and what you're seeing at Fred Meyer, as well, plus the seasonal general merchandise you already addressed. Yes, it does. And Rodney reminds me, if you wanted me to try to quantify the word "strong," I probably should. It's a nice word that could mean a lot of different things. I would use last quarter, third quarter, our idents there, I view those as strong. So that's another maybe reference point that I use as a reference to strong. And I've got a couple more specific questions, but, Dave, I'd also like you to comment on industry consolidation in light of three smaller deals or perhaps deals being recently announced. Just today we had Fresh Brands make an announcement and Food-A-Rama last week and Marsh looking at strategic alternatives. What do you think? Why the coincidental timing in your view? I don't think it's so much coincidental. I think it's just a sign of the times. I think it's just a continuation in a long stream of announcements like this. Sometimes they get publicity. Sometimes they don't. This has been going on actually longer than all of us have even talked about it, but it's a consolidating industry. It becomes harder and harder for the smaller operators to make it work unless they have a particular niche that is unique for them, for their markets, for their location and can make that win. And certainly I'm not forecasting that every smaller operator is going to disappear. I don't mean that at all. But I do mean that many of them have decided that market and landscape that made them successful has changed. And their ability to continue to be as successful as they once were has changed and as a result they have decided their better alternative is to sell. And I think that's all you're seeing in those three cases. I think that's what you've seen in numerous other cases. Every time we've had this call, there have always been stores available and always been stores that are out trying to be sold. And I think it's nothing more than the continuation of that same stream. Capital questions now perhaps for Mr. Schlotman. Looking at a big cash increase or source of cash from store deposits in transit, income tax payables and receivables were up quite a bit, and then a mention in the text of the release about construction and progress payables. I was wondering, Mike, if you could sort of clarify and balance all of those. And what's ongoing and what's sort of just part of normal operations. I think just about everything in there is an ongoing phenomenon. The deferred taxes is a number that, depending on settlement of cases and new cases or new issues that a taxing authority could raise could affect that, but when you look at our store deposits and transits and the like, I don't really see anything in our run rates that would alter those. We did end the quarter with about $100 million in temporary cash investments. That's primarily because there was really no other debt to paydown. And that's just the sign of our strong cash flow as we've gone throughout the year. We actually made a little improvement on our internal definition of working capital from the second quarter to the third quarter, which was encouraging. We continually make sure we balance any focus on that with what a knee-jerk reaction to that could be as it would affect sales. The last thing we want to do is to get a bunch of working capital out and not have stuff to sell to customers who have become used to having nice product and having some surprises in our stores. So we'll continue to balance that as we go forward. Good morning. Dave, could you give us a progress report on where you stand on some of your cost cutting opportunities? Certainly sounds like you're still looking for opportunities to be more competitive. I'd love to get any color on that specifically and maybe some actionable items you can see in front of you over the next six to 12 months on that. Thanks. There's a couple areas I might highlight, Jason. First is that even though our OG&A was basically flat in the quarter, when you take fuel out we were very pleased with that. As you know, the first couple of quarters this year, we were able to pull some costs out in actual basis points, but in the third quarter we faced a number of increases, in particular the 9 basis points that Rodney described in OG&A that were the fuel related and energy related cost increases. But we were able to offset all of that and still end up actually slightly down. So we see that as good news. And we think that was helped of course by sales, but it was also helped by good cost control and a number of steps that our divisions and our group here at general office have taken. So we're pleased with that direction. We do see additional opportunity out there. And I think we've described this before, that every time we think we have nailed down an opportunity and we pull our heads up and look around, we see additional opportunities out there again. And so I do not yet see, and I don't know that I'll ever see, but I sure don't now see an end to the opportunities for us to bring our costs down and to leverage the sales growth with that as well. We have seen -- in one particular area we have seen some modest decline in health and welfare costs in the quarter. Those were partially offset, though, by increases in pension. We do think that some of the changes we've had and some of that of course is the result of changes we've made in labor agreements. Some of the changes in the labor agreements will, over time as we grow our business, will produce improved results too or at least give us the opportunity to have improved cost results. They're predicated in large part on us growing our business, because often they require us to be hiring new employees and so forth. But we see that as an opportunity. And then there are a variety of other individual opportunities that I don't think we'll plan to identify. And then just a short following question on a separate subject. You mentioned product inflation was fairly minimal this quarter. What do you see in terms of package food companies giving you some price increases here over the near-term and immediate-term based upon some higher fuel costs, transportation costs et cetera? How do you plan to deal with those? What is the current view within the end market, within the competitive side as well on that? Thanks. You saw what our inflation was. At least what we estimate it to be as best we can. The grocery component of that, which is where most of the packaged goods would reside, in the quarter it was the lowest quarter for inflation in grocery in the last nine -- not the lowest, second lowest in the last nine quarters. So fairly low. I mean, it's not -- we haven't had that much of a range in the last nine quarters, but it's still quite low. We've read about the kind of increases that you're describing. We certainly have gotten notice on a few. The thing you need to keep in mind, though, is a couple of things. First is that increasing list price to us doesn't necessarily mean that the price goes up. It depends on what they do with promotional allowances. And that remains to be seen, because that will be more dictated by the competitive marketplace than it will be by any particular announcement. But you can clearly see, at least in the third quarter, that we did not experience any noticeable inflation in those areas. And then maybe finally, the main thing I want to point out is that our best defense in the long run is that if prices are raised to us, costs on products are raised to us, and the corresponding underlying economics, the cost to operate, the cost to manufacture the product, did not also go up, it gives us a good opportunity for our Kroger brands, because it will increase that price spread between where the national brands are and where our own Kroger brands are, either out of our own manufacturing plants or even out of those that we buy. So we see that as a real opportunity. And of course Kroger is well-positioned with the Kroger brands that we have to take the best advantage of that. And we expect to do exactly that. On Dave's last point there, we have examples time and time again where CPG companies have tried to push costs through beyond the economic costs. And usually when you go three or six months down the road, you can see significant improvement in share market by our private label products. And I would assume the same is true for our competitors. The same thing happens. But that just happens time and time again if somebody pushes up their pricing more than what the real costs are changing by. I wanted to go over a bit, with respect to ratings, what sort of competitive advantage or boost to earnings do you get for having ratings kind of where they are versus, say, high BBB or even A or below investment grade? And a second question is what is sort of the -- I know that you guys aren't announcing your plans until Q4, but in general is there sort of an optimal level of sales that you're gunning for over time that you think you can manage effectively? Is it growing a scale of the business? Is that the idea? On the rating, we feel like our lowest cost to capital is the BBB flat type rating. And you can go a little bit on each side of that. I don't know that it's that precise, but we would believe that's our lowest cost to capital. And that's the reason why we believe so strongly that that's their optimal place to be from a rating standpoint. But if you gave -- if you were to go up or down, how much of an effect would that have? Is it a large effect on your earnings? Is it a very small effect? I know it's optimal, but if it were to be given one way or the other, would it be a big deal, I guess? If it was small changes, it's not. If it's big changes, it would have a pretty big effect. I realize that's a little obvious answer, but small changes really don't show up very much. Bigger changes would. But we just think it's very important to be investment grade. We think it gives us the financial flexibility to manage our business appropriate and deal with the competitive environment that we're in. To answer your question about sales, I did address part of that before when we were talking about long-term sales strategy. Maybe another way to think about that is we do see it as a balance. Obviously -- and, in fact, that's the reason I pointed out that it's not sales just for sales sake and it's not sales that are unprofitable sales. We do realize there's a balance and we still see opportunity or we wouldn't be pursuing it. If we thought that we had reached the point where we ought to stay where we are and keep our sales level where we are and then see if we can just grow the earnings, that would be a different strategy. But we see opportunity here, we think it's the better long-term strategy for us. As a result, we haven't reached that point yet. We will try to address that a little bit more in the fourth quarter when we talk about 2006. Thank you, good morning. Last quarter you gave us a rough approximation of the core ID sales increase breaking down between customer account and transaction size and I think you said it was about a third count. Can we use that safely for this quarter or was it a little different than that? It was a little did different. It was a little bit stronger on count. It would be more 50/50 in rough generalization this quarter. Dave, on southern California, you said it mixed out a little, I think, lower than you had expected. Could you elaborate on the reasons for that? Well, I'll eliminate one of them for you, but I won't elaborate further. One of the possibles, Ralphs, is whether or not that market has gotten super hot competitive. And that of course could lead to that, but I don't believe that that's the reason. I think it has more to do with our own mix and how we're addressing some things. There are questions for us to address. We are addressing them. And we have insight into how to do that, but I don't plan to further elaborate on this call. Okay. And lastly, the rent expense had been trending down year-over-year. I think in the past you'd said you wanted to own more stores and the store count's down a little bit. And then this quarter it went up year-over-year and sequentially. Could you explain why that occurred? Yes. Whenever we close stores, we would estimate the net present value of the remaining lease liability versus the recovery. And that net expense would show up on the rent line. There was a couple of stores that we did close in the quarter and that's the reason why rent was a little different this quarter than the trend. Over time, our expectation would be rent expense would continue to decline as we continue to own more of our real estate. Andrew, thank you. And, with that, we'll wrap up. I have just a few closing thoughts I wanted to share with you. I am proud of what our associates have achieved so far this year. We've shown solid progress on the commitments that we've made to our customers and to our investors. And we look forward to finishing the year on a similar note. As you can tell, we are ready for the holidays and we invite you to shop with us so that you will be, too. In addition, we encourage our associates to listen to this earnings call each quarter. As a result, many of them are on the line right now. They have been working very hard to get our stores in shape for the busiest time of the year. I want to thank all of you for taking such good care of our customers every day. Our improved sales are because of you. The holiday season is a time when our thoughts turn to family and friends and I hope that each of you take some time to enjoy the holiday spirit with those close to you. Merry Christmas and Happy Holidays! Thank you for joining us. 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. 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 E*Trade’s (ticker: ET) 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. [Q - Mike Vinciquerra]: A couple of questions mostly on kind of the modeling side, looking forward to a lot of things kind of changing here over the next twelve months. But first of all, the big jump in bank our interest earning assets, about 4% sequentially. Should we assume that that is a pace that you guys want to maintain for the foreseeable future? Is that kind of an extraordinary boost for the one quarter? [A - Mitchell Caplan]: There are a couple things that are happening. One is, one of the things you'll note is that quarter-over-quarter we had about a 50%, little bit more than a 50% origination increase in originations from our retail customer base. And we increased what we kept on balance sheet by about 170%, quarter over quarter. So it was a strong quarter in which we were able to grow the balance sheet around mortgage loans, HELOCs, you can see it as we continued to connect with these retail customer through complete and otherwise. One of the things I think we've talked about in the past, to answer your question specifically, is that the earnings alone at the "Bank legal entity" can generate 10% annualized growth without contributing any capital down from the parent. So without saying any more, I think what we'll do is as we give guidance in December for next year it will be much more specific about the obviously the top line guidance and where it's coming from and the implied growth in the balance sheet as a result of that. But clearly we are in a place where our goal is to try to grow the loans as a percentage of your total assets, as we said here, to 59. We'd like to see that between 70% to 80%. So a lot of that would be the result of just declining your securities portfolio. [Q - Mike Vinciquerra]: Okay, great. Thank you. And then two other things, maybe for Rob. The FAS123 impact for 2006, have you guys put together an estimate of what that will be? I guess we had 8 million in the quarter? [A - Robert Simmons]: No, we'll talk about 2006 in December when we come out with our regular guidance, Mike. But this quarter, the component that was purely options-related was about $7.1 million this quarter. So that's, you know, kind of a reasonable run rate for now. [Q - Mike Vinciquerra]: Okay. And then just finally, just to clarify on the marketing, Rob, I guess we had 21 million this quarter. You said you expect it to be up 6 to 8 million for Q4, implies something in the high 20s, which is still pretty much in line with where you were Q2. Is that, am I looking at that the right way? And then next year we're talking about something similar in terms of your annual marketing budget? [A - Mitchell Caplan]: A couple of things, Mike. Yes, you're absolutely looking at it right in terms of Q4. With respect to next quarter or the quarter that we're currently in, we do intend to spend more. It does look a little bit more like Q2 when you're out of the, What traditionally had been a seasonably slow summer. And so there will be a penny of additional increased marketing expenses in Q4. Again, with respect to 2006, we'll deal with all of that when we give guidance in December for next year, including the details around marketing. [A - Mitchell Caplan]: Hi, Rich. [Q - Richard Herr]: Just a quick question on the start of with gain on sale. Obviously a minor detail. But a lot of what we've been hearing from other banks is gain on sale margins haven't been very good, and it looks like yours held up, your gain on sales revenues held up pretty well this quarter. Could you maybe just discuss and give a little color on how that was and if you expect that to continue? [A - Mitchell Caplan]: Absolutely. Happy to do it. So I think if you remember last quarter, you actually saw a gain on sale pretty consistent on the originated gain on sale as a result of the originated loans. What you saw last quarter down was gain on sale of securities and otherwise, really the institutional part of the gain on sale business. And I think what we said was we expected to see gain on sale associated with the mortgage volume being pretty consistent going forward. Again, you have to remember it's down probably 60% from its high. So we were in a position where close to a year ago we made the decision that regardless of where interest rates were going, we wanted to reposition the mortgage company from being an originator and reseller to try to originate and move in the direction of putting stuff on balance sheet. So as a result, overall origination volumes would be down, and ultimately what we packaged and sold into the secondary market would be down. So that's why I think you're seeing us be much more consistent versus other people who are being much more impacted right now by the declines in the marketplace. Secondly, with respect to the institutional gains, last quarter it was pretty flat. I think you've seen it as high as 20 million. And I think we guided last quarter and said we would expect to see it anywhere in the range of 5 to 10 on a quarterly basis. And I'd say we're pretty comfortable with that range now and going forward. [Q - Richard Herr]: Okay, that's helpful. And just looking at the corporate interest expense, I'm assuming that the jump there really had to do with the carry of, for Harris? [A - Mitchell Caplan]: You got it. $450 million carried for three weeks. [Q - Richard Herr]: For three weeks. Okay. So I guess looking at a full-quarter number, maybe it's a 3 million or a 4 million additional expense there? [Q - Richard Herr]: Just lastly, one last question. On the average rate per trade, I apologize if you covered it in the prepared remarks. But, you know, it continues to stay strong at $10.89. I know you're guiding forward at $10. I think the original guidance we had gotten as late as June was $9.50 to $9.70. Any reason there for the strength? [A - Mitchell Caplan]: Yes, two reasons. One is, there's good news and bad news with Professional being down so significantly. So I think if you saw, our DARTs were up nicely quarter-over-quarter and, certainly, year-over-year. It was driven much more by retail, which was up 16%. In fact, Professional was down 8%. So when you think of the mix between Retail and Professional, Retail has a significantly higher average commission than Professional. Then commensurate with looking at the retail commission, when you look at the mix between products that are higher yielding in terms of average commission, things like options and otherwise, international, as well as the kinds of customers, meaning more Main Street, less active trader, you end up shifting toward a higher average commission from that, as well. So the answer to your question is mix shift, and it's mix shift, both in terms of Retail and Professional, and also within Retail. Again, we've guided down for Q4 to $10, assuming that you see a more traditional return to the mixes that we have always seen historically, to the extent that's not the case, there's upside. But right now, clearly, our view is that we would presume that Q4 may look more like the norm. [Q - Rich Repetto]: I was just going to zone in a little bit. I had some peculiar numbers here on the Institutional segment, in the segment earnings. [Q - Rich Repetto]: It looks like, for whatever reason, the net interest is going down, quarter to quarter. I was wondering, in the back, on the bank net interest, that's up. So what have I missed? There's a number in here that I'm not getting. [A - Mitchell Caplan]: Yes. You're absolutely missing the most important connection, and that is if you look at the number on the P&L, it ultimately gets reduced or eliminated through consolidation. That is a payment that gets made from Institutional to Retail for the origination of both Retail deposits and Retail credit products. So it is possible for the Institutional spread to look like it's going down simply because it's losing earnings as a result of paying more to the Retail business. This is exactly what you want to see. You want to see more and more growth on the balance sheet coming from the Retail business and the Retail business getting paid for it by Institutional. So you'll see, as I was talking about holistically when you think about enterprise spread, you'll see the overall spread of the Company going up, you'll see the spread of the bank going up, you'll see the whole Company spread going up, but Institutional is just acting now in the capacity not as an originator as much, but more as a manager of the balance sheet around credit risk and interest rate risk. [A - Mitchell Caplan]: It is. It is simply the payment in dollars from Institutional to Retail for their ability to generate deposits and also borrowings. And the reason that's the case is that, as you know, retail deposits are our lowest form of, in terms of cost of liability. So you want to reward retail for generating it as opposed to having to go out and do wholesale borrowings. Similarly, the same thing is true. The yield on direct originated products, mortgages, HELOCs, a margin, whatever it is, is going to be higher than what you would be buying in the secondary market. [Q - Rich Repetto]: Okay, Mitch. And just sticking on this Institutional focus here a bit. It looked like the brunt or the good increase, big increase in comp was absorbed in Institutional. I'm just taking a look it went from 30, up $14 million. And you had a $17 million or so, increase. Just trying to figure out, you know, why. [A - Mitchell Caplan]: Happy to walk you through it. So I think as you know, Rich, a couple years ago when our esteemed CFO took over, he became incredibly focused on deployment of capital. And as we think about allocating expenses throughout our business, including comp and benefits, the expenses get allocated based on the capital that's required. So if you look at the total capital on our Company, a very significant percentage of it is allocated over to the balance sheet management group in Institutional. As a result of that, they take a very significant proportion of overall expenses, which were to be allocated including comp and benefits. So when you see, as Rob walked you through in expenses this quarter, being up $20 million or $21 million, and 18 of it being up in comp and benefits, and then you're allocating that based on overall capital deployment, they end up getting hit with a significant piece of that capital, of that allocation of expenses. [Q - Rich Repetto]: I get you. I thought, I wanted to be an Institutional guy because I thought you'd given them the bigger bonuses. [A - Mitchell Caplan]: No, and what happens is, Dennis is cringing your question because he's so focused on margins and profitability. And, no, those numbers in the end will get trued up when you pay out the final bonuses. [Q - Rich Repetto]: Okay. And very last question, don't want to go on here. Jarrett, when we, early September, we talked about, we thought we'd hit 1 billion in net new client cash and deposits. So I I assume, I think we're on the run rate of probably, I would assume, 800 or so through the two months. And then for the three months we ended up increasing 800 overall. So I was just wondering, did we see something in September with client cash that, where the rate, the acceleration slowed a bit in September? [A - Jarrett Lilien]: No, really what you saw is the continuation of it. And that's what made it so impressive is that the market was strong. So you saw a lot of that money moving into the market. If you look at security holdings, they were up $5 billion in the quarter. And basically if you looked at it overall, total assets were up 10%. So really, cash came in, and it just went to use with other products, some of it, and some stayed in the cash products. So it was exactly as the model's supposed to work. [Q - Mitchell Caplan]: Hey, Rich, let me also add a little something to that and bridge you through some of the numbers. So, a good way to think about that is the most significant investment by our customers in equity did happen in the third month of the quarter. Not surprising when you see the performance of the marketplace. So one thing to Jarrett's point is that when you look at asset growth being up 10% quarter-over-quarter, it was also up about 9% or 10% with respect to the securities holdings. You know, the market was up on a blended basis about 4%. So you know that there was net in-flow, significant net in-flow into equities from our customers. So basically what you saw happen over the course of the quarter was $700 million moved from what would be defined as free credit on the bank on the brokerage balance sheet over to the bank. In addition to that, you had in the neighborhood of $300 million of organic growth in cash that was moved from within the system onto the bank's balance sheet. You had about $200 million in transaction accounts, and you had about another $200 million in certificates of deposit. Now what's interesting is both the CDs and the transaction accounts are about in the high 90's as a percentage being originated from our core investing customers as opposed to the marketplace at large. So when you add those up, you get about the 300 and the 400 is about 700 million of net growth in the system. Okay? So and total enterprise cash was up about 800. Then specifically what happened is you actually saw growth in either free credit or sweep in excess of that by about $600 million. That $600 million ultimately flowed out between the time that it came in and the end of the quarter as people invested in the equities marketplace. So net/net we ended up in a place where we got about $1.4 billion onto the balance sheet from a bank perspective, which optimizes the spread. We got net/net 800 million of enterprise catch up, and we saw at least $600 million of our current customers' cash move into equity and equity holdings. So as Jarrett said, one of the things that we've always wanted to test is what happens to the marketplace when you have a stronger equities market? Can you still grow cash? And this is evidence of being able to grow $800 million in enterprise cash while also growing assets, and particularly, securities holdings. [Q - Rich Repetto]: Understood. I guess the moral of the story is you need to look at it more holistically. [A - Mitchell Caplan]:That's exactly right. And that's why one of things I hinted at is, you'll see us in short order start looking across the board at enterprise numbers. So we, last quarter we introduced this concept of enterprise cash. Soon you'll see the concept of enterprise yield on credit. That will ultimately lead to enterprise spread within the Company. So the great news is that Dennis and the team did an awesome job in a very difficult market of widening the spread by a basis point. At the same time, totally independent of that, our margin balances grew. You saw the growth in margin of both quarter-over-quarter and year-over-year, and this quarter, margin spread widened by over 60 basis points. So if you looked holistically at the whole enterprise, you would have seen an even greater widening of credit spread. [Q - Rich Repetto]: I get it. Three more Fed hikes, too, so it should widen farther. Thanks, guys. [Q – Campbell Chaney]: Looking at some of the asset liability management, the numbers on your rate volume table in the back, I noticed you've switched about $1 billion out of the reverse repos into FHLB advances. Can you walk us through that? Could you just try and go out the duration curve a little bit on that, lock in some rates? [A - Mitchell Caplan]: Yes. Well, actually, no. There's virtually no difference in duration between FHLB and reverse repo. There are FHLB products that you can buy with embedded options in them that have a longer duration protection. But when you look at our current borrowings from FHLB, they're virtually overnight, and so is reverse repos. So there's very little impact. The benefit is that traditionally, the cost of borrowing at the federal home loan bank is less expensive than it is for reverse repurchase agreement, particularly with collateral like loans, whole loans. So as we continue to increase our whole loans and our overall loans as a percentage of assets, it's much more cost effective to use that as collateral at the FHLB and borrow it from them. [Q - Campbell Chaney]: So, it would be safe to say we're going to continue to see this overnight repos come down and FHLBs go up? [Q - Campbell Chaney]: Okay. And can you give us an idea of how Harris Direct is going to fit into this table? Maybe give us some color on impact on the margin now that you've had Harris for a little bit of time. [A - Mitchell Caplan]: Yes. Again, I think what we said on the call was that we expected a neutral Q1 for Harris Direct, which is this current quarter. So we assume that whatever the benefits were as a result of the revenue, they would be offset by the expenses and so the real benefits for Harris Direct would come in '06, now a full quarter ahead. So there's nothing that you should see that's going to be meaningfully different as we report in Q4, and then with respect to next year, it will make a big difference and we'll talk about that when we do guidance in December. [Q - Campbell Chaney]: And you're talking about the net interest margin. [A - Mitchell Caplan]: Yes. [Q - Campbell Chaney]: Okay. Great. Thanks a lot. [A - Mitchell Caplan]: gain, because, as you know with Harris Direct, we get about $3 billion of cash, which is helpful, and we get a little bit over $1 billion in margin. So the idea with both Harris Direct and BrownCo was not only to connect with those customers around the trading, but also part of what we were purchasing was the relationship with those customers which included cash and credit in the form of margin. [A - Mitchell Caplan]: Absolutely. It will be additive to the margin, and then the issue is just on a macro level what else is happening. Again, I think Dennis did an extraordinary job this quarter. What you basically saw happen was, overall, both our assets and our liabilities repriced. Our liabilities reprised about 5 basis points lower than our assets did. And then there was about a 4-basis point compression as a result of the flattening of the yield curve, resulting in a net/net 1-basis point increase in spread. [Q - Rich Repetto]: Just one last quick question, Mitch. The 6 to 8 million increase, now is that just pouring it on from the last campaign, or is this a campaign designed to sort of handle any potential attrition with the acquisitions? [A - Mitchell Caplan]: I don't know what that is really, I think it's focused globally on all of our customers, both current and prospective. Best way I can answer it for you. [Operator]: Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I would now like to turn the conference back over to management for any closing remarks. [Mitchell Caplan, Chief Executive Officer]: Thanks very much, everybody, for joining us, and we will speak to you in December when we give the guidance 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_233868

Here’s the entire text of the prepared remarks from Tom Online’s (ticker: TOMO) 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 day everyone. Thank you for taking part in this conference call. With us tonight are Mr. Wang Lei Lei, TOM Online’s CEO, and Mr. Jay Chang, our CFO, and Mr. Peter Schloss, our Chief Legal Officer. They will give a presentation later, followed by a Q&A session. At first, I would like you to pay extra attention to page two of our slide presentation which says this presentation contains statements that may be viewed as forward-looking statements within the meaning of Section 27A of the US Securities Act. Such forward-looking statements reflect the current views of the Company with respect to future events and are not a guarantee of future performance. If you would like to see more details, please see the risk factor section of Company’s annual report on Form 20-F as filed with SEC. Thanks Rico. Good evening and good morning to you all. And thank you for your interest in TOM Online and our third-quarter results. I am very pleased to report another solid quarter of performance from TOM Online. Lets see the page four, our third quarter revenues is seated at the top end of our guidance range by over 5%, reaching US$46 million, which continues to position us as the leading wireless internet company in mainland China. This represented growth of 46% year-over-year and over 7% from the second quarter. More importantly, our third quarter net profit was US$12.88 million representing over 76% growth from last year and about 26% growth from the second quarter. Next page. The primary driver of this growth continues to be our focus to be the leading wireless internet company in China. We believe that our provisional excellence in the wireless internet market combined with the strong online presence of our portal has set us apart from many of our competitors. Moreover, with mobile phone to internet penetration at a factor of four, we believe that the Chinese consumer’s primary interactive media device will be the mobile phone. And we remain excited about opportunities this presents us to not only deliver digital entertainment services to these users as we are doing today, but through our recent announcements with Skype and the UMPAY extend our market opportunities into payment on the communications as well. Thanks Lei Lei, if you turn to page seven of the presentation. As Lei Lei mentioned, our third-quarter revenue exceeded the top end of our guidance by over 5% to reach US$46 million roughly. This is an increase of 46% over the same period from last year, and just over 7% from the previous quarter. Gross profits for the quarter were US$20.3 million, representing a gross margin of around 44.1%. This was a significant improvement from our second quarter gross margins of 41.6%. This was partly due to a stronger performance in our ad business, but primarily due to 1.26 million gross profit benefits which you recognized in the quarter, arising from significantly better revenue confirmation rates from our mobile operator partners. Without this benefit, our gross margin would have been 43% roughly, but still a solid improvement from the last quarter. Third quarter EBITDA was US$13.5 million, representing nearly a 50% increase from this period a year ago, and almost a 20% increase from the previous quarter. Third quarter net profits were $12.88 million, representing 76% increase from last year and about 26% increase from the second quarter. In addition, we also benefited from the Renminbi appreciation under FASB 52 due to currency translation of our net non-Renminbi liabilities as at the end of the second quarter. And lastly, our fully diluted per share ADS was US$24.05 per ADS compared to US$19.05 per ADS in the previous quarter. Next slide. In terms of our revenue breakdown, our revenue growth in the quarter was driven primarily by our SMS, 2.5G and Online Advertising business, offset by a decline in our Colour Ringback Tones services, which I’ll explain a little bit. IVR and Indiagames were both basically flat from the second quarter. In the third quarter, SMS revenues were up, were around US$17.62 million, representing an increase of about 14% from the second quarter. Growth in SMS was driven by new mobile music products, but also primarily by the better than expected revenue confirmations rates. For 2.5G services, MMS revenues were US$3.1 million, up 17% quarter-on-quarter, as the impact of the MMS MISC migration has decided, while WAP revenues were US$8.4 million in the quarter, up 7% quarter-on-quarter. As the impact from the mobile operators’ silent user clean-up policy has also begun to moderate, but is still ongoing. IVR revenues were $10.51 million, just up 2% quarter-on-quarter. And Indiagame revenues were also roughly flat quarter-on-quarter, at US$1.26 million roughly. Online Advertising revenues grew 41% from the second quarter sequentially to US$2.6 million as our portal reform activities have begun to show good progress. But more importantly, our strategy to tailor our portal, this portal wireless business is also beginning to show results. Colour Ringback Tones, however, were down nearly 30% quarter-on-quarter to US$2.3 million. During the quarter, we partnered very closely with China Mobile to promote free Colour Ringback Tone promotions in order to spur market awareness and usage of Colour Ringback Tones. This had a short term negative impact on our business as well as the overall market, but we believe our market share improves slightly to around the 20% level, and we are helping to lay the groundwork with the mobile operators to increase the usage of Colour Ringback Tone services in the future. Next slide please, turning, next turning to operating expenses. For the third quarter, total OpEx was basically flat around US$8.76 million, from $8.45 million in the second quarter. We had a slight ph decline in sales and marketing expenses in the quarter, offset by small increase in the G&A expenses. The slightly higher G&A were driven primarily by another US$1 million accrual for planned 2005 management bonus, in preparation for our upcoming remuneration committee. Next slide please. In terms of housekeeping for our net cash position, our balance sheet, our net cash position improved to about US$109 million from $97 million in the previous quarter, as this generates free cash flow and we also benefited from the Renminbi appreciating on our Renminbi cash assets. Now I would like to turn the presentation back to Lei Lei to discuss some more important business trends we are seeing in our business today. Thanks Jay. Before going to Q&A, I’d like to briefly discuss how TOM Online is leading change in how Chinese users consume and create digital entertainments, but leveraging our industry leading wireless distribution channels on our portal. For the Page 12, as a percentage of our wireless internet revenues today, over 40% are music-related revenues. Which in our opinion, positions TOM Online as a leading mobile music service provider in China today. In addition to working closely and early with all other major international music labels in China, we believe a key reason for this leadership position has been our innovation to create a new channel for Chinese artists to promote themselves international audience and make money. Through our, one of our branded sites, singer and song writers are able to use our internet platform to reach national audience. And by further leveraging our mobile distribution channels, make money through foremost ring tones, Colour Ringback Tones, IVR and the other music-related wireless services. For example, to date, we have aggregate nearly 10,000 internet-created sounds. Out of that there is about 200 new sounds being added per day. More importantly, this has started to become an important part of our mobile music business with roughly 5% of our total wireless music-related revenues being generated from our range of Internet created sounds. Today, we expect this percentage to grow in the future periods. Next page. Also through the success we have had with user generated mobile music and as part of our portal reform strategy, we are preparing other counter areas where users can create and make money doing so. As mobile phone functionality improves and as 3G comes into the market, we believe that in addition to music, users will be able to use our online platforms to create content for leader ph share blogs. Video personalities award us a lot of the flash components, and to leverage our mobile distribution channel to change for this content, to charge for this contents, sorry. And in all the discussions with the mobile creators, they estimate that in a few years, user generated content could make up as much as 40% mobile entertainment of content. And we want to be positioned as their leading partner in this area. Most importantly, this is an area where we believe our combined strength in mobile and Internet standards, apart from any of our other competitors. Next page. So the Skype in addition, the third quarter we announced two new and an important new business initiatives. Firstly, as many of you know, we announced our 51% to 49% joint venture with Skype to be all of TOM/Skype in mainland China. As of the end of October we had over 5.2 million registered TOM/Skype users, up from the 3.4 million registered users at the beginning of the September when we announced the joint venture. Our first target for Skype is to continue to grow the unit base and continue our discussions with the Chinese telecom operators on ways we maybe able to cooperate on Voice-over-IP value-added services. It’s our hope that over the coming quarters we will develop premium Skype services for the mainland China market, but we only to serve where the regulations allow us to do that. For the mobile payment issue, UMPAY, in addition to Skype, we also announced our strategic cooperation with UMPAY to develop mobile payment services in China. For those of you who are not familiar with UMPAY, UMPAY was founded in 2003 by China Mobile and the China UnionPay as the only inclusive payment gateway between China banks, China’s bankcard system and the China Mobile. We believe that this is largely, is an important milestone for our Company, as we hope that through this cooperation we will be able to complement our leadership in mobile content by broadening our service offerings for our users into mobile functions, firstly as payment as well. Currently we are working closely with UMPAY to tailor the mobile payment experience to be easier to use, with a goal that it could become a cash replacement service some day. However, it’s still very early stage in our view and we do not foresee any meaningful revenues from these alliances in the near term. But delivers significant opportunity to work with UMPAY to link over 800 million bankcards in circulation through China Mobile’s over 230 million mobile phone subscribers. If you turn into the Page 17 of the presentation, if you have it up. Our current outlook for the fourth quarter is that our total revenues will grow roughly 2% to 4% from the third quarter to between US$46.75 million to US$47.75 million. This reflects stable performance in our SMS business, a growth in our 2.5G services as well as IVR. We also expect mid single-digit growth in our Online Advertising business quarter-on-quarter. 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_233869

Here’s the entire text of the prepared remarks from E*Trade’s (ticker: ET) 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 ETRADE Financial Corporation's Third Quarter 2005 Earnings Conference Call. At this time all participants have been placed on a listen-only mode. Following the presentation, the floor will be opened for questions. I've been asked to begin this call with the following Safe Harbor statements: During this conference call, the Company will be sharing with you certain projections or other forward-looking statements regarding future events or its future performance. ETRADE Financial cautions you that certain factors, including risks and uncertainties referred to in the 10-Ks, 10-Qs, and other reports it periodically files with the Securities and Exchange Commission, could cause the Company's actual results to differ materially from those indicated by its projections or forward-looking statements. In this call, ETRADE Financial will discuss some non-GAAP measures in talking about its performance, and you can find the reconciliation of those measures to GAAP in the Company's press release, which can be found on its web site at www.etrade.com. This call is being recorded. A replay of this call will be available by telephone beginning approximately 7:00 p.m. Eastern time today through 11:00 p.m. Eastern time on Wednesday, November 2. This call is also being webcast at www.etrade.com. No other recordings or copies of this call are authorized or may be relied upon. I'll now turn the call over to Mitchell Caplan, Chief Executive Officer of ETRADE Financial Corporation, who is joined by Jarrett Lilien, President and Chief Operating Officer, and Robert Simmons, Chief Financial Officer. Mr. Caplan, please begin. Good afternoon, and thanks, everybody, for joining us today. The third quarter was, as we like to say around here, truly extraordinary. In the last 90 days we delivered superior results. From a financial perspective, we generated record net revenue, record customer assets, and the second-highest operating margin in our history. From an operational perspective, we executed on our core initiatives to deliver these financial results while we evaluated and announced two significant consolidation transactions, closed on one, and successfully raised $450 million in senior notes to finance this acquisition. More specifically, with respect to how we executed on our core initiatives, we continued to broaden and deepen customer relationships. In doing this, we created growth across each of the key drivers of our model, including assets, cash, borrowings, and transactions. We remain committed to delivering a compelling and differentiated value proposition to our customers. Through this commitment, we expanded the engagement of our existing customer base, leveraged over 200,000 new customer relationships, growing total client assets to $106 billion. These growth trends all point to our connection with the retail customer and the continued adoption of ETRADE Complete. As we continue to create greater value for customers, we strengthen the franchise and generate greater value for shareholders. In the third quarter, with respect to our superior financial performance, we delivered $0.28 in earnings per share on total net revenue of $423 million. We generated these strong results through a combination of top-line growth, prudent expense management, and further operational efficiencies, all realized through the continued integration within and between our Retail and Institutional segments. Our model is delivering. Our third-quarter results represent 20% year-over-year growth in revenue to a quarterly record, with 35% growth in segment income. These results were achieved despite our expensing of employee stock options for the first time under FAS123-R. Excluding the impact of option expensing, the model delivered 42% year-over-year growth in segment income and a record-operating margin at 37.4%. As we continue to deliver strong and consistent results through our integrated model stand-alone, we seek opportunities that can accelerate value creation. We have long said that excess capacity in the industry represents an opportunity to create value through nearly any aggregation of trading volume. However, when we consider various consolidation opportunities, we focus on transactions that offer greater strategic value to us through assets and credit relationships. Both Harris Direct and BrownCo represent ideal fits with our strategic vision. Both companies bring trades, which add scale to our transaction business and carry a high incremental margin, but of even more interest to us, they each bring a high quality customer base with attractive asset and borrowing relationships, characteristics consistent with our best customers today. So as we step back and look at what we expect to achieve from a growth perspective through these two transactions, it's impressive. On a pro-forma basis, Harris Direct and Brown add over 600,000 new accounts and increase total client assets by 63% with cash balances up 45%. Margin debt balances rise 170%, and retail DART volumes increase 52%. In addition, we expect to unlock approximately $340 million in combined annual pretax synergies. These synergies will be realized with only a modest increase in retail commissions as a percent of revenue, moving to about 25% post closings from 20% in the third quarter. As we continue to execute on our vision of creating an integrating financial services company, we will ultimately move toward a place where we can assess, evaluate, and manage the Company from an enterprise-wide perspective. Two years ago, we took our first major step toward integration with the launch of the Sweep Deposit Account. This product allowed us to better leverage our bank and brokerage models by realizing the synergies of these previously competitive businesses. We have since built on the success of the Sweep account by realigning the structure of the Company to a more customer-centric perspective around retail and institutional segments. As we begin now to integrate Harris Direct and, eventually, Brown, upon closing of that transaction, we will continue to focus on pulling together our operations, technology, and service around our retail customer relationships. Through the integration of customer cash in the form of deposits, certificates of deposits, checking, money market funds, and Sweep, and credit in the form of mortgage, key lock, margin, and, to a lesser extent, credit cards, we are moving to a place where we have started to think about assets and liabilities and the spread between them on a total enterprise basis. We believe this holistic view of the Company is the ultimate structure that will help drive the best management decisions and illustrate the value of the franchise. Utilizing the strengths of our institutional segment to leverage growth in our retail relationships, we can optimize the model and deliver greater value for customers and shareholders. I am extremely pleased with the record results that we have generated in many areas of our business and the continued accomplishments of our team. We delivered these strong operating and financial results while remaining focused on enhancing the strength of the franchise for the long term. I'd like to turn the call over to Jarrett now to talk about more of the specifics of the quarter. Thanks, Mitch. Our continued focus on expanding existing customer relationships while attracting new, high-quality customers resulted in core growth in our business in the third quarter. At the highest level, revenue per customer, segment income per customer, and the number of products per customer continued their upward trajectory on both the quarter-over-quarter and year-over-year basis. I'd like to spend a few minutes on our segment results to discuss how we are achieving this success. In retail, we continue to benefit from our focus on account quality and efforts to deepen engagement across our customer base. In the third quarter, assets per customer increased 25% over the year-ago period, including a 10% increase in cash per customer. This increase was driven in part by our initiative to market and focus on assets and cash management solutions, and rewarding customers with greater value for holding larger asset balances at ETRADE Financial. As we bring cash in to our retail customers, we are able to further leverage the value of that cash in our institutional segment through our balance sheet integration strategy. Looking across our entire suite of cash products, total customer cash in the system increased by $800 million in the quarter to a record $19.5 billion. When we talk about total cash in the system, this includes cash at the broker dealer, as well as total bank deposits, including C D's, transaction accounts, and the Sweep account. In the quarter we saw organic growth across all of these cash products. Specifically, we saw organic growth of over $300 million in Sweep, $200 million in CDs, and $200 million in transaction accounts. We also continue to make progress on moving cash from the broker-dealer into the bank's balance sheet by sweeping 700 million of previously un swept cash from the broker-dealer. This combined with the organic growths in CDs, transaction accounts, and Sweep, increased cash on the bank's balance sheet, where it all carries the greatest value to our model, by $1.4 billion. Overall, we saw growth in customer cash balances, even as our customers participated and invested in a strong equity market. Our focus on the combination of value pricing, functionality, and service is delivering growth in our retail customer base. In the third quarter, we generated nearly 49,000 net new retail accounts, nearly double the growth we saw in the second quarter, and a significant reversal from the net account attrition we experienced a year ago. This, of course, does not include any impact from Harris Direct, which didn't get closed until after the quarter end. In addition to the growth in customer assets that I already discussed, we also saw growth in margin consistent with increases we experienced in trading activity. Average margin debt increased 12% year over year and 4% sequentially. Retail DART volumes also increased, rising 50% year-over-year and 16% sequentially, corresponding to the movement out of cash and into investments by some customers during the quarter as previously described. In Professional, DART volume declined 9% year-over-year and 8% sequentially. This decline is a result of seasonal volatility, exaggerated by our exiting of the prop business last quarter and the effect that had on certain professional customers. As a result of a favorable mixed shift towards Retail volumes versus Professional volumes in the quarter, average commission per trade increased to $10.78 from $10.09. Moving over to the Institutional segment, we continue to realize the benefits from the connection with our retail customers. Growth in retail customer cash, for example, is a critical component of our balance sheet management process. As we grow customer cash and integrate that cash with the bank's balance sheet, we benefit in two ways. We are able to use this cash to replace wholesale funding sources such as repose and FHLB advances, which reduces our aggregate cost of liabilities and or we can use the additional cash to grow the asset side of the balance sheet as we connect with our customers through lending products such as mortgages and HELOCs. We do this while always adhering to our strict discipline around credit and interest rate risk. In the third quarter, the benefit of this relationship between our Retail and Institutional segments translated into a further spread widening on the bank's balance sheet to 223 basis points, despite a challenging yield curve environment. In addition to delivering further spread widening, we were also able to grow the bank's balance sheet to $30 billion in assets. Loans, as a percent of total assets, also increased to 59% from 45% a year ago. Our Institutional segment also stands to benefit as we connect to our retail customers around credit relationships such as margin lending. As we continue to focus on attracting and retaining high-quality customers, we expect to generate growth in margin debt balances. Clearly, the additional of Brown and Harris will accelerate this initiative. In the context of the broker-dealer as it stands today, larger margin debt balances provide an attractive source of collateralized, recurring interest-related income, yet the value of margin debt could be enhanced as we ultimately move towards full balance sheet integration. Before turning the call over to Rob for more of the financial details for the quarter, I'd like to comment on the integration of Harris Direct and Brown. As you know, we closed on the Harris Direct transaction on October 6th, nearly a full quarter ahead of our original schedule. We are very excited to have started on this integration. We have a dedicated team overseeing this process from start to finish. This team includes many of the people who were involved with our own back office conversion to ADP last fall, which was a significantly larger undertaking. Given their background and experience, we expect a smooth conversion for our new customers, and our goal is to improve the experience for existing customers by leveraging the best parts of the acquired platforms. The early closing of Harris allows us to complete several of the largest integration steps before year-end. With respect to Brown, we remain on track to close the transaction by year-end as we projected, pending regulatory approval. The early closing of Harris and the anticipated closing for Brown mean that we will be able to focus on one deal at a time, reducing the overall execution risk of these two projects, and increasing our confidence in a clean and smooth conversion process for both sets of new customers. With that, I'll turn it over to Rob for the financial details. Thanks, Jarrett. As Mitch mentioned earlier, we are very pleased with the performance of the Company in the third quarter. As we continue to execute our strategic plan, including both organic growth initiatives and consolidation opportunities, we successfully delivered top-line growth with increasing profitability. Total net revenue in the third quarter increased 26% year over year and 8% sequentially. This growth continues to illustrate the benefits of our direct and indirect leverage to retail customer relationships. Through increases in customer cash and borrowings, we were able to further reduce our funding costs at the bank, deepen our credit relationships, and widen our net interest spread. At the same time, retail commission revenue grew by 35% year-over-year, and 16% sequentially, while holding at about 20% of total net revenue. As we continue to grow the bank balance sheet and create greater leverage with our retail customers through borrowing relationships and cash, we expect net interest income to continue to be a growing contributor of high quality, recurring earning. In the quarter, net interest income after provision grew 32% year over year and 5% sequentially to $204 million or 48% of total revenue. Turning to operating expenses, we continued to demonstrate cost discipline and realize operational efficiencies. Third-quarter segment expenses totaled $272 million, up $19.8 million in absolute terms, but down as a percentage of revenue compared to both the year ago and prior quarter periods. Two factors contributed to the $19.8 million sequential increase in total expenses. First, compensation and benefits increased $17 million sequentially to $103 million. Of the $17 million increase, approximately $8 million was related to our adoption of FAS123-R and $9 million was related to volume and performance-based compensation. Second, commission clearance and floor brokerage expenses increased $2.2 million sequentially, directly related to the 16% increase in retail DART volumes. Including the effect of these two factors, we delivered year-over-year and sequential operating margin expansion and the second-highest segment income ever, second only to that of the first quarter earlier this year. To assess the progress we have made over the past year, it's helpful to evaluate our performance year to date. Total net revenue for the nine months ended September 30, 2005, increased 12% over the year-ago period, consistent with our stated goal of 10% to 15% top-line growth. At the same time, total segment expenses increased just 8%, including the adoption of FAS123-R this past quarter. So as revenue growth outpaced expenses, we widened our operating margin by 250 basis points to 35.7% and delivered 21% growth in segment income. Particularly interesting is that these results were delivered despite flat commission revenue. We believe these results further demonstrate the enhanced operating leverage of our model while highlighting our reduced dependence on trading related revenues. In light of the progress we have made and the strength of our year-to-date results, we are raising and tightening our 2005 earnings guidance today to a new EPS range of between $1.04 and $1.09 from our previously expected range of between $0.96 to $1.06. Taking into account the $0.79 in EPS that we have reported year to date, our raised guidance implies a range of between $0.25 to $0.30 for the fourth quarter. This revised guidance considers the impact of higher interest expense, restructuring, and field-related costs associated with the acquisition of Harris Direct, which we will offset with approximately $0.03 of the expected $0.08 gain from the sale of ETRADE Consumer Finance. To preserve comparability with prior guidance, we are excluding the remaining $0.05 of the expected Q4 gain for purposes of this guidance. When we report our actual results for the fourth quarter in January, the bottom line number will include this additional $0.05, resulting in an expected headline number of $1.09 to $1.14. Our fourth-quarter guidance also includes an estimated $6 million to $8 million increase in marketing spend in accordance with seasonal opportunities and the integration of Harris Direct and Brown. We are also including an assumed decline in average commission to approximately $10 per trade, down from $10.78 this past quarter, as a result of mixed shift in our DART volumes, as well as our simplified pricing structure. Turning to the Harris Direct acquisition, we are pleased by the fact that we were able to close a full quarter ahead of schedule. That said, we do not expect this to have any material contribution to operating income in the fourth quarter. The early closing does put us on track to be ahead of our initial integration schedule as we head into 2006, as Jarrett discussed, moving the timing of full synergy realization to approximately mid-year versus the September quarter, as originally estimated. As for our 2006 outlook, we plan to establish guidance in December as we have in the past. With this, I'd conclude by saying that we remain very pleased with the continued performance of the model and the fact that we are well on track to deliver a third year of record profits. We are also excited about the opportunity to accelerate our cash flow generation as we integrate Harris Direct and Brown, and we will remain disciplined in our approach to deploying that cash flow. Operator, we are now ready for 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_233870

Here’s the entire text of the prepared remarks from Ameritrade’s (ticker: AMZN) 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 morning. My name is Lee and I will be your conference facilitator. At this time I would like to welcome everyone to the Ameritrade September quarter and fiscal quarter 2005 earnings call. All lines have been placed on mute to prevent any background noise. By now you should have received a copy of our press release that was faxed or Emailed to you this morning. If you have not, please call our Investor Relations department and we will fax or Email one to you immediately. Otherwise you can view a copy of our release and slides, listen to the call, and submit any questions to us via our website at amtd.com. Also, if you want to contact us directly after the conference call, please call Investors Relations at 800-237-8692. Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Federal Securities laws. These statements involve risks, uncertainties, and assumptions that may cause actual results to differ materially from those anticipated. Listeners to the call are advised to review the risk factors contained in our most recent annual report on form 10-Q, 10-K, and quarterly report on 10-Q for descriptions of risks, uncertainties, and assumptions related to the forward-looking statements. In this call, Ameritrade management will discuss some non-GAAP financial measures, specifically, operating margins, EBITDA, expenses excluding advertising, and liquid assets. Listeners to the call can find a reconciliation of these financial measures to the most comparable GAAP financial measures and the other required disclosures in the slide presentation during this call, which can be found, again, on our website at amtd.com. Please note that this call is intended for investors and analysts and may not be reproduced in the media, in whole or in part, without prior consent of Ameritrade. At this time I'll turn the call over to Ameritrade CEO Joe Moglia, who will be followed by Ameritrade's CFO and CAO, Randy McDonald. Joe? This is our third consecutive record year in a row. We finished the year at $0.81, with $335 million in net income. That's up 27% from where we were a year ago. And over the span of the last three years, Ameritrade has generated $744 million in bottom line net income. That's something, frankly, in a difficult market environment, that we are really very proud of. When you take a look at the actual quarter itself, there were a number of records that were set. We set records for EPS, net income, pre-tax income, operating margin, EBITDA, and net revenue. When you look at the entire year, I've already alluded to the fact the $0.81 and the $335 million were both records. Our pre-tax income, also a record of $545 million or 54%. That was up 24% from where we were a year ago. Our operating margin is at $637 million or 64%, up 17% from where we were a year ago. EBITDA, $572 million, 57%. And net revenue is just about $1 billion. As far as the rest of the quarter goes, we did average trades per day of 146,000. For the year, we came in at 156,000. So, for October, it is 154. Our ROE for the year came in at 25%. And new accounts, we opened up 372,000. Now, of the 372,000, 327 were opened organically through our advertising and 45,000 through our M&A and acquisition of JB Oxford. The net account growth for the year was 197,000. We finished the year with 1.735 million qualified accounts. Our client access were 83 billion. And our liquid assets were almost 400 million. Now, I want to spend a minute and I want to talk about, frankly, where we're headed over the span of the next couple of years. Our scalability and our operating leverage have been, I believe, to a great degree, our competitive advantages, and they are the reasons why we've achieved what we've achieved over the span the last three years. If, however, we're going to maximize our potential and accomplish something really significant over the span of the next several years, we're if effect going to have to be able to focus on long-term growth and we will do that through our client segmentation strategy and our movement from a marketing organization to a marketing and a sales organization. With regard to the client segmentation strategy, and we've talked about this before. We will continue to emphasize our efforts in the active trader space. But we will very much intensify our efforts in the long-term investor area. The big effort for us is that of the $83 billion of assets that we have, or the almost quarter of a trillion that we're going to have after we close the deal, the majority of our clients' assets are still held away from us. So we think by having a legitimate long-term investor suite of products and services, we will significantly have an opportunity to be able to grow our share of wallet. That will help us with our prospects. But we think it will also help us garner greater yield from our current account base. It will make us more of an asset gatherer, and we believe that should command a higher premium with regard to our PE in the marketplace. It will help us with our retention. And it will help us with new accounts. And as far as our clients go, we will offer them now the full spectrum of -- going forward, the full spectrum of customization and choice, whether you're do-it-yourself and you want an electronic execution to simply buy or sell a stock, or whether you want somebody else to actually manage your money or you want a relationship with the branch. The movement from marketing organization to a marketing and sales will become apparent over the span of the next 12 months or so, especially after we close the deal. A simple example of what that means is just how we will focus on Amerivest. Today the entire effort on Amerivest has dominantly been internal and has been all from a marketing perspective. Moving forward, there will be a much greater effort from the branches and from our investment consultants to sell Amerivest works appropriate for our clients. We just recently relaunched the Amerivest site. We've added auto-balancing and auto-investing. For those of you that haven't seen it, it would only take you a few minutes. I would encourage you to do it. And again, while this has been our dream and our vision all along, the TD acquisition, frankly, leapfrogs our ability to implement our strategy by several years because of the different assets and the products and services that we are getting from them. Now I want to focus a little bit on what is going to take place as far as the close goes. There are three things that have to take place. First, we've got to be able to finance the dividend. We will be doing $2.2 billion, 1.6 of which will be used to pay the dividend itself. We'll have 300 million of working capital. And we're going to increase our revolver that's currently at 105 million to 300 million. We have already made our presentation to the rating agencies and we're waiting for them to come back with their final determination of those rates. Citibank will lead the deal and co-led by Merrill, UBS, and JP Morgan. Second thing that has got to take place is regulatory approval. We're already done with Hart-Scott-Rodino. And we are awaiting on the New York City Stock Exchange and the NESD. We don't anticipate any issues as far as they are concerned. Lastly, we need to be able to come up -- provide shareholder approval. Now, on September 12th, we filed the proxy. That was returned to us about a week ago. We're going to get that refiled within about a week. Now, once the SEC is satisfied, i.e., that means they send the proxy back with no more comments, at that moment we will be ready to go within 24 hours. A mailing will take place immediately, and then there will be a 20-business day wait from the time the proxy gets out to the shareholders' vote. The vote takes place, and then there is approximately ten business days after that that is basically an administrative waiting period for the New York Stock Exchange. Once that is done, we pay the dividend and then actually close it. We want to get this deal done as soon as possible. But my best guess with regards to an estimate is probably going to be sometime in January. Now, with regards to the specific SEC comments: eventually all of that information will be a public document. But there's one thing that we want to be able to highlight and share with you ahead of time. And that is that the SEC has questioned the documentation supporting the accounting treatment of the hedge that we've used on our night stock on the actual day that we entered into the transaction back in February '03. From day one, we have been running both the hedge and the night stock through our balance sheet. If it is determined that our documentation is inadequate, we may need to run that hedge through our P&L. If so, there will be no economic impact to either cash flow or our stockholders' equity, but we will record noncash gains in '05 of a penny; '04 of two pennies, or 5 and $10 million, respectively; and a noncash charge in '03 of $0.07 or $28 million. We've put together a slide, just so this is crystal clear for everybody, and I would like to run you through this now. The heading of the slide is The Night Position. Now, this is the way that the night stock and the night hedge has been on our balance sheet all along. The night stock in '05 lost $4 million in terms of mark to market. But the hedge gained $5 million. The net impact on stockholders' equity was $1 million. Remember, this was all on our balance sheet. However, if we had to run the hedge itself through the P & L, we would record a noncash charge of $5 million -- I'm sorry, a noncash gain of $5 million and an improvement of a penny. In '04, on our balance sheet, the night stock lost about 10 million bucks. The night hedge gained about that. The net impact to stockholders' equity was around $1 million. But if we needed to run that through our P & L, we'd achieve a $10 million or a $0.02 noncash gain. In '03 the night stock went up about 31 million. The hedge was down about 28 million. So the impact of stockholders' equity was a positive 3 million and change, but again, if we have to run the hedge through our P & L, we would take a $28 million or $0.07 noncash charge. I reiterate, there is no economic impact here in terms of our overall cash flow. And we are currently working with the SEC to try to get this wrapped up and resolved. Now, with regards to our integration preparation, there are some decisions that we have already made that we've communicated internally and with TD Waterhouse and we are happy to share with everybody now. We said with regards to personnel and management, we wanted to make sure that we kept the best talent on both teams and consequently, Tom Bradley from Waterhouse will be running our advisory business going forward. John Bunch from Waterhouse will be running our branches and investment consultants, going forward. At Ameritrade, Bryce Engel, who is in charge of all of our brokerage operations, will continue to do that going forward. And Jerry Bartlett, whom we've just promoted at Ameritrade to Chief Information Officer, will continue in that role going forward. With regard to functionality, we made a decision that we are going to operate the call centers and clearing efforts out of both Omaha and Fort Worth, and we will be closing down the TD Waterhouse efforts in Harborside, New Jersey. We said when we announced the deal we thought 378 in terms synergies and 200 in terms of revenue opportunities, i.e, a 578 number was what we thought was realistic. We still think that number is realistic. And the next update with regard to the integration and all the things associated with that will take place right after the close. Now remember, a number of you have asked me questions on this, because of the people that are involved in many of these decisions, we will not announce anything externally until it is handled internally first. Hopefully everybody understands why that is the case. So I would anticipate the next update shortly after our close. With regards to outlook for '06, we know that everybody is most interested in what TD/Ameritrade is going to look like. But for the time being, we thought it would be far more simpler and far more accurate to report Ameritrade only and we will update TD/Ameritrade again after the close. If you have any interest in looking at Waterhouse has been doing over the span of the last several months, their information is on the TD website. You can find that by going to td.com; investor relations; financial reports; and then TDW trading volumes. Again, td.com; investor relations; financial reports; and TDW trading volumes. As always, we've given you a sensitivity analysis on the outlook statement that ranges anywhere from 3 to 7% activity rate. But our more specific guidance for the quarter will be 3.8 to 4.8%. And as a point of reference, in '05 our activity rate was 4.3%. I would ask you to go to the slide on our EPS growth. If we come in at 3.8% activity rate for the entire year, we generate around $0.83. If we come in at a 4.8% activity rate for the year, we would generate $1.02. If we repeated the 4.3% activity rate, we come in at $0.93, which is up 15% ahead of last year. As far as your models go, one thing you may want to keep in mind, in '06, we will have a 52-week year. In '05, if you recall, we had a 53-week year. Let's start with operating leverage. As Joe mentioned, this year was the best in the Company's history. It also included three of the four best quarters in Ameritrade's history. We generated a record $572 million in EBITDA or 57%. When you combine that with $467 million that was earned in fiscal year '04, the firm generated more than $1 billion in EBITDA. Net revenues increased from the same quarter last year by $87 million or 47%, from 187 million to 274 million. That was driven by almost a 100% increase in net interest income and a 26% increase in commission income. Now, I'll note that we continue to deliver on our promise of operating leverage, as our revenues increased 47%, yet our earnings per share increased 64%. Let's review the income statement and look at the quarter-over-quarter results. Again, this quarter, we move to a more diversified revenue stream. Last year, commissions versus asset and fee-based revenues were a split of 55, 45. This quarter, the split is 47, 53. Turning specifically to commission income, the commission revenues increased 26% or $27 million over the same quarter last year as a result of an 18% increase in trades per day and five additional trading days in the current quarter. The commission rate was $13.01 for the September quarter, which was 1% lower than the same quarter last year. That's slightly higher than what we expect in our outlook statement, and that would be primarily due to greater activity and options trading. Turning now to net interest income, the net interest revenue approximately doubled, to $126 million from $63 million in the same quarter last year. The net interest revenue growth is comprised of three things: larger loans plus segregated cash balances earned an extra 69 million. Ameritrade's securities lending business and other interest earned an extra 26 million. And all of that was offset by an increase in expense from securities lending and interest paid on client credits of $33 million. Let me drill down, starting with marginal loans, and looking at interest from marginal loans, which increased 26 million to 66 million this quarter. That was primarily due to increased rates. Additionally, balances improved slightly, to $3.6 billion from 3.2 billion, which was at the higher end of our guidance. The average margin rate earned was 6.86%, which was slightly in excess of our guidance. We typically don't forecast Fed rate increases, and we experienced two increases in the quarter. So this resulted in interest revenues from margin balances being at the upper end of our range. Now, the margin rates increased to 6.86% from the same quarter last year of 4.93%. That's a 193 basis point increase. However, we did not increase the rates we paid on the client cash at the same velocity. Those rates only improved by 43 basis points. Therefore, this resulted in 150 basis points, wider spreads on margin loans from 4.67% in fiscal year '04 to 6.17% in fiscal year '05. Turning now to segregated cash, the interest from seg cash increased by 43 million to 70 million this quarter. And that was almost entirely due to increased rates. The average seg cash balances increased only 100 million from the same quarter last year to 7.7 billion this quarter. The average seg cash balances of 7.7 billion were within our guidance, and the average rate earned of 3.35% was up from 1.45% in fiscal year '04, or 190 basis points, and that was slightly above our guidance. So for both these reasons, interest revenues from seg cash balanced were at the upper end of our range. Similar to the spreads on margin loans, our spread on seg cash also widened. They widened by 147 basis points to 266 basis points in fiscal year '05 from 119 basis points in fiscal year '04. Now looking at the client credits, client credit interest increased by 12 million to 18 million in the September quarter from 6 million in the same quarter last year. The average client credit balances were 9.4 billion and were at the upper end of our range. The average client credit rates were 69 basis points. They were at the lower end of our range. So that resulted in client credit interest expense of approximately 18 million, which was within our guidance. The client credit rates increased 43 basis points from 26 basis points in fiscal year '04 to 69 basis points this year. So the result is the Company did a great job in controlling interest expense and widening our overall spreads. Securities lending, the interest revenue earned there and the interest expense paid on the securities lending business increased over the same quarter last year by 24 and $22 million, respectively. So that resulted in a net increase of $2 million over the same quarter last year. Finally, with regard to other revenue, it was down about 2 million, which primarily resulted from a nonrecurring gain last year from selling a repo instrument. When looking at the sequential quarter results, so when comparing the September quarter to the June quarter, the net revenues were up 40 million or 17%. The commission revenue increased 16 million or 14%. That was primarily due to 7,000 more trades per day and four more trading days in the current quarter. Additionally, commission per trade increased 2%, primarily due to higher options activity. Net interest income was up 27 million or 27%. There were three reasons: There were seven more interest days; slightly higher average margin in seg cash balances; and higher spreads earned on these balances. Expenses before advertising were 96 million. That was up 23 million or 32% over the same quarter last year. I'll remind you the starting point of 73 million in the same quarter last year was actually 82 million because of some one-time credits in that quarter. What that means is the comparative increase was actually 14 million. Then we had some unusual items this quarter. The September quarter this year was one week longer. That resulted in an additional 6 million of expense. There is $5 million of severance payments to some former executives. And we had increased bad debt expense this quarter of $4 million. Then we add $4 million of variable expenses from 23,000 more trades per day this quarter, and the sum of all of this is 19 million. So, effectively, rather than a $14 million increase in operating cost, we actually experienced a $5 million decrease. With regard to the bad debt expense, we had transaction review controls over employee trades that were circumvented, which resulted in some unsecured debits. The employees who were involved were terminated or otherwise disciplined. We've added controls over employee trades designed to prevent this type of activity. Looking at expenses relative to the outlook, there were four items outside of our guidance. Employee comp was slightly above our range, due to the severance that I mentioned. Clearing and execution was slightly below the range, as we continue to benefit from favorable rates we've negotiated with our vendors. Professional services was below range, as we capitalized the costs related to our electronic asset management and procurement projects; and lastly, other expense was above our range, due to the additional bad debt expense I just mentioned. Looking at the year-over-year expenses, last year's expenses, excluding advertising, were $339 million. And this year, they were $366 million. The increase was almost entirely related to annual increases in salaries, the severance that I mentioned above, and about 90 additional associates in our call center for improved service levels. I'll now reference you to a slide we have called Dividend Funding. And at the end of September, Joe mentioned we had liquid assets at $397 million. Ameritrade has added over 125 million to liquid assets since the TD transaction was announced at the end of June. This is an historical high, as Ameritrade continues to build its cash position for its share of the $6.00 special dividend. The purchase agreement calls for both firms to deliver their brokers with excess regulatory capital of 6%. Because liquid assets only includes 5% excess capital, then Ameritrade needs to encumber liquid assets by another 1% or 44 million. We then add to that the net of tax proceeds from the sale of our Canada business. So at close, Ameritrade will need 406 million to fund the first dollar of the $6.00 dividend. So we'd need to earn another 17 million in the December quarter. TD is obligated to also fund $1.00, with another 406 million of contributed capital. So that means the remaining $4.00 of dividend will be funded via committed borrowing of 1.6 billion. That will then get us to the total 2.4 billion we need to fund the $6.00 dividend. So we had an excellent year of many records and we're confident that the TD merger has positioned us to continue our strong growth, with active traders, long-term investors, and registered investment advisors. 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_233871

Thank you for standing by, good morning and good afternoon. All participants are currently on a listen-only mode. After today’s presentation we will conduct a question and answer session. If you would like to ask a question please press star one on your telephone touchpad. Today’s conference is being recorded, if you have any objections you may disconnect at this time. And now I’d like to turn the meeting over to your host for today, Kate, you may begin. Thanks Ed. Good morning everyone, thank you for joining us for today’s Emmis Communications Conference Call regarding Third Quarter Earnings. I want to extend a special welcome to all the Emmis’ employees who are joining us in this meeting this morning and those of you who are listening in from our website: www.emmis.com. We will begin in just a moment with opening comments from Emmis’ Chairman & CEO: Jeff Smulyan; and Dave Newcomer, Interim Chief Financial Officer. After their opening comments our conference call moderator will come back on the line to instruct you on how to submit questions. Joining us to help answer your questions is Rick Cummings, President of Emmis Radio. A playback of the call would be available from the next week by dialing 203-369-0900. The conference call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, please refer to Emmis’ public filings with the SEC for more information on the various risks and uncertainties. Additional disclosures can be found under the Investors tab of our website: www.emmis.com. Jeff? Kate thanks, and I want to thank you all for being here this morning. This has been a good quarter for us and an environment obviously within the radio business, which has been challenging but couple of high points. In the radio business we beat our markets from the second straight quarter. Our magazine - city and regional magazines have had an exceptional quarter. We exceeded guidance in street estimates on EPS, we are pleased about. We continued our aggressive deleveraging of our balance sheet with the proceeds of our television stations and participated in the launch of the HD Alliance, which we think is a major part of radio’s reinvention of itself and I know its not getting a lot of notice right now but I think it foreshadows a trend that the radio business is coming back, and we think that’s important. For own sake we think we are poised for a very good year, we think this is a good year upcoming starting with our fourth quarter but really more important in what fiscal ’07 which starts in March. We are making some investments in our fourth quarter especially in Chicago but also with our Los Angeles properties but Chicago clearly is in the midst of a turnaround and we are going to continue to invest as we always do and to make that happen. So all in all in an environment which all of you know is and challenging for all forms of broadcast media. Emmis continues to outperform and we feel very good. And with that I want to turn it over to David Newcomer. Thanks Jeff. I will go over some financial highlights and then will turn it over to Q&A. Overall we are pleased to report that like Jeff said, we beat first call EPS estimates by $0.02. We also exceeded revenue, station operating income and EBITDA consensus estimates. For domestic radio, the Q3 results for radio were inline with guidance despite a weak October and overall market growth that was really less than expected. We do continue to focus on cost management and while expenses were up about 4% for the quarter, which were inline with guidance. They are getting included as Jeff says some investments. In Chicago, which included new morning show and some marketing and this is reflected in our Q4 guidance, and we can talk about that further if need be. As Jeff said, 5 of our 7 as markets gained share with Chicago, Phoenix and St. Louis leading the way. For the quarter national markets were up about 2%. Although our markets were up about 4%, and overall our markets were up 3. I would say that Emmis’ performance was stronger nationally than locally for the quarter. Regarding categories Auto was again down slightly although most other categories in our Top 10 were up lead by movies, bands, beverages and media. A couple of the rating highlights for summer were Kiss FM and New York No. 12554 for the first time since winner of ’96. Hot97 No. 180 was 34 for 35th straight book; POWER 106 No. 180 and 34 for 14 straight book, and BOB-FM Austin again No.1. Our fall book will start coming out this week and Rick will address any other ratings, questions in Q&A. Lastly on domestic radio, average unit rate was again higher and up 7% for the quarter. Regarding our capital structure, our capital structure and asset sales are explained a lot further in detail in our queue, which is now on file, but here are some highlights. Net proceeds in Q3 from the Gray and LIN transactions were approximately 442 million. Net proceeds in Q4 so far from journal were approximately 225 million. We expect the SJL closing in January with gross proceeds of approximately 259 million, and for a full analysis of these total net proceeds including all severance, completion and success bonuses, please refer to the 10-Q. We also hope to close on Red in St. Louis, which was sold to Radio One by the end of the fiscal year. To be at notice, to redeem 213 million of the floating rate notes and plan to redeem additional notes at some point following the SJL closing. Total average at 11/30 was 7.9 times, which includes the 208 million debt repayment, which was pledged at 11/30 but it’s reflected as restricted cash in the 11/30 balance sheet. Leverage at 2/28 will be much lower based on additional TV sales and debt repayment, and all of this information necessary to estimate that leverage is available to you in the queue. Lastly in our capital structure, our weighted average cost of debt was approximately 7% at 11/30. Couple of other items, CapEx for Q3 was 3.5 million and is expected to be 13 million for the full year, and corporate is estimated around 6.2 million for Q4, and this number excludes TV severance and bonus payments. With that I will turn it over to Q&A. No I think that’s fine, thank you, and I think you can see that deleveraging is a major part of our story, we have said that the television sales would successfully allow us to deliver the balance sheet quite dramatically. Thank you, at this time we would like to entertain questions or comments. If you have a question or comment please press star one on your telephone touchpad. And our first question today comes from Victor Miller of Bear Stearns. Actually, I will direct this to Rick, in terms of the last conference call you talked about how when ABC decided to move its format that that was kind of a gift to you in the circumstance, that was a big break to you in terms of the overall value what might - that what are your Disney deal might have meant to you, yet now we are seeing a very significant increase in costs in that marketplace. When you thought that a lot of a gift that was already been provided to you, maybe you could talk a little bit about what’s happening in Chicago? Second, could you update us on what you expect for, you know, most of the most important station probably is Orlando and then maybe just update us on what’s going on maybe the big baseball and what do you think will actually have an arbitration and will actually hear whether there is going to be a team in Washington by the end of this month? Thanks. Hi Victor. Yeah Chicago, we do definitely see some benefit already from, in fact I checked back, literally, the zone literally left the format a day before the Q2 earnings call. So we have had 90 to 80s without the zone in Chicago, and already we have seen Q1’01, which would be primary beneficiary, grow up about three quarters of the share point. I don’t think we have seen most of that yet I think we see some more of it when the fall book comes out. I think we see additional gain in the spring book but also arrange a pointing to us benefiting directly there. The reason cost is up is because we brought back Jonathon Brandmeier to the loop. And while the loop would benefit somewhat from the zone, the loop really is not going to be a major player again without our Morning Show, and Brandmeier is clearly the guy that takes that radio station back to we think Top 5 performance in the market but we could have waited until that was more convenient budget wise but we felt like from the strategic standpoint it was time to get Johnny B. back in Chicago and get him on the air as soon as possible so we did that about 60 days ago. We think that’s going to be a major part of the loop’s success in the next several years. And, as to the remaining TV sales, discussions are ongoing, Victor I think because of Katrina and a few other factors, it has been a little slower but we are in discussions but our position is in, so we have something to announce, we have another new one out so we are just going to keep moving ahead and you know our plan is clearly to finish our TV divestitures, certainly in the near-term and we will just keep moving ahead, we are very focused on it. As the Major League Baseball, the process continues I can tell you discussions are ongoing and MLB has filed for arbitration to mediation. My sense is that discussions are continuing and I think they will reach a resolution in the fairly near-term, and that’s my sense. My sense is that it probably won’t go before the arbitration process. That is just based on being an observer and of course again baseball will not select any owner until that process is done. My sense is that it will be completed in the next 30 days but you never nothing. Just two questions, and the first actually relates to publications. I thought that it was slight upside to the revenue, I looked for it in the quarter and I wonder if you could add some color as to which maybe its categorically whether there is the originals of the magazines that we are performing and how they were doing in the quarter? And then secondly here in the February quarter, I am looking at the May quarter, in New York City we anniversary the year ago record event with regards to the Tsunami advertising withdrawals and so I guess I wanted to give some bit of color as to how New York cluster growth is proceeding as you enter the New Year? I think couple of thoughts. No.1, our performance in the city and regional magazine business has been stellar, especially because of excellent performance of Texas monthly and the Los Angeles magazine. Both have really improved, if you want to get down to one specific area of luxury automobiles but really those magazines are doing such a great job of reflecting their community since I think you know its continuation of pattern of just our performance do a very very good job. As per New York I’ll take that one, it is a year as the second half of the year has unfolded we have seen Hot97 bounce back, that strong competition from the Clear Channel station but it has maintained its leadership eighteen thirty-four. Advertising revenue has come back, we expect the next fiscal year will be a very good year for Hot97, and coupled with consistent performance of CD1019 as well as a spectacular year at Kiss-FM where we went back to No. 12554 and went aboard. We feel good about the future in New York. A little bit of clarification in Chicago, I think some of the expense was marketing as well as the Morning Show so what can we expect to see after the fourth quarter when marketing stage is to retire as most of this expense by the Morning Show and we will see that continue for another couple of quarters? And then can you talk a bit about in the annual contracts and the current trends that you are seeing and how it suggest the radio business you know this coming year? I don’t think you will see – I don’t think you will see additional ongoing marketing expense that is particularly dramatic in Chicago. We’ve spent some certainly in Q3 a little bit and plan on spending a little more in Q4 to make sure Chicago knows Jonathon Brandmeier make us return to the market, and I think that’s very very important. But I don’t expect that to be dramatic in quarters one and two of fiscal ’07. The expense of putting Brandmeier on the air, no question it has had some impact on our Q4 and a little bit on Q3. That’s an expensive Morning Show, but we also think that that show, an early indication and most of it is anecdotal, we have only got a little bit of ratings indication but that was positive but early indications are this, this is absolutely the right move for that radio station, that may and it was No.1 in Chicago from mid 80s to mid 90s on that station, and bringing him back appears to have been, we think early on anyway a great, great move. So I don’t think there is going to be dramatic additional marketing expense in the first two quarters of next year. So do you think for the first two quarters in the next year, it could go down maybe 2 to 3% expense or do you think it is going to stay up towards the mid single-digit? Well I will let Newc talk a little about that, but I think its probably going to be low single-digits. Newc your thoughts? Yeah it’s a little early to be talking about expense growth in the next year as we are still finalizing our strategic plans for next year but I would say that we are not looking at any abnormal type expense growth for next year, but its I would say at this point its early to make any comment. One other thing I would like to point out quickly is that Chicago is also seeing some pretty significant revenue increases already even though Brandmeier has not generated the ratings yet, just has returned, just his return has started to produce some of that, for example Q3 were up 16% in Chicago so you know I think that this is an investment that is we are very confident is going to pay off dramatically for us. I checked last night before this call to look at national pacing and national pacing is basically right now for the first quarter of this coming year flat. But it is so early for us to make predications on this, I mean you know you look back 3 or 4 weeks ago, and it was up 10 or 12%. It could be up again 10 or 12% two weeks from now, so its really difficult to tell. I do know that we have some concern about some cancellations in Auto and yet even though Auto was not the primary category this particular quarter, it was down in some second pricing, I don’t recall that being happening anytime in the recent past where Auto was not the first No.1 category. Having said that it’s only down 5%. And I think we are pretty confident that when you look at this next quarter, Auto is going to be on top again. Its just a little difficult for us to say right now where this market is going to go, unless well I think would be in conscious of the guidance. Hi good morning. Could you give some color on the fourth quarter radio guidance, do you still see out performance versus your market? Ricky touched a little bit on it in the last question. And also can you break that guidance domestic versus international, is there something going on there that we should know about? Thanks. You know I do not think we will continue, I mean if you look back over the last 6, 7, 8 quarters we have consistently outperformed our markets by 2 to 3 points, almost every single quarter it is a couple of points again this quarter. We anticipate it will be a couple of points again next quarter. I don’t see anything on the horizon that changes that Jonathon, I think that’s going to continue to be where that is. Newc you wanted to talk for a minute about domestic versus international? Sure, yeah similar to the last quarter, our guidance for Q4 internationally and domestically are pretty close, they are pretty similar at this point. I just think that you have got a couple of other markets that are you know reaching, I wouldn’t call it maturity but let’s say they continued their good markets but we had seen some outstanding growth out of it over the last year or two, and while we say that with regard to Hungary we had some other markets that are developing and you know we see good things down the road but I would say that probably because we have seen such great growth out of Hungary over the last year or so. And I think we are probably being a little cautious on Slovakia and you know Belgium maybe but you know we would rather be a little cautious then. Thanks I appreciate, thinking the question, well just pointing here the publishing business was a little stronger than expected, I was wondering what’s driving the growth there? And then Jeff I was just wondering if you can outline your plans for the HD formats, can you talk about the terms of the rollout particularly of the company’s plans, not can have the advertising on the HD radio format for up to 2 years, and just the terms of those types of rollout, if you can just explain that a little bit? HD I think we are really excited about as you know we are part of the alliance. The alliance was formed really for couple of reasons. One to promote the whole notion of HD radio and digital delivery of radio formats to consumers, then also to the auto industry. And second I think to coordinate the rollout of the HD radio, so we really have a robust offering. And if you think about it, the digital quality double the number of formats, its free, I mean there is very compelling things there. We look that – its going to take significant time, we got a lot of radios out there, why not put these formats on in a conversional freeway for at least a year, a year and a half so that we really give consumers some motivation to get out in the quarry of radios etc. We’ve got a long way to go with it but I think we are pretty excited about it, and we think that this is going to ultimately lead to tremendously more format offerings. You know how long that’s going to take, how that all shakes out is anybody’s guess but we have agreed that we are going to start to rollout these HD 2 formats over the next couple of months and our key markets I think about three quarters of our stations would be up in running in HD by the end of 2006, so we feel pretty good about this, got a long way to go but its an exciting time and if you look back at the history of this industry through all the technology challenge it has had, it has always found someway to reinvent itself. We think HD maybe part of that reinvention. I think the publishing business, you know some of it is cyclical, you know it shifts from quarter to quarter, but generally speaking then, city and regional magazines led by LA and Texas Monthly, really had a very nice year, you can see that in some of the advertising trends at local magazines, Houston has done well and we think we have you know four five of the best of them. Good morning, first just a clarification. I think you said a nationals of stronger than local in the last quarter and then national’s currently flat, so should – assume that locals doing better than in fourth quarter than it was last quarter so you too wanted 2% revenue growth outlook for the fourth quarter? Okay and then secondly I know its early but I was wondering if you are noticing any kind of impact in the marketplace from Clear Channel, finally anniversaring the inventory reduction? Its too soon to tell but we think it will help overall the industry that, really too soon to tell that. Okay and you hadn’t noticed I guess somewhat more specifically, and that shift in 60s versus 30s for them. I thought you are going back to something more 60s against here anything. We don’t, we have really not seen, I mean we have seen some increased demand certainly for 30s and we have start to set our policies is going to provide advertisers whatever they want whether its 10s or 30s or 60s whatever works for them, and in an effective way, that’s what we will do. We have not made a conscious effort to push, there is no certainly we provide them up a little bit but nothing I don’t think dramatic, and I’ll also just to clarify national. I think most of the reason the national was up so dramatically 14% for us in the Q3, and it was near double-digit in Q2 is more the performance of our group of stations, and our maximum sales effort and our rep firm and really the national marketplace. National marketplace is still up only just a few points this quarter. So its really been more a case of our group performing well than it has been national you know, it performing in general in a great way. Hi, good morning. Jeff your tone is less optimistic than its usually been, and I am wondering if there is something going out in the radio industry, in your markets if I miss that would also explain the decline in growth in your radio division from 4% in Q3 to 15% in Q4? And then I am also wondering what your thoughts are on in ABC sale occurring this year, do you think it will happen or not? Well Marci couple of caveats, one I maybe kind of little down, I am finishing the flu and of course the rose balsam pilgrims for me is a little bit tougher than any brother people. You know, this has been a tough run for radio, I think you know that we see some signs, one of the things that I think in my heart of hearts is that all the loop will over you know, satellite radio is finally starting to die down. I think Howard Stern has done a serious bit of – a job of marketing themselves, every time I turned on TV the last week or picked up a newspaper or magazine, it was Howard Stern. But the reality is I had said before, nobody has ever made money in pay radio and they have got a long way to go if you know. And I think people have finally started to put their calculators to work on that. But clearly we have a job to do, and I think the HD Alliance led by Clear Channel and Infinity and the rest of us has been, you know, a watershed event along with our industry marketing, and I do believe this industry is better than 1 or 2%. On the other hand, until we go out and do it, you know, Wall Street’s not going to take notice as they should not. So we understand that, and we are certainly are on to a robust start this year, there is no doubt and the last quarter was a little disappointing, you know we gave our guidance. It was right before October and the October month was horrible, it was down 7 as an industry. November-December were a bit better, but clearly this industry needs to bounce back, and I think we are all doing some proactive things that they will make it sell. But until it happens, you know its not, you know until we released those numbers, you know we are not going to get the credit that I think the industry ultimately will deserve. As far as ABC Radio, you know those talks are ongoing with others, we have said we are not in that process, I would assume that it will be sold this year but I just don’t know, that process is going on for so long on so many different parties and that’s really is not something that we are engaged in at this point. Once you get your leopards down, the TV divestitures are behind you. In looking at growth and acquisitions, what would you like to expand with, where do you take unless if its not the ABC, which apparently its not. Well Bish I think we have said we are going to – we want, you know the thing that I have found with this company is its an extraordinary group of people who always managed to outperform and we want to find areas where we can grow. I know was in, people questioned the baseball investment that there is a thing if that happens, there is some things here we see that has some interesting broke around the baseball organization. We are going to continue towering for opportunities, and well we think we can grow beyond our recent past. Those are the types of investment we will make, and you know whether it’s a domestic radio or international radio or whether its in baseball or whether its in more publishing, we just we believe that we are very good at operating businesses. And now I want to put our skills to work in areas that grow disproportionately. That is the goal of this company, its time for us to create some dye. No, I think we are just going to – we are going to do what we think makes the most sense. And I think the difference is that we will look at it more from a long-term maybe perspective than some will look at and say you know what about this quarter, we always focus on our quarters. I think our quarters you know stack up very favorably with other people but what we really want to do is create some long-term value and people who are going to be with us for the long-term hopefully will be rewarded. Hey thanks and thank everybody, I want to thank everybody for being here today. Again I really take great pride in the fact that our people stack up as well as anybody. They always have and I think they always will, I think we are in an industry especially radio that’s been challenged but we managed to perform well. And we think that in the coming years there is some exciting things happening and we will have a balance sheet that will allow us to move in different directions and we just have to see what those are. I can’t tell you what that will be right now but we are just going to keep moving forward. And again thank all of our people for making that possible.

EarningCall_233872

Here’s the entire text of the Q&A from Sabre Holdings’ (ticker: TSG) 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. Indeed. And thank you very much, Mr. Gilliland and our host panel for your update today. And ladies and gentlemen as you just heard then if you do have any question or comments we invite you to queue up at this point simply by pressing “*”, “1” on your phone keypad. You do hear a tone indicating you have been placed in queue and should you wish to remove yourself from the queue simply press the “#” key. So once again ladies and gentlemen to ask a question please press “*”, “1” on your touchtone phone. And representing Bear Stearns, our first question we go to the line of Jim Kissane. Please go ahead, sir. Hi, just a clarification. Jeff I think you said you want to work GDF deals that are neutral to earnings and I think you used to say you want to work GDF deals that are neutral to revenue. Has there been a change in the strategy? No. I think what we’ve been talking about Jim over the last couple of quarters is how the deals themselves are all very different, different structures, different levels of progress with each of the airlines and in fact I think in the second quarter we talked about the possibility as there exists at certain places in the world that of opt in models, that’s just one example. There are many. The AirTrans example shows that we can leverage the assets across our business and as a result, I just thought it was appropriate to describe them the way we did today. Okay. And can you give the growth in total incentives? You gave the offline. And then can you elaborate on the factors enabling you to drive down the offline incentive growth? I, no, well; we can’t elaborate any more on incentives than we did on the call. I think it’s, I think it’s a variety of things and Sam or Tom Klein could chip in if they like. But it’s our presence in the marketplace; it’s a combination of our relationships, our service, and our content. And, I just think that on balance and it has, this has generally been the case for some time, that we’re able to, even in a very competitive marketplace with incentives, generally maintain or grow our share with a lower incentive rate than our competitors have to pay. Yeah. And I think, just to add to that. We have continued to have a very disciplined, disciplined focus on incentives. So we’ve talked about over the course of the last year, we have had an incentive program that we had in place for small and medium sized agencies and that’s been a successful effort or initiative. But we’ve been we just continued to apply discipline and I think the sales team’s done a good job of winning new business, even in light of, again, pressures they get from a competitive perspective. I think, the flip side of that Jim is, I think Sam has said in prior calls, was incentives are important in how this marketplace works. And so we think it’s important that the relationships continue the way they do in general, but take this disciplined approach to managing that cost line. Got you. And then Jeff last question. Can you give us a pre lastminute free cash flow? Are you still on track to do 200 million if it wasn’t for lastminute? And thank you very much Mr. Kissane. Next in queue we go to the line of Chris Gutek, representing Morgan Stanley. Please go ahead. Hi, Sam. Just a follow-up on that last line of questioning a little bit here. I guess with the Sabre Travel Network bookings growth of 4%, I think that does include some GetThere bookings. Do you have a number that is just for the pure GDS business? The bookings business. No. We now measure transaction growth because there are so many different types of transactions as opposed to specifically TN bookings or the traditional TN bookings. So no, we don’t have a number for that. And do you have any updated thoughts on the new entrants and then other forms to the channel just specifically to prior websites I know you said that the airlines have spent a lot of commitment to using TS just going forward but just any updated thoughts there on the channel shift and what that what that quantitative impact is on the bookings growth? Well, first of all I did say that we have continued to see channel shift at levels consistent with what we’ve what we’ve said really over the past 12 months or so. So no dramatic change there, although I know we’ve heard from at least one of our competitors they believe that’s the case. It’s not something that we’ve seen. And I guess secondly, on the new entrants, we haven’t seen a lot of progress there. We’re paying close attention to it but we’ve not seen a lot of progress from them. Or heard a whole lot more, even related to their pricing models. So there’s still a fair amount I suppose that you’d say is unknown about them in the marketplace. Michelle, a question for you. I guess the merchant hotel inventory supply constraints haven’t been as much of an issue for Travelocity as it has for some of the competitors but presumably there is some tightness there that you’re feeling some negative impact from? Is that in fact true? And in fact could you put some color around how that might be getting a little bit worse? Yes, let me debate the premise .We saw a strong room night growth of course globally but also in the North American marketplace. As a matter of fact our merchant mix in North America was up in the third quarter so we continue to believe that as a result of our supplier friendly model and our strong relationship, we have a better and more sustainable merchant model than some of our competitors. So we actually had we actually had a nice quarter in the across the board for our hotels particularly in the North American marketplace. Chris Gutek No. There’s nothing, we don’t believe that we’re going to face significant supply constraints. Of course in the fourth quarter there’s always seasonality in big markets like New York but that’s just part and parcel of the hotel business that we’ve become used to over the past few years. I think, I think I have to just add, we haven’t seen anything unusual in terms of that content availability. You know besides what Michelle mentioned in terms of peak periods. So none of the tightness that I guess we’ve been hearing from others. No. We now have, we now have our 8-KA behind us and after today of course our earnings and so we’re beginning to look so we’re in a position to be able to refinance and I would say generally over the next couple of quarters we’ll look at it. As I have said recently, we’re looking at all range of refinancing alternatives, but with our stock price at current levels we’re a little less inclined than we might otherwise to be to issue pure equity. Hi, a couple questions. First, I was wondering what impact you think Wilma might have on your business particularly since I think it hit some of the key leisure markets in going into the holidays? And then second is on lastminute we saw a price onto a decent quarter, in Europe and Expedia has been doing the same thing. I was curious what you think about lastminute’s market share, what disruptions your interaction might have and how long will it take to put lastminute back on track? Okay, Paul. On the Wilma question, this is Jeff, by the way, I will, I think, I think we’ve been, we have seen a little bit more impact and Michelle can elaborate from Wilma than some of the other hurricane activity in the last three or four months and generally as a result we’ve been a little bit cautious in our fourth quarter forecast until we see how that slows through actual bookings. And on the lastminute.com question, Paul, we as I mentioned, in earlier, the October transaction growth across Europe and in the UK for lastminute.com is very encouraging. So we have broken several hotel records and so we believe that strong growth is returning after what was a tougher third quarter for our European business. Yes. I’m going to just comment on the hurricanes just a little bit more because there was some question about that in the third quarter and then there’s a question about Wilma specifically and I think we did see some impact in the third quarter related to Katrina, and, yet, there was a lot of just movement, I guess you’d say dislocation movement of people that might have otherwise gone to those areas that decided instead to vacation in other places. So clearly inbound traffic was moving other places, you would lose some of the outbound clearly because there was no outbound but the strength of the overall business overcame any issues that we might have seen from those two hurricanes or those several hurricanes. The, with Wilma it’s a little bit different because of course it hit some very significant leisure destinations, Mexico and Southern Florida and that’s why that’s why we’re still looking at it to understand what kind of impact it might have. Now, again, clearly, you would expect that if somebody was planning a vacation in Mexico, they might well vacation somewhere else instead. But the question is, and I think over the over the longer term, it would be a fairly smooth situation, but over the very near term we may see some impacts and that’s I think we’ve factored that into our fourth quarter numbers. One easier, one similar question if I may on, one on Travelocity’s marketing spend. Clearly you’re spending the marketing dollars a little bit smarter and better as you said. Can you give us a little context as to how you’re shifting your spend between general offline, online and specifically your online budget, how have you changed the way you spend your online dollars to sort of strengthen those four key strategies you outlined earlier Michelle? Yes, we actually are shifting money away from online towards offline and that’s partially because I think we believe firmly that it’s, we’ve got some great ROI vehicles offline to tell the brand that’s in those four key points I talked about earlier and we just have more and more confidence that we can tell a more robust message in a very cost effective manner with some of our offline channels. And so we have been moving money more from online towards the offline channel and then we’ve just gotten much tougher in how we evaluate ROI in our search spend in particular to make sure that, while it’s a great vehicle, we want to make sure it’s truly incremental and so we’re taking a harder look at that than ever before. Okay. And thank you very much, Mr. Keung. Next in queue we go to the line of Justin Post, representing Merrill Lynch. Please go ahead. A few questions. First on your prepared remarks I think you indicated that revenues in North America were up 23% at Travelocity, the release says bookings were up 30%. We were kind of thinking revenues would be inline with bookings. Could you talk about the net revenue rate and are merchant hotels still growing faster than the average. Sure. And let me just clarify exactly what we said. We said that if you take out lastminute.com and adjust for the $7 million catch-up we reported in revenue in the third quarter of 2004, revenue growth was 32%, which is very much inline with where our gross bookings growth was. So we do continue to see hotels and packaging and those businesses outgrowing traditional air bookings as you might imagine. And as I mentioned, in the merchant mix in the third quarter in our North American business was actually up, so if you take out, again lastminute.com, and adjust for the one time, you would have seen 32% revenue growth. If you just look at North America, that number would, would have been 26%. Great, thank you. That’s a good clarification. Secondly on margins on the Sabre Travel Network down year-over-year, is that just due to industry cost pressures that are sustainable? Are you really making a big investment that you could pull back on next year if necessary? Well, we have, clearly we’ve been investing for the long term in the TN business and you see that impact because the core TN business has been performing really quite well and the margins have been very consistent. But our, we are investing in merchandising, we’re investing in new businesses there and that does drive some drag on the overall margins. However, it does also deliver things like I mentioned during the more formal part of this call here, 25% growth in car and hotel revenue at TN. Now, over the longer term, we should expect that we’d actually see these margins come back, but we clearly feel like it’s important right now and for the foreseeable future to continue investing in that TN business. Great. And then two things on sustainable of what I see are pretty good trends. First, are you able to continue to grow bookings in North America at 30%, continue to beat the industry, or are you coming across tougher comparisons? And secondly on the Airline Solution business, very nice margin improvement year-over-year, does that have any more room to grow there? Well, on the North American front in Travelocity we continue to believe that our the momentum is sustainable particularly the kind of championship platform that we’re building on. Of course as we get into next year there will be tougher comparisons because we in our North American business performed so strongly this year but we will keep plugging away at the things that we think differentiate us. The great supplier model, good pricing, fantastic marketing effectiveness and all built on a platform of customer championship and we do think that’s different than, and sustainably different than what our competitors are doing. And then just in terms of forecasts for the Airline Solutions business, I’d say that we’re pretty pleased with where the margins are now. And we’d like to sustain those for the longer term. The challenge will be that we’re operating in, that business is operating in an environment where, where spending is down, particularly in the US market. The good news is we’re seeing lots of growth on a global basis and we’re seeing lots of growth in terms of passengers boarded which drives a large part of the Airline Solutions business, the reservations or what we call SabreSonic part of that business. So I think we feel quite good about the growth in that business even in a fairly difficult environment. But, we’re going to; we’re going to work to sustain the margins that we see there today. Yes, a few questions. Have you made any announcements concerning potential head count reductions, especially in connection with the lastminute.com acquisition? On lastminute.com side, it’s part of our integration we talked about doing a couple of things. One is consolidating offices and secondly is bringing our G&A spend down as a percentage of total spend. We think there’s room for both. We did announce some possible consolidations in the UK earlier this year. And we’re working very diligently to make sure that we’ve got the right people in the right box. But on the G&A side one thing we talked about on our update on lastminute.com is we really want to reduce G&A spend after we do the right consolidation from a technical perspective to, to make things like hotel payments easier and the like. So we’re making sure that we pursue it in a very, in a very disciplined way. Would you expect that maybe in the early December call we’d get more details, or would it just be an ongoing effort? Absolutely. What you’ll find, you’ll continue to hear from us, is progress as we track towards realizing the synergies that we talked about when we made the acquisition and we’ll continue to be real transparent. The good news is we are ahead of schedule in most of the major areas. Things like rolling out merchant hotels, things like consolidating some offices. We are announcing the potential consolidation; things like ramping down brand spend for travelocity.co.uk we’ll continue to make sure we lay it out clearly how we’re progressing towards synergy rationalization. And I think what you can expect is that we’ll laid our progress and then we’ll provide you with proof points over say the next quarter or so, of our progress. And, and where we intend to go in terms of that integration. And then we’ll let you know as we get toward the end of that quarter how we’ve done versus that. I think we just, we feel very good about our progress so far there though. Okay. And Sam, do you have a particular time frame in mind or goal that you’d like to get another, a major sort of DCA type contract signed by? Well, of course we have our internal goals. I would expect that you’d see us making progress towards the end of this year or early next year. You’re, I’m sure aware of the timelines for the expiration of DCA 3 agreements and really those start in the, I guess it’s really the second quarter of next year; we start to see some of those deals expire. So, we’ve set our internal goals. We, I’m not here to make any commitments on that. We are being very, very patient to ensure that the types of deals that we strike with the airlines are; obviously we want them to be good for them and particularly in the US market where they’re having a difficult time but also good for agents, for the travel agent’s community. And one last question. The AirTran deal that you signed, do you see at any risk of this type of, I guess it would be the splintering of distribution with where Sabre or and/or Travelocity is left out of the distribution? Well, I think, first of all I would just say I think we’re in a very good position there in the sense that we do have the greatest distribution in the North American market. And therefore I think that places us in a good position. We also have a large percentage of corporations do their business through us. The majority of corporations do our business do their business through us. And so that puts us in a good position. I also would just say that even though we are seeing some of that splintering going on. If I were an airline I’d be participating in all of the GDSs. It’s a very efficient channel. Now, I’m not an airline, but I am biased, I suppose. So, but it that would be my view, that I think it’s I think it is it’s a very good place, high-yield place to distribute products. And I guess if I were stating a preference they’d be distributing through all GDSs. So while you might you might imagine that we’re sitting back saying this is great, this, all this has occurred with AirTran, we actually, we’d like to, we’d like to see these airlines distribute through all GDSs. Thank you. I’d like to ask a few but I’d like to just follow up on that last first. Which clearly AirTran transaction went against airlines using all GDSs, American has strongly indicated that they won’t use all GDSs either. Can you talk about assuming that this that this trend continues, what consolidation presumably world span seems to be the odd man out, what the consolidation might mean to you all? Well, I mean I, I’ll comment on consolidation, I guess. I, but less related to how the airlines are participating or strategizing. Those are really their strategies and their approaches, not mine. So again, they’re better to ask those questions about how they think about these things. If I were to talk more broadly about consolidation, I think in any market you see consolidation, you see more discipline. And I think that ends up being a good thing. But I would talk about consolidation separate of what we’ve seen with any airline actions. Okay. And in regard to, could you tell us or give us a rough idea of how much of the Travelocity incentives come from Sabre? Well, we won’t, we won’t get into too much detail there. But we do have, in the, we have laid out that in the 10-Q and I think it’s probably in the neighborhood of 30%. That’s, that’s what it seems. And in, well, you haven’t given any guidance, is there any supposition that in the attempt to be earnings neutral and reduce incentives that online travel agents might see any reduced incentives and what kind of effect that might have on Travelocity’s incentives? Well, we haven’t seen any indication of that thus far in the marketplace. And we set the incentives, the inner company incentives at what we believe is market. Switching, could you, on the hotel room nights or hotel inventory that you have compare your third quarter with your second quarter, what kind of sequential growth are you seeing? Okay. We didn’t break that out but what I will say is that room night growth just in North America, or, sorry, without lastminute.com, room night growth was up over 30%. So it was up in total for the quarter at 94%. And if you take out lastminute.com, it was still up north of 30%. We had a 40% roughly year-over-year growth last quarter, the second quarter compared to the year prior. And again this is north of 30%. About 33% actually. We haven’t given, haven’t broken out specific numbers. So it’s up 40% roughly in Q2 and then again north of 30% in this quarter. And the Internet travel, at least the numbers show that Travelocity was up about 10% and the industry was up about 16%. I guess the first question about that is are those numbers meaningful at all? If you’re talking about media metrics we’ve said over and over even comp score and the like that we don’t believe those accurately reflect true performance and we’ve now demonstrated that, I don’t know, six or seven quarters in a row where we have seen share gains versus our competitors. We’re very, I think smart about how we spend our money. And as a result, we’re not out there trying to maximize visitor growth, we’re out there trying to max customer acquisition and loyalty and revenue growth. And so we don’t believe nor have we believed in a long time that media metrics and comp score and the like are an accurate reflection of true underlying performance. Sure. We haven’t given conversion rates in a long time at Travelocity as you know and that’s partially because there’s so much noise in the numbers with things like robots and even for instance as we move somebody from buying a standalone air ticket and/or potentially a standalone hotel that would have been two transactions historically if we now sell them a total trip that’s one transaction so conversion goes down but obviously you’re much better off from a revenue perspective. So we haven’t broken out conversions. What I will say is that we are seeing more effective we are seeing conversion growth in our CRM campaigns so this is where we’re really talking to consumers with tailored offerings based on their origin city, their shopping behavior, their interests, and we are seeing those campaigns, we’re bringing some of them even directly to the website produce better results than we ever have. And thank you Mr. Millman. Next representing Lehman Brothers we go to the line of Scott Schneeberger. Please go ahead, sir. Good morning. I guess Michelle in your prepared remarks you had mentioned that obviously you’ve had some very strong bookings performance relative to peers and you mentioned that the marketing and advertising spend had been very reasonable for Travelocity to attain it. Could you just elaborate a little bit more? I guess what I’m looking at is how should we think about your marketing spend in future quarters? Well, we don’t give specific advertising expense on line item numbers and that’s obviously for competitive reasons amongst other reasons. But we did see North America revenue grow at more than five times the rate of North America advertising spend. And I will mention that number is even artificially, or it is suppressed by the fact that AOL and Yahoo! didn’t grow at nearly the rates of dot.com for us, Travelocity.com. So we do think that we have got an effective marketing mix going on and we certainly do intend in our drive to continue to improve our margins. We do intend to not have advertising expense grow at the rate of revenue growth going forward in future quarters as well. We should mention that, as we said earlier, that we are shifting, we are finding some offline vehicles to have a great ROI and so we are moving some more of our money more towards offline vehicles. Great. Thanks. And then I just have a broader question. With, lastminute closed and what with Zuji coming up in a few months, any comments on that, the probability of you attaining more ownership? And then I guess a broader picture, the acquisition outlook or the strategy that you have going forward? If you could just restate that. The situation with Zuji is as you know they own a put option so they have the ability sometime in the first quarter to put the put it to us. It’s a pre-negotiated price. So that decision’s entirely in their hands. The financial accounting decision is a little bit different and as they seek capital calls, we obviously intend to continue to fund, if our current partners choose not to and that could occur sometime in the fourth quarter if they choose not to then we would, we would bring the entire asset under our balance sheet and have a minority interest. So that could occur in the fourth quarter. In terms of the strategy we think it’s great to be a global player and we’re seeing that demonstrated even with our suppliers, so having the capability to be to drive, for instance, room night growth in Europe for IHG, is a really important part of our overall Intercontinental Hotel Group relationship. So we’re pleased. We clearly we are pleased with North America results. We clearly have a lot of work to do to successfully integrate lastminute.com and we’ll seek to do the exact same in Asia. And where we can share underlying technology, marketing, campaigns, and effectiveness, certainly global supply, we think that adds to the value proposition. And I think, I think actually with that, we are at the, we are at the top of the hour and so I’ll just emphasize how pleased we are with the performance of all of our businesses, in particular as compared to peers and we’ll look forward to talking with you soon. We thank you all for your participation. And thank you to our host panel and ladies and gentlemen, your host is making today’s conference available for digitized replay, it’s for two weeks starting at 12:30 pm central standard time November the 3rd all the way through 11:59 pm November the 17. To access AT&T’s executive replay service, please dial 800-475-6701 and at the voice prompt enter today’s conference ID of 799747. And that does conclude our earnings call for this third quarter. Thank you very much for your participation, as well as for using AT&T’s executive teleconference service. You may now disconnect. 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. 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EarningCall_233873

Welcome to the Foundry Networks Fourth Quarter 2005 Earnings Conference. Operator Instruction I would now like to turn the program over to Quinn Winn of Financial Dynamics, go ahead please. Thank you operator and good afternoon everyone. Thank you for joining us for the Foundry Networks Fourth Quarter 2005 Earnings Conference Call. I am joined today by Bobby Johnson, President and Chief Executive Officer; and Timothy Heffner, Chief Financial Officer at Foundry Networks. Earlier this afternoon the company issued a release reporting its fourth quarter financial results. This release can be accessed from the Investor Relation section of Foundary’s website at www.foundrynetworks.com. For reference we‘ve arranged for a taped replay of this call, which maybe accessed by phone. This replay will take effect approximately one half hour after the call concludes today and will available for seven days. The dialing access number for this replay is 402-220-2567. The call is also being webcast live with the web replay also available. These may both be accessed from the Investor Relations section at Foundry’s website. Before we begin, I would like to make a brief statement regarding forward-looking remarks. The call today contains forward-looking information regarding future events and the future financial performance of the company. We wish to caution you that such statements are just predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business. We refer you to the documents the company filed periodically with the SEC. Specifically the company’s recent quarterly report on Form 10-Q and Annual Report on Form 10-K for the year-ended December 31st 2004 as well as the Safe Harbor statement and the press release the company issued today. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company’s projections or forward-looking statements. Foundry assumes no obligation to revise any forward-looking information contained in today’s call. Now I would like to turn the call over to Bobby Johnson, President and CEO of Foundry Networks. Thank you Quinn. Good afternoon everyone. Turning first to the revenues for the fourth quarter of 2005 of $116.1 million, 9% sequential increase from $106.6 million in the September period and 11% increase over the last year’s $104.8 million fourth quarter results. We reported an operating profit of $26.7 million and a net income of $20.6 million. This represents a quarterly revenue record for Foundry Networks. Our book-to-bill ratio continues to be greater than the one during the quarter. There were so many successes that we experienced during the fourth quarter, I would like to review these beginning with our financial highlights. First, our 9% sequential revenue growth reflects strength across almost all geographies in the European markets. The US enterprise and Asian markets delivered robust growth in the fourth quarter with Japan representing approximately 12% of revenue. The fourth quarter results reflect investments made over the last several quarters particularly in our sales footprint and product portfolios. Second, revenue for the US Federal Government with strong even in the absence of US Federal budget. US federal represented 21% of total revenue in the fourth quarter. Fourth, we generated approximately $47 million in cash for the quarter, leaving us with $746 million in cash; this represents over $1 million in cash per employee and leaves us with significant growth and investment options for the future. Next, I would like to address five additional key product and operational highlights of the quarter. The first key product highlight in the quarter was strength and demand and shipment of our new flagship product line: The BIGIRON RX Series. The BIGIRON RX platform was announced in the second quarter of 2005 and began revenue shipments in the third quarter. Shipments in Q4 more than tripled over the third quarter. We have received great interest from such sectors like premier universities, key research labs, very large enterprises and many leading service providers. The second part of highlight of the quarter, we will start with file testing of our new NetIron router family: the NETIRON XMR series. The XMR is a complete product family of small, medium and large chassis family members. It has up to twice the switching and routing capacity of any other single MPLS router in the market. It sets new levels of price performance and scalability for both service providers and even large enterprises looking to deploy MPLS backbones and are interested into cost savings associated with long haul Ethernet infrastructures versus SONET infrastructures. The XMR series did receive orders last quarter and we began revenue shipments of the XMR in the first quarter of 2006. The third product highlighted the quarter was in our Layer 4-7 Traffic Management portfolio. We had several successful bidder files of new Layer 4-7 as it’s our Traffic Management module. It is now shipping in this calendar Q1 of ‘06 quarter for revenue. The fourth set of product highlights for Q4 ‘05 included a record number of wireless units, a record number of 10 Gigabit Ethernet port shipments, a record number of PoE port shipments and a record number of Gigabit Ethernet over copper port shipments. And the fifth operational highlights of the quarter was that we had 427 new customer wins during the quarter, which is our largest number of new customer wins in a single quarter. We now have a worldwide install base of nearly 9300 end-users. We are carefully implementing key product transitions and solutions that refreshes, every year, we introduce more new products than the prior year. Our R&D in intelligent investments are continually increasing and we are experiencing excellent reception for our new products. During the quarter, we generated approximately 80% of our revenues from the overall enterprise and cluster computing environments. We generated the remaining the 20% of our revenues for the worldwide service provider markets. I will now turn the call over to Timothy Heffner, our CFO. Thank you Bobby, and good afternoon everyone. I am pleased to present our financial results for the fourth quarter and the year-ended December 31st 2005. Foundry posted record quarterly revenue for the fourth quarter of 2005 of $116.1 million, that’s compared to $106.6 million in the third quarter of 2005, and $104.8 million in the fourth quarter of 2004. This was an increase of 9% and 11% respectively. We continue to generate a profit, posted an operating profit of $26.7 million, a net income of $20.6 million. Diluted earnings per share were $0.14 for the fourth quarter of 2005 compared to $0.11 per share in the third quarter and $0.12 per share in the fourth quarter of 2004. Our revenue for the year-ended December 31st 2005 was $403.9 million compared to $409.1 million for 2004. Net income for the full year of 2005 was $56 million or $0.39 per diluted share compared to $48 million or $0.34 per diluted share for 2004. During the fourth quarter of 2005, our Federal business grew slightly in absolute dollars representing 21% of total revenue compared to 22% in the previous quarter. Our America’s enterprise business represented 49% of total revenue. Our overall domestic revenue was 70% of our total business and our international business represented 30% of the total. This compares to 72% for domestic and 28% for international sales in the third quarter. Sales in Japan this quarter increased significantly representing 12% of total revenue. Our enterprise business was again our primary source of revenue. Enterprise customers accounted for approximately 80% of our total revenue for the fourth quarter. The revenues from our chassis-based products decreased slightly compared to the third quarter representing 69% of revenue in the fourth quarter of 2005. Our gross margins were 61.3% for the fourth quarter compared to 62% for the third quarter, a decline of 70 basis points. The product gross margins declined primarily due to product mix and an additional inventory reserve taken at year-end associated with product transition, which is running slightly ahead of plan. The service gross margins were of 300 basis points sequentially due to a benefit of the year-end reserve adjustments. Looking at operating expenses like: Research and Development was $12.2 million, which was nearly unchanged from the third quarter; R&D expenses represented 11% of revenue in the fourth quarter compared to 12% in the third quarter; Sales and marketing expenses was $25.6 million, representing 22% of total revenue in the current quarter, down slightly from $25.8 million in the third quarter. The decline was related primarily to lower marketing cost offset by increased headcount in the sales organization. In the fourth quarter of 2005 G&A spending was $7 million, down 26% from $9.6 million in the third quarter of 2005. The $2.5 million decrease was due to the one-time cross-license agreement with IBM, which impacted Q3. Foundry delivered $26.7 million or 23% operating margins and net income of $20.6 million in the fourth quarter of 2005. This compares to an operating margin of $18.3 million or 18% of revenue and net income of $16 million in the third quarter for 2005. Earnings per diluted share were $0.14 for the fourth quarter of 2005 compared to $0.11 for the prior quarter. Our tax rate for the quarter was 37% as compared to 31% in the third quarter of 2005. The increase was primarily due to our year-end adjusted of deferred tax assets. Our cash and investments at the end of Q4 totaled $746.4 million, which is an increase of $47.4 million from the third quarter. Year-over-year our cash balance grew $128.9 million. DSOs were 61 days down from 65 days in the third quarter. Our book-to-bill ratio was again greater than one. We ended the year with 737 employees, an increase of 27 people mostly in the sales organization and to a lesser degree Research and Development. With that I’ll now turn the call back to Bobby. Thank you Tom. On balance, we are pleased to be making progress as Foundry continues in its quest to be a total solutions provider for IP-centric enterprise and service provider environments. For the enterprise markets we offer wireless access routing LAN switching securities and Layer 4-7 traffic management solutions. With campus backbones workgroup, data center mobility and online applications. For the service provider markets we offer Metro, data center, core routing, access routing and web hosting solutions for emerging as well as existing infrastructures and providers. During the first quarter 2006 we’ve already begun shipping integrated SSL security features in our Layer 4-7 products and also we’ve begun revenue shipments of our first dedicated security products to enable new levels of innovative security and access protection for our customers. We have an installed base of approximately 9300 Gigabit and 10 Gigabit Ethernet customers around the world and it is estimated that we lead the 10 Gigabit Ethernet for Layer 3 market. Additionally, the largest consumers of Layer 4-7 switches are standardized on Foundry and we have among the largest installed base in Layer 4-7 switches. We’ve now concluded seven consecutive years of net profits and we are continuing to invest in Foundry. We’ve added a significant amount of headcount in the last 12 months and of course see 2006 as a continued investment year for Foundry. I would now like to turn the call over to the operator for questions and answers. Operator Instructions We will take our first question from the side of Mark Sue with RBC Capital Markets. Go ahead please. Thank you. Just on your guidance for the March quarter directionally how we should model the revenues, if you could just help us there first of all, Bobby? On this call, we are not giving guidance for Q1. Traditionally we have strengths in certain geographic areas and we have weaknesses in certain geographic areas. Additionally Q1 is going to be a little bit of an additive but also a transitional period for us since we ramp up the new XMR series. And we are looking at where all of the Federal budget dollars go. So we are not providing specific forward guidance for Q1 on this call. Maybe then if you can help us understand the level of topline growth that you might be planning for the full year of 2006 or maybe your estimates for the market growth for Layer 3 switching? And if you could just give some thoughts on industry comments? Well I think overall in the first quarter, you mean the first half of 2005, the LAN switching market basically took a breather. All LAN switching companies had some trouble a year ago, to this date I can’t put a very specific rocket or you know a rocket shot explanation of what exactly happened. So we are being a little bit cautious on that but overall in the second half of the year we saw Ethernet switching markets return for us, not only Q3 but obviously Q4 was very good. And we think that overall the economies are improving and in particular for our market sectors, and I think we have high hopes for the long term, for the SP market to return on this arena, specifically with the XMR series. Got it. And lastly Japan was leading by others but you had a good quarter there in Japan, maybe just some quick thoughts on Japan? We had a good quarter in Japan. There was a little bit of calling as looking into Q1, Q1 is traditionally a good quarter for us because it is their end of year quarter, their budgeting end of year quarter. But with some events in their NIKKEI, it provides a little bit of problem as for us of what happened over the last 1-2 weeks in Japanese economy. But overall I would say worldwide, we were feeling much better with this quarter than we felt a year ago. Thank you. We will take our next question comes from the side of Subrahmanyan Natarajan for Sanders Morris, go ahead please. Hi thanks. First, could you give us the split between LAN and Layer 4-7 and the split that you usually give us? Okay, and then just moving to gross margins, as some of the service provider products ramp and some of your new products ramp, can you just can talk about what you expect for gross margin in the March quarter, and just kind of the progress into 2006? Subu, this is Tim. Although our gross margin flipped slightly, we continue to believe that we can maintain our margins in the 60% to 65% range. We have the basic philosophy that we either are first to market or early to market, the new products which typically carry higher gross margins and as older products mature, we tend to see erosion on gross margins but the blended average should allow us to maintain our overall gross margin between 60 and 65. And final quick question on OpEx, as you see revenues, continued revenue growth opportunities in ’06, I think you made a comment talking about ’06 being a continued investment period. Should we see a similar kind of OpEx edition in ’06, as we saw in ’05 versus 2004? Well, I think, we do, we’ve not had a history of growing the infrastructure too far ahead of the topline. We will make the necessary investments to continue to grow the topline. But as we previously stated we believe we can maintain our operating margins between 20% and 25% though. You got to get a feel for where the operating expenses will fall. Thank you. We will now take our next question from the side of Tim Long with Banc Of America Securities, go ahead please. Good afternoon. This is Jeff Flubber calling in for Tim. Just to dig into Japan a little bit more, how much of the success that you saw in Japan this quarter was from new products and have you seen any change in spending behavior by the carriers? Well certainly we feel though we are having success in the service provider router market. We have a series of products that can be sold into the router and into the SP world. They are primarily the MGXs to 40Gs, the RXs, the IMRs and XMRs. If you take a look at all of that combined, we sold more routers into the service provider market last quarter than we’ve ever sold in a single quarter in our history. So, and Japan is one of our stronger SP market. So if you ask we think we are having a good success in the Japanese service provider market but I believe, I want to focus people there on the long-term, there will be some investments that we are making in the router market for the long-term to gain even greater foothold than we have previously. And then how much revenue did you recognize this quarter that came from deals originally scheduled to close last quarter, can you quantify that somehow? Well, couple of different things. I can’t answer exactly what you ask but I don’t event know if I have got all that data, so… …let me kind of give you the flavor. Two things, one is our book-to-bill continue to be greater than one it has for maybe infinity. So book-to-bill is greater than one and our federal business remained strong in Q4, not just in Q3. So and because of where we sell in Federal still a significant percentage of our orders come in March priority. There is different priority ratings but in general the federal team gets on average more priority on the manufacturing floor than many of our other sectors. So in other words coming out of Q4 is not a whole lot different than that coming out of Q3. Thanks. First just a tone of management thinking comment. The stock was indicating up quite a bit on the earnings release this afternoon and you just said you weren’t offering guidance that promptly sold-off. So I just want to get some clarity, first of all that you haven’t been offering guidance, so this is no new news and second the lack of guidance is not an indication of concern about the outlook for 1Q or beyond? I think, it’s always our objective to grow the topline quarter-over-quarter. We are affected by seasonality, federal budget, all kinds of things but we certainly have objective to continue and grow the business. If we look over last year, we haven’t provided guidance and have added $32 million a quarter in the last third quarters to the topline. And I just wanted to make sure that they have understood, that’s the stamp there. And second on, a more important question, can you go through where you are on your sales hiring, what you did in terms of hiring new staff in the fourth quarter for sales? How that staff – what the increase in the staff was is a percentage of staffing year-over-year for the full year and what’s your expectations are for additional sales hires as we go into ’06? Well, our objective is to continue to add sales because we are a direct sales moderator, a great touch model I would like to refer to ourselves. We don’t use distributors, so if our guys making to call or working with our partners, resellers of ours and so forth, making joint calls to make the end sale. So the way we look at it, the more feat of the street, the more we could affect the topline. The challenge is always finding qualified people, they are highly technical sales, just can’t take any salesperson, that person need to have an engineering background. And so we will continue to increase the heads as we go, year-over-year our total company is going from, its gone from 658 to 737 and…. Can you tell us what the least, just what the percentage change in the sales staffing was during last year or during the fourth quarter, quarter-to-quarter? Okay, I will give you a round number. I think the headcount increase in terms of quarter sales people it’s between 35% and 40% and it is our goal to at least do that this year. Thank you. Could you explain, just going back to the third quarter why there was a half a million-dollar reduction in the revenue numbers. Than what was reported in the SEC filings is different from (multiple speakers) quarters? Hi Gina, this is Mike Hybrid. So that was just a timing issue between September and October. So as we run into a project discount which we went back and allocated a portion of it to our partial shipment in September. So it's not a big deal its own course of business. No, it wasn’t a factor of falling into the quarter was a project that we shipped half of that in September, and other half in October but we normally take a project discount at the end. We went back and allocated half of that to the first half of the shipment. Yes hi, one question for Bobby and one question for Tim. First of all, can you comment about your trial activities with IMR and XMR and I think a quarter ago you mentioned you expect XMR to achieve volume shipment in 2Q or 3Q and given your experience so far do you think is that tracking according to plan? And the second question is regarding to your, if you have any guidance for option expense that you are starting fiscal ‘06 now so any comments will be helpful? Thanks. Okay, so I will take the first part. On IMR and XMR, both prospective customers, they are being bogged, and I would say worldwide the service providers: Backbone carriers, Metro carriers and even big enterprises and big government sectors. So right now interest in the XMR, which really is going to replace the IMR is at or near the top of our expectations, we went through nearly ten trials with the XMRs with lots of purchases, we still have trials, we have a lot of new trials starting and we did not ship the XMR in calendar Q4 of ’05 for revenue. But we have already begun revenue shipments of the XMR in January of ‘06. So we are in hard-collecting revenue on XMRs but like the carrier market of the past we expect it to be a little bit up lumpy, so we will expect build-out some trials and some trails will basically bring the result quickly and some will go on for extended periods of time. But right now, I am very pleased with the XMR progress and overall, I would want to caution people that I believe the XMR is really a long-term 18 to 24-month ramp but I am happy with where we are already. Okay, now this is Tim. On the option expensing, you know I am sure the companies are – they are experiencing just warming up to it now because its gets starting January 1, but the early estimates we didn’t come with it. We believe it will be somewhere between $5 and $6 million charge per quarter for the options that are out there. Now we’ll know more later this quarter as we refine those numbers but that’s my best guess at the moment. Thank you. Two quick questions for you Tim, and then I want to go back to Bobby. First of all you made reference to an inventory reserve that was taken as one of the reasons for the decline in product gross margins. Can you specify what that was, if I look at the cash flow statement I just see a change of just over $3 million from the third quarter to the fourth quarter, is it all, is that what it is? We did $3 million provision for the quarter and we did $1.5 million write-off, so the net increase in the reserves was $1.5 million. Okay and also on the international. For the year what was the percentage in 2005 versus 2004 do you have that number? Okay and Bobby if I can come back to you. I just like to ask you if you could comment at all or give us your views on what the current dynamics are in the service provider market that might help to improve the overall growth outlook or opportunities whether you see anything in particular that you would care to highlight on the service provider front? Okay I think there are several different aspects of the service provider market and believe me optimistic long-term. One is obviously the XMRs received good acceptance already. Overall, there is many service providers whether they will be traditional which we call carriers or which we call ISPs or metro providers that are very open to long haul Gigabit and 10 Gigabit Ethernet replacing on it because of really cost, price to them so the account for equipment purchases are substantially less. Also the rollout of worldwide Metro deployments, which has been going on for years but it seems to be gaining steam and there is the whole triple play aspect that is voice, video and data, emerging service providers in that arena. So you’ve got new emerging service providers, you have a little bit of a rebirth in some of the hosting and data center concepts, you’ve got traditional carriers, SAN this Ethernet stuff it was actually okay after all, the SONET stuff maybe seen this day. And for those people some convergence but all of that is good for Foundry because we saw more performance, more scalability and up to 1/10th the price, a big in SONET-oriented routers. And we’re out proving that in many of the world’s toughest environments as we speak. Well that’s option expensing, its going to jump around, so you know if you exclude the option expensing we should be in the 35% to 37% range. Okay great. Bobby, could you also talk about your outlook for the government of vertical I know in the past you have talked about its lumpy but over the last couple of quarters seems to be pretty stable or could you give us an update on that? After really, you know Q1 of last year, we are seeing federal returns of 15% to 22% or so of our revenues. The last two quarters I believe its covered 20% to 22% of revenues. So overall Foundry’s goal is to keep federal strong, grow federal but also to currently grow the diversity of our prospects in install base beyond federal. So we would like to get more vertical and geographic market diversity but not at the expense of not going federal. So we are going to try to grow across the board. Okay. Great and back to Japan, sort of my rough math indicated that sales in Japan in absolute dollars increase over the $5 million, is that in a right ballpark? And I was also wondering do you feel that the very strong performance in Japan maybe sustainable and perhaps should accelerate this quarter because of seasonality? Well, one were to hope for all that but right now we have some shakiness last week or two in the Nikkei and we will be a little bit precautious but yes we are experiencing good demand in the Japanese market. And I don’t know if we will accelerate because we did have particularly good growth similarly to what you pointed out between Q3 and Q4. We are still expecting Japan to be probably our premier international site and certainly our premier Asian circle. Good after this is Vancouver calling in for Tal. I just wonder if you can discuss the trends in the European business, you mentioned that Asia was strong, Japan recovered well and I was just wondering if you could talk about Europe and also if you can help us understand the seasonality in the US business on the enterprise side, if we exempt the Federal business, what has it typically declined or has it always grown in the March quarter, if you can help us there? And give us perhaps the impact of stock options if they were expensed this quarter? Thank you. Europe grew for us throughout the year. So we are adding as I said we are trying to get more diversity in not just vertical but geographic coverage so from Q1 to Q4 Europe was up 20% or so. But obviously we would like to continue to grow out and have plans to do that. The US economy minus Federal always seems to be unpredictable in Q1. We always come off with a very big Q4 and we run into Q1 and that depends. So I would say right now our note of caution a little bit will be on US enterprise. Okay and then on the stock option expense, we’re still going through analysis than what the appropriate measurement is like Shoulders, one of the Matrix model and so forth but our early estimates as I said earlier will be between $5 and $6 millions per quarter? Thanks, if I can just have a quick follow-up on the end, just putting the math on the business in Asia Pacific, and just wondering if you can give us some color on maybe the percent change in revenue during the quarter? And you didn’t mention Europe as a percentage of revenue, did it dip below 10% or you just didn’t mention it because it didn’t perform as well as you hoped in December? Thanks. We’ve not historically given out that level of detail for Europe. We gave out Japan because if you ship to any one specific customer or country that’s greater than 10% of your total revenues you need to call it out. And since Europe and a number of countries we don’t call it out, directionally it’s up quarter-over-quarter. Good afternoon. Bobby, I believe you said that you exited the forth quarter in similar fashion to the third quarter meaning possibly that you exited with some pretty sizable backlog. You talked a little bit in terms of the linearity, which you saw throughout the December quarter and then particularly or specifically I guess Extreme noted that, December had decelerated, can you talk about what your December looked like? Yes so first of all there, the original part of the conversation was about Federal and priority yield each other. So if we look at the percentage of revenue, the Federal quarter-to-quarter was very similar. Secondly, more specifically to your question, overall we were pleased with not just Q4 but every month within the quarter. And we always did a little bit of recalibration in January because we take a week and held a worldwide sales meeting, and so we are recalibrating as we’ve just finished that. If I could add just a slight bit more color on the quarter, this quarter we saw more linearity from month to month than we have in recent quarters and that makes it easier to run the business? Thanks a lot. Question, you said that the RX tripled quarter-over-quarter, can you tell us how many months you shipped last quarter and what the growth rate would have been had you shipped for the full quarter last quarter? The RX began shipping in July in Q3, it shipped all three months in calendar Q3 and shipped for all three months in calendar Q4. Okay. And then on Japan the strength there is a carrier or enterprise and you think if you have taken share in the carrier space in Japan? I think we have pretty good strength in all sectors in Japan. On your second point I think we did well in service providers in Japan, we historically have done well. There is no single quarter can make a trend in that because we have customers that do very large build ups so we have these bubbles when they are purchasing for very large Backbone or Metro build out, they can bubble up. And so what they’ll have to do is take a look at say the next quarter eight quarters to really say we are taking share. Okay and the trend in the Federal business, the positive trend, do you think that last quarter was more backend loaded and so you saw a better quarter this quarter or do you think it’s really organic streamed products that you are associated with that are helping you grow faster than you have on the last several quarters? I’m not quite sure I understood all aspects of it but I would say that overall we’re getting good repeat business, we’re are getting new wins, we’re getting diversity, you know within federal, and so that helped us in Q4 as I said even in the lack of a Federal budget. So we were pleased with what happened with Federal in Q4. On the expense side you guys have done a very good job kind of maintaining your expenses here, you have revenues go up obviously in the quarter sequentially and yet your expenses is, kind of total OpEx came down, is that a trend that can continue or at some point you will have to reinvest more dollars? Well we will always be reinvesting dollars its just a matter of the magnitude of certain bigger events that we do throughout the year. Also, so we do have swings in discretionary budget such as advertising from time to time when we have very big pressures concentrated in the particular quarter over rollout that’s under. So I think you will see still some swings quarter to quarter but we should be increasing our overall investment throughout the year. Okay now a follow-up, Tim, you alluded to little bit earlier on the gross margin, again you had record revenues in gross margins tick down a little bit, could you just give the more clarity on that? Sure we took a little additional charge for the older product line because the newer products are ramping up a little bit slightly faster than we originally anticipated so we just want to make sure that we don’t get caught with old inventory but there was little bit of product mix in terms of cyclic versus chassis, and a little bit of additions to the reserve. I wanted to also clarify that on the quarter-over-quarter expenses and actually if we exclude the one-time charge for cross-license agreement we did with IBM in Q3, the quarter to quarter they are almost exactly the same, we didn’t – R&D stayed the same, sales and marketing remained the same, and G&A would remain the same excluding that cross-license. Thank you, we’ll now take our next question from the side of Matthew Robinson with Ferries Baker and Watts, go ahead please Actually this Mark Donahue for Math, with the XMR release, just one question is there any strategic customers driving the efforts in that products? Well, there is certainly everyone strategic at this stage early in the product cycle. There is nothing that I can publicly disclose at the moment. Thanks this is actually Priya Parasuraman for Bill, just one quick question as you look at your investments for ’06, how do you anticipate that would breakout between hiring new sales people and investing in R&D? We’ll continue to invest in both but obviously when you do have products and you are trying to ramp revenue and market share the larger percentage of investment will go to sales and marketing activity. Hi, this is actually Matt Schimmel for Wojtek. Just couple of quick questions, first of all you are looking at your sales and marketing expenses as of the course of the year, it actually looks pretty much flattish except for the June quarter which is your big tradeshow quarter, can you explain how did that while adding a lot of people? Okay. Should I assume that in the December quarter you did payout on your accelerators so that expensing comes on a little bit for the March quarter? Certainly we tend to indeed pay our accelerators at the end of the year especially when you have a record revenue quarter there were indeed accelerators. I don’t have all the calculations in front of me but there are new sales people that have started post December that will be in the expense line for sales and marketing in Q1 and their contribution in Q1 will be marginal as you are getting ramped. So how do you think about your investment in sales and marking then? Are you trying to manage the dollar amount or a percentage of sales or. I am trying to make sure that we build federal re-brand, we treat our existing customers well and we gained new prospects, and getting new prospects is a combination of both hiring and promotional activities, and we do a continual month by month look and planning associated with the trade-offs between the two. So it wasn’t planned to be spend as a percentage of revenue, if it turned out that way that’s okay but it was really looked at on a virtually month-by-month basis what were the best activities we are pursuing at that moment for what we could see for the next 30 to 90 days. I don’t know if you are always paying attention to the percentage of revenue at sales and marketing. We’re just trying to do the right thing at the right time. Thank you, we’ll now take our next question from the side of Stephen Kamman with CIBC World Markets, go ahead please. Hi this is Lucas Bianchi for Christin. I was wondering if you could somehow quantify whether most of the recent increases in revenue have come from new sales people or new products and maybe one way to get there is if you can kind of describe to us what has occurred with sales people that has been there over a year in terms of absolute sales level? Oh I think the answer is yes. Part of any investment strategy is to get return on that, we certainly wouldn’t have the sales headcount today, I must have filled the – the sufficient number of them were indeed adding to topline, and secondly part of the reason is having for everybody is the new product cycles. So in terms of sales people who have been there over a year, could you quantify what kind of increased sales per salesperson that would be or that have been? I am not tracking it with that level or that specific view because when you take a salesperson’s territory, sometimes you are splitting their territory. So sometimes a person can deliver a last year-over-year but you still feel good about them because you took so much accounts wherein you give to some new guy. So I’m looking at it a little bit more strategically than that focus. Thank you, we are out of time for questions. I will now turn the call back to Ms. Winn for any closing remarks. Well I want to thank everybody for joining. I want to remind everybody that indeed I think our new products are gaining traction. We are gaining traction in our traditional markets and I think we are gaining traction in new revitalized adjacent markets. I’m happy with the progress of our new sales hires. I am happy with the progress of hiring on the sales front. And obviously in this year I believe ‘06 will be an investment year very similar to ‘05. Right now Federal appears to be doing much better compared to Q1 of last year and Federal basically did fairly well as 27% in Q3 and Q4. And I would say right now our level of dual activity and level of interest at Foundry remains solid. Once again I would like thank everybody for joining us this afternoon. Thank you.

EarningCall_233874

Here’s the entire text of the Q&A from AsiaInfo Holdings’ (ticker: ASIA) 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. Okay, the impairment charge including the goodwill impairment charge and also the intangible assets we sold for the acquired businesses and also the net assets generated from these businesses during the past two years. No. The impairment, the annual impairment will apply to all of the acquisitions we did before including the telecom business we've acquired from Dokon and Bounsen and also acquired from the Pacific for the HR and the BI businesses and also for Lenovo IT Services we acquired from the Lenovo. Including all the things and some of the businesses may not have the impairment charges because they have showed a very good business growth in the past year already and some of the newly acquired businesses probably will have some impairment charges because we are restructuring the business and disclosed some of them in order to focus our core business in line with our strategy. I see and then Steve, you know, after this fourth quarter you kind of mentioned you are quite confident or optimistic with growth in 2006. You know, in terms of the growth prospect, can you give us a little more detail, what you have in mind? Well, after the restructuring we are mostly left with our telecom business and the security business. For the telecom business we expect to grow roughly 8% to 10% in 2006 compared with 2005. And for our security business we are expecting a 25% to 30% growth. So with this number what would be the 2005 base number because you never really split out what's the revenue for the security business? No, the rest are the business where one part is the one we sold. The HR and some other revenues were related to the business that we have for consulting for the government. Yes, maybe I just ask one follow up question. Eileen, you just mentioned you have two debts, which was fully provided in earlier quarters and in the second-- in the third quarter you collected. How much is that amount? No, our debit provision policy is any accounts receivables over 365 days we'll do the 100% provision, so this kind projects we are within the provision previously, not necessarily last quarter, but gradually went into aging up to 360 days. Right, so in a sense if this was not-- I mean suppose if you have not received this $3 or $4 million, which means your G&A will be $3 or $4 million higher? No, no, no. Because the better provision is ongoing monthly and also, the collections is also ongoing. We have bad debt provision in and we have also the collection. It's a combined numbers. Yes, our G&A showed a little bit decrease-- sorry, our G&A did show increase because for last Q3 of last year we did not have the normal AsiaInfo in yet. Operator Instructions And there are no further questions at this time, so I will turn things back over to our speakers for any additional or closing remarks. This is Steve. Okay and thank you for joining us today. If you have any further questions please do not hesitate to contact myself, Ying or any of our investor relations representatives. Thank you. 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_233875

Here’s the entire text of the Q&A from Gateway’s (ticker: GTW) 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. Okay. Thank you, sir. Ladies and gentlemen on the phones, if you’d like to ask a question at this time, please key star then one on your touchtone phone. All questions will be taken in the order in which they are received. Once again, for a comment or a question, it’s star, then one. Q - David Bailey: Yes. Thank you very much. Your retail mix was up only a little bit compared to last quarter, yet your gross margin was down about 170 basis points. Why was it down so much? And what does this mean for gross margin in the retail heavy fourth quarter? A - John Goldsberry: Okay. So the sequential decline in gross margin percentage was in part due to the increase in retail, which of course has lower margins, but it also reflects declines in our gross margins in professional, and to a lesser extent in retail. The professional business remains a very, very competitive business. We believe that our margins in professional will remain low for some period of time. As concerns that the smaller decline that we saw in retail margins, honestly, I’m not concerned about that. We think those will bounce back. I guess what was not mentioned was our actual margins in direct improved sequentially. So that business is actually showing better margins. Q - David Bailey: So can you give us some idea of where you directionally, where you think it’s going to go in the fourth quarter given all these factors? A - John Goldsberry: Well, needless to say, given the likely strength of the retail business in Q4, I would expect mix to drive that margin percentage down further. It is also possible that we could see some modest further decline in margin in professional. Q - Rebecca Runkle: Good afternoon. Thanks. Just a couple of questions. First, John, just a clarification. The $1 million gain that you alluded to during your discussion, I’m assuming that that’s included in the $0.04, and if we back that out it’s closer to $0.03 from an operating standpoint? Q - Rebecca Runkle: Okay. And then I want to try to get my arms around some of what’s happening in the direct business. You just mentioned that margins went up in the direct business and that was some good news on the margin front; yet if we just looked at pricing, that was down significantly sequentially. So can you just provide more color in terms of what you’re seeing on the pricing front and then what drove the margin improvement? A - Wayne Inouye: How’s it going? I think if you look at the marketplace today, you’ll see that there’s been a fairly significant shift in the way that brands are now attacking or going after business in the direct market. I’ve said this for a long time. It’s impossible to compete with retailers in the direct space in the popular price segments. So in terms of direct in consumer space, if you want to make any money at all, you really have to sell things to consumer that retailers do not provide. And I believe that you’ll see most advertisements in the marketplace today reflect that, advertising higher end products, more feature-rich and with a focus on higher price notebooks. So, and I believe that will be a trend in the direct space. The area you can make money in the direct space, I believe, is small business. There are still issues that we have internally to focus on that, but I believe that is still a market to target. A - Wayne Inouye: We see them from time to time. They do not represent a big threat to us at this point. But we certainly are not ignoring them. Q - Derek Winder: Hi. Three financial questions. The gross interest expense for the quarter, the depreciation and amortization for the quarter, and then the CapEx for the quarter, and the outlook for the calendar year ’05 and ’06 on CapEx. A - John Goldsberry: Bear with me a second. Okay. Focusing on, I believe your first question was interest expense. Interest expense was 1.6 million in both Q3 as well as in Q2. A - John Goldsberry: Okay. Depreciation and amortization, as you probably already know, was 14.7 in Q2 but declined to 10.5 in Q3. Q - Derek Winder: Okay. And then CapEx, what was it for the quarter, and then the outlook for calendar year ’05 and ’06? A - John Goldsberry: Okay. CapEx increased from 4.8 to 8.2. And I guess we’re going to refrain from making a projection of that figure for Q4 or for next year. Q - Charles Wolf: You’ve reported it in every past quarter, so I -- but I couldn’t find it in the release. A - Wayne Inouye: We refrained from publishing it this quarter. I can tell you that the revenue on what we call non-PC products, beyond the box products, on a sequential basis grew about 10.2 percent, and on a year-over-year basis it’s up close to 6 percent. Q - Michael: Hi, there. I was just trying to understand a little bit more the plans to invest in this plant in the U.S. Two quick questions on that. One, why build in the U.S. when you’re right next door to a great cheap labor location? And two, you’re talking about you’re building this to serve the professional segment, which you pointed out during your presentation was a little margin and will continue to be a little margin segment in the foreseeable future. So why focus on that -- I guess the question is, why focus on that segment and then why build the plant when you have a cheaper alternative just a few miles down the road? A - Wayne Inouye: Yes. We’re committed to a manufacturing facility. But it’s a lot different than spending money to build a facility. A - Wayne Inouye: One. Number two, in terms of cheap labor, the labor rates in Mexico are less expensive. We have had difficulties managing the quality of the product coming out of Mexico. And we believe that there’s zero tolerance for product quality issues in the professional sector. So we have taken essentially a zero tolerance policy on quality. Right now, with a great deal of supervision, we’re getting it out of Mexico. We believe long term we are better off managing this ourselves. If you look at the component of labor of any products that we sell now, it’s a relatively small part of the product. And we believe that the quality issues offsetting service costs will far outweigh a location in the United States. We also believe the supply chain is much better positioned in the U.S. versus Mexico. Q - Les Santiago: Hello. Could you give me some more color on the outlook for the direct segment? I mean, do you expect margins to continue going up next quarter? Is this sustainable, this trend that you saw this quarter? And when exactly do you expect to see small business kind of kick in as far as the segment is concerned? A - Wayne Inouye: A couple of things. On direct, our focus is, one, on a year-over-year basis, we’re still down. We believe that it will take some time to get back to former levels in the direct business. But our real focus in the direct market is to figure out how to make money, or not lose money in the direct segment. And I believe we’re very, very close to doing that. So really our focus is not so much revenue but it is on the overall operations and profit that we can generate in the direct segments. Q - Les Santiago: Okay. And then as far as SNB is concerned, you don’t expect that to become a big driver in the near term? It will take a few quarters? A - Wayne Inouye: Yes. Well, the end part is not something that we’re focused on through our direct channels; it’s really the yes part. You know, it’s really 100 case and below. We do believe it will take some time to ramp that business. Q - Les Santiago: Okay. And then as far as your SG&A expenses are concerned, where exactly do you see further potential reductions? I mean, you’re running very, very lean right now. And I’m just wondering is there potential for further reductions, or are you pretty much done as far as that SG&A line is concerned? A - Wayne Inouye: I’ll let John respond to most of that. But I do believe there are still opportunities for us as a company. And more importantly, I believe that we can sell a whole lot more product with the number of people we have in place. The math ratios would indicate that we can drive our SG&A down as a percentage of our business considerably from the point we are today. But I’ll let John answer the -- answer your questions direct. A - John Goldsberry: Yes. If you look at the SG&A expense, it declined for a couple of reasons, but it was mostly in corporate G&A. BU expenses which are largely selling expenses were flat or even up. Our corporate G&A expenses declined for a variety of reasons including lower headcount expense, lower deferred compensation expense, lower legal expenses, relocation costs and various other items. There’s no question in my mind that we can continue to drive our corporate G&A expense down. Some of those things, to be honest, will happen quite naturally. If you look, for example, at our deferred compensation expense, which largely has to do with stock that was granted to eMachines executives in the context of the merger; that has been vesting over time, and so we’ve been taking a deferred comp expense. And that will largely be behind us by the end of this year. But in addition to that, which will happen naturally, we’re certainly committed to driving our SG&A expense down further, and believe there are opportunities to do so. Q - Charles Wolf: Yes. I’m trying to understand this Microsoft arrangement. As I understand, you have to spend the money in order to get the reimbursement. But why do you have a separate line item for Microsoft if indeed you’re spending that money on whatever, SG&A? A - John Goldsberry: Well, let me attempt an explanation. We negotiated the Microsoft agreement as a strategic alliance, market development type agreement. But it was negotiated in the context of legal claims that we had in connection with past activity. The agreement as a result is a strategic alliance agreement, but it’s one that combines elements both of a strategic alliance agreement as well as a settlement of claims. The net result is in today’s accounting environment, we’re no longer allowed to make a judgment call as to how to apportion it between these two different aspects. And therefore, unfortunately, we need to leave it to investors to make their own assessment as to how to apportion the agreement between the two different characteristics. But I guess what I would tell you is, one, as you make your own assessment, you got to keep in mind that this agreement is a strategic alliance market development type agreement despite also including a settlement of claims element. That’s one. Two, we certainly continue to get support from Microsoft as has been mentioned at other times in this conference call in terms support for our advertising campaign for the tablet. Okay. And then lastly, it’s cash, which we’re certainly delighted to get. Q - Michael DelBono: Hi. I had another question, please. You said during the call at one point we’re one of the lowest cost providers. And – other you’ve issued. Would you be willing to help us understand a little bit by segment how your costs would compare to, say, an HP, or by product line? I don’t know. Whatever. A - John Goldsberry: I know one thing certainly, what you can very easily do is look at our SG&A expense as a percentage of revenue and compare that to HP’s documents. That’s obviously only one component of the overall cost comparison, but it certainly is an important one. Okay. Thank you, sir. Ladies and gentlemen, if there are no further questions, I’d like to turn the conference back to Ms. Marlys Johnson. Thank you, Rob, and thank you everyone for joining us today. A replay of this conference call will be available on the home page of the www.gateway.com website for 24 hours, and thereafter archived on the investor relations web pages. There will be a telephonic playback of this conference call beginning tonight at 7:30 p.m. Eastern time and running until midnight Eastern Time on Sunday, October 30th. That number is 617-801-6888, and the pass code is 56128850. Have a good evening. Okay. Thank you, ma'am. And thank you again ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines now at any time. 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_233876

Here’s the entire text of the Q&A from Xcel Energy’s (ticker: XEL) 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. Hi. I was just was wondering, you obviously are anticipating not so great earnings in the fourth quarter. Is this mostly stemming from how your O & M or there are other issues like tax rates and things like that? Well, part of it is when you compare it to where we were in the fourth quarter of 2004, we have recognized $0.08 in tax benefits. We don't anticipate doing that in this last quarter of 2005. O & M trends will roughly continue at the levels we have seen. Short-term wholesale margins will be less than what we saw last year. All of those things contribute to our estimate that will be in the lower half of earnings guidance range, Daniele. Okay. Just one quick one, you mentioned that you are going to offer a sharing mechanism for wholesale sales. Could you tell us what is a normal contribution to earnings for wholesale sales? That you are going to be offering as sharing? Well, we have the overall earnings in the press release, Daniele, and for the full nine months, it's roughly around $60 million. The lion's share of that is related to the NSP territories. So the sharing mechanism will greatly affect the lion's share of those margins. Ben, this is in reference to '06 and if you can just help me out with my analysis, I might have something, if there's a rationale behind it. As I look at it, in your assumptions, we are expecting a shortfall from the short-term wholesale is 15 to 30, so if I take the midpoint, $22 million or so. And then $40 million in higher depreciation if I'm right, if you take out the $60 million. So that's about $62 million. And then there's about $10 million to $15 million of higher interest expense that gets to you $75 million and then, of course, negate the AFUDC by 10, so back to kind of like the 60, 65. So if I'm saying to myself and I know Merc added and all that but if I'm saying to myself that the rate cases have to contribute something in the $80 million to $90 million dollar revenue line item, for next year, all the rate cases combined, am I in the right ballpark, or am I missing something? For the earnings to show up higher. I just wanted to see if I'm doing something wrong in my math from what you have provided. Well, the cost increases you talked about, many of those costs will be included. The increases will be included in the rate case filings, I think you picked up on that. I think Ashar, at this point I don't want to handicap what is in our guidance range. I don't think that's probably what we should be doing while we're in the middle of rate cases. I suggest that what you do is you should look at where we have been earning on we have that in some of our investors relations material and one of the appendixes, and just draw your own conclusions based upon the ROEs that we are requesting. Hi, guys. Just a quick question on taxes. What is your expected effective tax rate for 2006, and I'm sorry if I somehow forgotten about this research tax pay if you could just explain how much that is and what that is related to? Well, to answer the first part of your question, the assumption that the effective tax rate will be 27% to 29%, Paul, the research and the experimentation tax credits are credits based upon a portion of the capital you spend on qualified capital expenditures. It can range from planned improvements to in some cases, even software. It really just depends, but it's a fairly elaborate process to quantify the amount you spent and then you get a piece of that through the crediting process. Those research and experimentation credits that we picked up in the third quarter equalled about $3.3 million, and they related to the '03 and '04 calendar years. Does that account for the other, I guess it would be $7.7 million? Could you go into that a little bit? It accounts for, I think the exact number, Elizabeth, is $6.6 million and that, typically, you could only carry back losses two years, but there are some exclusions for expenditures made that are nuclear related that allow to you carry it back up to ten years. We did the work this year and we were able to take the deduction and hence the $6.6 million I mentioned. Okay. And just a quick follow-up on that. Or, did all the tax credits, are they all at the utility? You mentioned there's this benefit or timing difference at the parent, which accounted for the positive swing at the parent. Is any of it showing up at the parent company or is that something else that's going on there. No, I think most of that, I think all of it, of the $0.03 that I referred to is at the operating utilities. What's happening at the holding company is the interim tax accounting that we did it to make sure that our effective tax rate for the quarter and the nine months approximates where we think we will be for the full year. Good morning. Ben, could you remind me again, if the FASB rule is implemented beyond certain tax issues, if it was implemented today, would you meet the probability threshold, or is it likely that you would not meet the probability threshold? Well, I mean, again, I don't know what's, where the FASB is ultimately going to come out because of the amount of opposition we saw but, if we were talking about this last quarter, I would have told you that it was unlikely that we would meet the FASB standard as the exposure draft discussed, and what that meant, David, is, we would not be able to record tax benefits going forward and that you would have to reverse out the benefits you recognized previously. You basically need a should opinion from a law firm, in our understanding, of what the exposure draft suggested, and you probably know, getting a should opinion from a law firm is extremely difficult. But, again, there was more than 100, I think the number was like 110 comments on this exposure draft. They were almost all opposing the exposure draft. I think we'll see some significant changes, but we'll have to wait and see. Ben, why the Merc, if I'm looking at your new numbers, the significant changes been in the Merck spending that's going down '06 versus your previous number at least from the Merrill Lynch conference page I have. Can you tell me why that difference occurred is happening? Some of it is timing, Ashar. I would have to look at some of the details. We were able to actually buy some secondary markets and that sort of thing that might have helped that. But the bottom line is most of that will just be timing. Yes. Could you comment a bit about the coal rail supply situation as you are going into winter and the wholesale power market situation out your way? Let me answer the first part of your question. Since May, and that's really when these rail problems surfaced for us, we have been receiving our nominations probably at the 80% to 85% level. So we have been mitigating the reduced deliveries within our operating plants, switching fuels where possible, doing some other things to make sure our coal piles are acceptable levels. Those levels are currently across the system, they average in the low to mid-20s. We ultimately would like to see that being the 30-day level. Now, as you go into the fall, we typically take down some of our coal plants for routine maintenance. That should give us an opportunity to increase those coal levels to the 30-day level where we typically like them to be. But we're going to keep watching it. It can change week-to-week, and overall, it's been at that 80% to 85% delivery level, as I mentioned. The second part of your question was wholesale margins? Are you still there, John? It has to do with the power prices and the given coal and gas situation, just what is the general markets on power that may be selling into that. I think, you know the notion on the amount of power prices has increased this year. We actually think it will increase next year, but we have seen a compression on the sparks spreads which is probably more important. We see, again, we make most of our margins in the Miso region. And we have seen with the new market rules, the evolving cost allocations, with the compressed spark spreads we see a decline in margins next year and for the balance of this year. Does that answer your question, John? Good morning, how are you? Could you expand a little bit on your O & M increases? I guess you are guiding 3% to 4%. I missed what the reasons were and I guess you kind of mentioned that they are going to, these increases are going to be somewhat offset by the coming rate cases and what you are going to ask for them. I guess one concern I have is how would it be effective with the timing of the test years and so forth. I guess Minnesota is forward test year and Colorado has it get historic, but that will be in '06. So in effect you would kind of take care of the high increases you will see in '06. Well, you are right, Minnesota is a forward test year. North Dakota is a forward test year. Wisconsin is forward test year. Colorado is historically an historic test year. We are looking at the potential when we file in the spring of this year, to look forward or to at least use a lot of knowns or measurables. So you potentially do have a good portion of those increased expenses picked up through the rate filings that I mentioned. If you stick with an historical test year, and you can get some known immeasurables, the vast majority of those expenses get picked up. If you can it and you get more of an historical approach, then there's some slippage there. Now, can you, is this also going to be sort of an ongoing O & M rate or going into like '07, '08, how should we think about O & M growth? Well, some of these that are pushing our expenses up are things like pension, medical, post-retiree benefits, those things don't turn around on a dime. We will continue to look at our programs and look for opportunities to reduce those costs, but I don't see a silver bullet for those kinds of expenses. I think if you, our expenses have increased in the last few years. But I think if you put it in perspective, we still compare very favorably to our peers. Our overall energy prices have, again, are also very favorable to our peers. So, we have been investing not only in capital, and you have seen that and that was part of the build of the core strategy but it's necessary to make sure that we are running a good reliable, efficient system, and we are going to get, hopefully good rate relief on that and I anticipate that we will, and that's just part of running, I think, a good system but that doesn't mean we don't look for cost takeout opportunities, regularly. Yes. Just following up on your fourth quarter comments. I know you mentioned higher O & M expenses it just seems even notwithstanding a big tax benefit contribution last year, you did have mild weather last year. You had a refueling outage, you had the accruals of the FTS fuel case. It just seems like you are looking for a fairly significant decline kind of embedded in your guidance comments. I'm just wondering if there's anything else that we ought to be thinking about in terms of the fourth quarter number. I don't think anything I haven't mentioned. O & M, we will continue to see pressure there. We talked about some of the reasons. I mentioned the charitable contribution of $5 million we made, some of the increases in O & M expenses related to bad debt and legal accruals and that sort of thing. Depreciation continues to tick up. We do anticipate the short-term margins will be low in this last quarter. And, again, Elizabeth, I know you have mentioned it, but we won't have the tax benefits in the fourth quarter of this year that we enjoyed last year. So I think that makes the, that was the reason why we said we would end up in the lower half of our range. Okay. If I could ask just one other question. On the TRB situation, other than the fact that it might have cost you some opportunities on the short-term wholesale side, was there any financial impact in the quarter in terms of fuel expense, etc? Well, indirectly, Elizabeth, and some increased working capital needs but the fuel expenses, we have good recovery mechanisms for that. It probably has also impacted to some degree our ability to earn at the upper limit our ECA mechanism in Colorado. Thanks very much. Coming back to the bad debt expense issue, I was just wondering if you might be able to talk a little bit more about what you are assuming for '06, where in particular it might be hurting you, and if there's any regulatory relief? The fact that we have forward tests here creates the possible for regulatory relief in our bad debt expense. We, at this point, think that bad debt expense, the upward trend that we saw this year, and the levels we saw this year will probably be about the levels we see next year as well. I think specifically, if you look at where we've seen some issues this year in Colorado, there, I think of all of our territories, that's probably the territory that has seen the most economic slowdown. You see that in some of the sales growth, the sales growth there as been relatively flat for the year. But the other thing that's happened across all of our- territories is I think you have seen an acceleration of bankruptcy filing as people got ahead of the new bankruptcy laws and have filed. So that should be behind us, as we end this year. So all of those things considered, we will continue to be in a high fuel environment, and I think bad debt expense will be at the levels that we saw this year. Ben, how should we look if weather had been normal this year, what earnings would have been. I know you said that weather helped about $0.04 above normal, but you also said that you did much more O & M because of the thing. So could you just mention what would have been the earnings if you had a normal summer? Well, Ashar, we manage the business with all the component parts. So when you have favorable weather, you do look for opportunities to spend money where it's needed and it, as I mentioned on the call, our plants can use the O & M. They have been run hard. We want to make sure, they produced wonderfully over the last several years. And we want to make sure that they continue to perform that way in the future. So I would say roughly we spent between the plant and some other investments in O & M around our system, probably $0.02 to $0.03 of additional O & M this year that perhaps we wouldn't have spent if we hadn't had favorable weather. Okay. And then can I just follow up, if I have my numbers right, the short-term wholesales and all of that are running right now for the nine months $36 million less from last year and your projection is $40 million to $50 million for the full year, so it's expected another $9 million or $10 million shortfall in the fourth quarter; is that correct? I think that's the way that numbers add up and basically I think short-term wholesale margins have been behaving about how we expected coming into the year. Just a short question here. The TRB situation, could you give us a sense of when does it ever end and is there some progress report that you get on that? Well, we stay in very close contact with the railroads. I mean, it's very important to us. They continue to repair the rail beds and the line, Daniele, and we're entering the summer season here and, or rather the winter season. And so some of that repair work will cease. I think we're probably going to be looking at some kind of reduced delivery into next year, perhaps, as late as the second quarter of 2006, but, again, we're just, we're going to mitigate and monitor it and we'll make sure that we have adequate coal to run our plants. Yes, Ben, I wanted to ask you if you have heard any more comments out of Representative Frangas, is there any risk in Colorado, you think of a political backlash or was that just some opportune advertise comments Yes, I was asking about risks for political backlash in Colorado. I think across the country we are seeing a lot of politicians comment or opine on rising energy rates. I think specifically, there was a representative in your region, Jerry Frangas, who made some comments earlier this month, or last month, are there any politicians getting involved in this process, or Well when fuel rises, I think you are always going to increase the political and the media scrutiny and activity. I don't think you can have a build to core strategy if you are not comfortable with your commissions, that your commissions are what will ultimately set the rate that need to attract the capital, if we didn't think they were going to make the right decisions and we think they will. Overall, I think the politics in our service territories have been very supportive of our strategy. If you look at some of the things we have accomplished and I know you have heard me talk about it repeatedly, but, getting debt, imputed debt recognized in Colorado, getting rider recovery in Merc, getting transmission legislation in Minnesota, those are really positive things that say that, we have forward looking commissioners and legislators. So you are going to have noise. And you are going to have people coming out of the woodwork, but we think we are in a good environment and from our perspective too, I think we have done some of the right things by helping out some of those customers that are that we know will be hurt the most in this coming heating season by making some of those charitable contributions I have referred to. I do. First, I want to thank you all for participating in our earnings call this morning. I look forward to meeting with many of you at EEI in early November. In addition we are hosting an analyst meeting in New York City on November 29th. At the meeting, we plan to review our 2006 operating plans, and update you on our Minnesota rate case and other regulatory initiatives. We hope to see you there. If you have any follow-up questions in the meantime, Dick Colton and Paul Johnson will be available to take your calls. Thank you for your participation today. Thank you for participating in today’s Xcel Energy third quarter 2005 earnings conference call. This call will be available for replay beginning at 1 p.m. eastern time today through 11:59 p.m. eastern time on Saturday, October 29, 2005. The conference ID number for the replay is 9828840. Again, the conference ID number for the replay is 9828840. The number to dial for the replay is 1-800-642-1687, or 706-645-9291. This concludes today's conference. You may now disconnect. 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_233877

Good afternoon. My name is Shanell and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Red Hat 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 period. If you would like to ask a question during this time, simply press “*�? and the “1�? on your telephone keypad. Please limit your questions to one question and one followup question. If anyone should need assistance during the call, please press “*�? then “0�? and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded today, March 28, 2006. Thank you. I would now like to introduce Mr. Dion Cornett, Vice President of Investor Relations. Mr. Cornett you may begin your conference. Thank you Shanell. Welcome to Red Hat’s Fourth Quarter Fiscal Year 2006 Earnings call. Speakers for today’s call will be Matthew Szulik, Chairman, President, and Chief Executive Officer; Charles E. Peters, Executive Vice president & chief Financial Officer, and myself. Our earnings press release was issued after the markets closed today. If anyone has not yet obtained a copy, it may be downloaded from redhat.com or requested by calling Linda Brewton, Manager Investor Relations at 919-754-4476. Various remarks that we may make about the company’s future expectations, plans, and prospects including statements contained in the words believe, anticipate, plan, expect or will constitute forward-looking statements for purposes of the Safe Harbor provision under the Privacy Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those assessed in the company’s most recent quarterly report on Form 10-Q filed with the SEC. In addition, any forward-looking statement represent our views only as of today and should not be relief upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligations to do so, even if our estimates change, and therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. I would now like to turn the call over to Matthew. Research 2.0 combines in-depth, theme-oriented technology investment research with a lightweight business model. Our approach is to concentrate our research energy and resources into areas not well-covered by existing firms. While other analysts are attending informational meetings with company managements, we are talking to customers. While other analysts are spending a huge chunk of their time each quarter on earnings releases we are doing hands on work with technology. While other analysts are focused on what amount to trading perspectives, we are working on long-term underlying trends that drive revenue, margins and long-term company valuation. Because we leverage technology and new distribution models rather than traditional high-cost infrastructure, we can provide unique research in a much more cost effective manner. Individuals can purchase an annual subscription, corporations and institutions can become sponsors or consulting clients. We also deliver a good deal of our content at no charge via our email list, blog, free publications and summaries of our other research reports. Thank you Dion. We are pleased with our strong finish to a great year for Red Hat and our shareholders. Robust sequential bookings growth, global operational enhancements contributed to both our fourth quarter and our full year results. The driver of our company’s performance continues to be Red Hat’s capability to deliver the highest value for the lowest cost to our global customers. This capability was highlighted during the quarter as Red Hat for an unprecedented second year in a row took top honors for delivering the highest value reliability in the annual CIO insight survey. Moreover, Red Hat was chosen as the number one vendor that CIOs continued to do business with, ahead of excellent companies like Cisco, Symantec, Research in Motion, and others that generally receive high marks for customer loyalty. We are proud of this customer acknowledgment, but we recognize that we are in the early days of a very large global market and we are driven to avoid complacency as we enter fiscal year 2007. Looking back at the Analyst Day in New York City, I referred to our approach last year as “smash-mouth�? software, day to day, hour to hour solid execution. I would characterize our fiscal year 2006 as a year of solid execution. The senior management experience and those who were new during the prior year are now fully up the learning curve. We continue to scale our business with operations now in seventeen countries in seven new offices and 278 new employees added during the year. We invested approximately $17 million in capital expenditures, principally in new and improved systems to further increase our operating efficiency. We added over 50,000 new customers during the fiscal year and our renewal rate with large customers has been outstanding. We have provided solid leadership in the open source community; we plan on continuing to do so. Finally, we improved our financial performance along virtually every operating metric while providing continued strong value to our customers. Now, I’d like to highlight a few of the initiatives that we have underway to further enhance our value creation. During our last three earnings calls, we quantified the renewal rates of our top 25 transactions from the prior year’s quarter We are pleased to report that during the fourth quarter 25 of our top 25 fields that were upper renewal were renewed again bringing our total for the fiscal 2006 to 99 out of 100 potential renewals. We continued to seek out ways to better serve these large accounts. As part of the effort, we have unified our sales, support, learning, and services organizations within our largest global accounts under a single senior Red Hat executive unifying sales and delivery. The measure is already winning customer praise and tightening relationships with our ecosystem partners. By jointly delivering technical roadmaps, we create new opportunities for our value-added partners. In one example I’d like to share with you, a major Wall Street brokerage firm recently challenged Red Hat to reduce its cost associated with hardware failures. After identifying one of the firm’s most expensive outages, the Red Hat team helped replace proprietary closed solution with Red Hat GFS on Red Hat Enterprise Linux, trained its IT staff and reduced trading system failover time from 2 minutes to less than 10 seconds. The customer estimated that this savings and this upgrade will produce more during the next fault condition and would be roughly more than $4 million. More importantly, the dedicated team serving this account now has a template for value creation that is broadly applicable. The transformation underway in these accounts is thus Red Hat as an operating system vendor has transitioned to becoming a strategic trusted advisor. Two weeks ago along with AMD, Intel, Network Appliance, and XenSource we formerly announced our integrated virtualization strategy. Virtualization technology allows for more efficient utilization of a customer’s computing infrastructure. We believe that our implementation of virtualization technology integrated in the industry standard Red Hat Enterprise Linux Platform will offer unsurpassed value to the enterprise. During previous earnings calls I had referenced the strategic importance to Red Hat’s customers of the community driven process. The process described is end-user driven innovation. Red Hat works closely with the community, our partners, and customers well ahead of the launch through the Fedora release. Customers can have confidence that Red Hat brand and technologies are enterprise, qualified, and appropriate for their business needs. It is this community process that has resulted in highly reliable, scalable and secure, broadly supported offerings. We encourage investors to attend our open house on April 11th to hear more about our platform strategy. Finally, our ability to create value for the enterprise is resulting in wider adoption of broadening set of offerings and stronger relationship with our business partners. During the fourth quarter we added more than 12,000 net new customers and bookings from layered solutions more than quadrupled year over year. Even more telling for the full year FY06, our revenue in billings growth exceeded 40% versus fiscal year 2005, and our OEM business more than doubled. The investment and technology to support our channel partners in tandem with excellent field-based execution were key drivers of this global indirect sales success. Looking geographically, whether in the US, India, Russia, China or Brazil, as the industry shift from heavily regulated to unregulated, federal forces are causing management within these industries to focus on more flexible and more agile computing infrastructures. Industries facing increased competition in pricing pressure, banking in Russia and India, telecom in China and Brazil, are pursuing solutions based on open source software. During the FY06 campaign, Red Hat successfully grew its customer base and its market share. We improved our global capabilities to educate, service, and retain customers, ISVs and OEMs. We continued to build our online model with the goal of complete customer and partner self-service. Hopefully, the success communicated by our financial statements today is evident to all. Charlie will now address specific financial performance. Thank you Matthew. I’m pleased to report that once again we have delivered strong financial performance to our shareholders. Total fourth quarter revenue was $78.7 million and represents an increase of 8% from last quarter at 37% from the same quarter in fiscal year 2005. Driven by strong bookings, subscription revenue of $66.7 million grew 11% sequentially and 44% year over year. Training and services revenue came in at $12.1 million. This was strong seasonal performance given the normal reduction of training opportunities around Christmas and the New Year holidays and speaks to the growing demands of Red Hat expertise. Breaking down bookings, we generated 61% of our bookings from the channel at 39% from direct sales versus 57%; a 43% split in Q3. From a geographic perspective, 56% of bookings came from the Americas, 24% EMEA, and 21% from Asia Pacific. This compares to a respective 55%, 22%, 23% split last quarter. Our billings proceeds, which we defined as revenue plus change in deferred revenue, was $102.5 million, up 40% year over year and 16% sequentially. Overall, gross margin was 84% compared to 84% last quarter and 81% in the year ago period. Operating expenses came in at $46.5 million, up 10% from last quarter. Note that the growth and operating expenses not only reflect the full quarter effect of third quarter’s head count additions and the fourth quarter’s new hiring, but also roughly $1.5 million of employer payroll factors associated with exercise and stock options. The tax deductibility of these option exercises had a positive impact on income taxes, and where the primary reported income tax benefit down below. Our operating income came in at $19.8 million for the quarter or an operating margin of 25%. This compares to operating income of $18.7 million, operating margin of 26% last quarter; an operating income of $7.5 million and 13% operating margin in the fourth quarter last year. But with even significant investment in people on systems and increase in stock option related payroll taxes, the fourth quarter year-over-year revenue growth still more than doubled the expense growth. Moving on, other income nets, which is attributable primarily to investment income was $5.9 million. Our effective GAAP tax rate was 2.8% for the fiscal year and as I mentioned previously, our corporate income taxes were lower than expected, primarily due to deductions related to option exercises which occurred during the fourth quarter. Net income was $27.3 million, an increase of 18% from last quarter and 131% year over year. Net income for purposes of the diluted per share calculation was $28.7 million, an increase of 17% from last quarter and 115% year over year. This translates into fully diluted earnings per share of $0.13 of the quarter. Looking at our income statement performance for the full year, subscription revenue of $230 million grew 53% versus fiscal year 2005, and total revenue of $278 million grew 42%. The timing of scale and improved operating efficiencies helped push operating income up 116% to $58.1 million, representing a full year operating margin of 21%. Net income for the full year grew 75% to $79.7 million or $0.41 per diluted share. Now, let’s turn to the balance sheet from the cash flow statement. We ended the quarter with approximately $1.1 billion in cash and investment, an increase of $77 million from the end of Q3, driven by strong cash flow from operations and cash receipts related to employee stock option exercises. At the end of Q4, total receivables, which include earnings in excess of billings, were $59.8 million, which translates to an adjusted DSO of 52 days versus 57 days at the end of the third quarter and 64 days at the end of fiscal year 2005. This result was achieved at the same time the ____ expense was reduced approximately $1 million from the prior year. We believe that our low DSOs not only indicate effective collection efforts but also satisfaction in our overall customer base. As a reminder, as DSOs are traditionally a measure of receivables versus billings, our DSO calculation includes the change in deferred revenue. Total deferred revenue ended the quarter at $223 million, which is an increase in $24 million or 12% of the prior quarter and $86.2 million of last year, a 63% increase. Looking to the statement of cash flows, cash flows from operation increased 64% year over year to $50.1 million for the fourth quarter. Cash flows from operations for the full year grew 53% to $186.6 million. We believe that cash flows from operations for live investors with a potentially useful means of assessing the performance of the business and from time to time may discuss this metric for that purpose. For the quarter, cash flows from operations was $0.23 per share and for the full year about $0.90 per share using the fully diluted share count of 213 million shares for the quarter and 208 million shares for the year. Now, I’d like to turn to guidance. Let me start with guidance on apples-to-apples basis by first excluding the effects of FAS 123R since the first quarter of the fiscal year 2007 will be the first year we implement FAS 123R. I will then provide our preliminary estimates of non-cash stock compensation expense under FAS 123R, which you can or not to your model as you see fit. First of all, we are anticipating the first quarter revenue to be in the range of $82.5 million to $83.5 million representing year-over-year growth of 37-38%. It’s our intention to continue to invest in people and systems over the course of fiscal year 2007 including approximately 100 new staff per quarter. We anticipate roughly $4 million of incremental Q1 cash expenses versus Q4 given the full quarter impact of fourth quarter hires and continued investment. As we have discussed on prior calls, our estimated effective GAAP tax rate for fiscal year 2007 is 35%. However, as we’ve also stated on prior calls, because we have large tax loss carry forwards, we anticipate a cash tax rate of approximately 5% for at least the next five or six years. In the first quarter, if one assumes an effective GAAP tax rate of 35% and a diluted share count of say 215 million shares, one would estimate diluted EPS of approximately $0.08 before FAS 123R expenses. For the full fiscal year of 2007, we anticipate revenue in the range of $370-375 million on 300 basis points to 400 basis points and improvement in full year operating margin before the impact of FAS 123R versus fiscal 2006. We anticipate a 35% GAAP effective tax rate for only 5% cash taxes for the foreseeable future. Let me now address FAS 123R. Our current estimates for full year fiscal year 2007 non-cash stock compensation expense under FAS 123R is approximately $33 million pretax and approximately $22 million after tax, assuming the same 35% effective tax rate. For the first quarter, you should assume probably 25% of this total. This is quite a bit lower than the quarterly FAS 123R expense disclosed in the footnotes in prior forms 10-Q, and we intend to discuss operating cash flows per share during subsequent earnings calls. We believe this is a calculation that best represents performance of the company versus other software companies, whether they use license or subscription accounting or some combination thereof. While cash flows from operations may fluctuate quarter to quarter given the mix of direct versus indirect business, one year versus three year deals, changes in foreign exchange rates, timing of payments and receipts, and other factors, we anticipate steady growth on an annual basis. Based on the strength of the business in fiscal year 2006 and our outlook, we believe it’s appropriate to raise our previous guidance on operating cash flow. For the full fiscal year 2007, we expect cash flow from operations to be $1.05 with $1.10 per diluted share, which is $0.10 per share higher than the $1 for fully diluted share guidance which we had previously provided. I would now like to turn it over to Dion and he’ll discuss some additional investor considerations. Charlie, thank you. As we did last quarter, we were trying several metrics to help investors evaluate our business. In the fourth quarter, the percentage of forward-looking values beyond one year was 19% versus 22% last quarter. Our average contract length remained in the 18-21 month range and again the vast majority of our long-term deals continue to be three-year contracts. For modeling purposes, we did have one large mid-seven figure deal where the client requested deferred billing into March due to internal budgeting issues. And finally, I would like to discus market shares give our completion of fiscal year 2006. We believe that Red Hat continues to gain market share on a global basis because our billings and revenue growth for the full year substantially exceeded mid 20% Linux growth rate estimate published by various leading industry analysts. Also, related to marketshare our growth dramatically outpaced the open source subscription revenue growth reported by other market participants. I’d now like to turn the call over to Matthew Szulik for closing remarks. Thanks Dion. In closing, I’d like to thank our customers, partners, and shareholders for their continued commitment to Red Hat, and I especially want to thank our Red Hat associates all over the world whose hard work, team spirit, and innovation all contributed to a great quarter and a fantastic fiscal year. The fact that our cash flow from operations in fiscal year 2006 was nearly equivalent to the total revenues we generated in FY05 effectively summarizes Red Hat’s growth and operational effectiveness over the last four quarters. We are so pleased that this performance translated into excellent returns to shareholders and our bond holders. Dion… At this time, I would like to remind everyone, if you would like to ask a question, press “* and 1�? on your telephone keypad. Your first question is from the line of Mark Murphy with First Albany. Thank you very much. Matthew, how large do you think the revenue opportunity for virtualization technologies is relative to the other parts of the stack such as the security or application server, and also can you detail what kind of success you might be seeing with virtualized environments through Fedora Core 5 so far? Thanks Mark. You know, I think the size of the virtualization opportunity globally is substantial. Clearly, it’s in the multi-billions of dollars when one considers both software and the related services. As you know in Fedora Core 5 it’s just been released, but some of the hypervisor technologies that was in Fedora Core 5 we saw a number of our large enterprises testing, kicking around, but clearly I think our focus is on building the integrated solution, not just the hypervisor but also the management technologies and the tools and the related services to help the organization implement and deploy, Mark. And as I said, in total, we think that that’s a multi-billion dollar opportunity. Thank you and as for followup for Charlie, looking at the balance sheet, the short-term revenue looks like it has increased at a slower rate over the last two quarters, whereas the long-term deferred revenue has been accelerating, and that’s on a sequential basis; can you walk us through what might be driving that, and then moving into FY07 would we expect maybe a rebound in the short-term deferred revenue? I’m not sure if you heard Dion’s watermark, but there was a mid-seven figure deal that was booked at the end of the quarter where the customer for their internal budgetary reasons did not want to be billed until March, so that was not in any of the deferred revenue or in the billings, all of which would have been in current deferred revenue had it been billed. So, that had an influence in the quarter. I guess I would say that the total deferred revenue balance has grown substantially. If you look at the current deferred revenue in relation to the total revenue for the year or the revenue guidance I gave you for next year, what you can see is that we have a higher percentage of current deferred revenue this year than we did last year compared to the guidance I provided at that time or compared to the actual results. So, we feel good about the deferred revenue in total and the split. I think as we’ve said before one of the things that are driving the long-term deferred revenue is the good business with the OEM partners and some of the long-term contracts that are being provided there. Hi, thank you very much and congrats on the quarter. I was looking to see if you had any comments on the cash flow seasonality going into the first quarter. I know you raised the guidance for the year, but should we be surprised to see any down take in the first quarter in cash flows, what’s your thinking there? I have a followup question. Kash, as I’ve said for the last probably I think four quarters I’m not going to provide any quarterly cash flow guidance, because quarterly cash flow guidance can be tricky as you know going back more than a year ago, it was difficult to predict. I’m very comfortable with full year guidance that we have provided, but I’m not going to provide any quarterly guidance. Great, and also if you look at the offering margin guidance looking for an expansion to probably the high end of your range, 27%, which line items are you expecting to get that operating margin expansion? That’s it, thanks. Let me just clarify what I said, because I don’t think you heard what I said properly. What I said is that our expectation is that the operating margin can improve 300-400 basis points on the full year operating margin and in fiscal year 2006. Yes correct, but to your question, as I said on a couple of previous calls, we are continuing to invest strongly in the sales and marketing functions and the support function where I think you will see — this is sort of prior to FAS 123R impact — reductions in G&A spending as we move forward. Well, it’s operating efficiencies across the board. For example, the gross margin has also been improving and that has contributed to the operating margin improvement as well. Hi, I was wondering if you can give us any update on sort of Windows to Linux migration, I know we’ve seen a lot of UNIX to Linux, but we started to pick a little of that, have you started to see any of that? Hey Brendan, this is Matthew Szulik. We’re certainly seeing that in both Europe, EMEA, and the Asia Pacific region, and certainly I think there will be those customers in the Enterprise in the SMD space now rather than Windows delay that I think will reflect over their software assurance investment and really I think create a potential opportunity now as Linux and open source becomes more pervasive as looking out as a reason to transition from Windows over to Linux. So, we’re starting to see that as I mentioned in the international markets; we expect to see that more popular here in the US markets. A big one is not wanting to have a dependence on a single supplier. The second key driver is the maturity and the reliability and the security of open source software, so you’re getting a robust reference base. The value that I described earlier in the conference call is being received with referencibility of some of the world’s largest corporations, and of course the multi-platform heterogenous environment I think is contributing to that capability. Hi, just a quick question following up on Brendan’s question about Windows migrations. As a result of the slippage of this, and I realize it’s very recent news but hardly unexpected, is there anything that you encourage the community to put into Fedora Core, is there anything that you do differently now versus what you would have been doing differently a month or so ago to help crack that opportunity open further? I don’t think so. Brent, I think, as you know you’ve probably followed the trails of Fedora Core 4 leading into Fedora Core 5, and the community does continue to be vocal about the functionality and the improvements. You saw great advancements around usability, you saw certainly the implementation of virtualization, better memory management, better I/O capabilities, so I think that these have been on planning and on course now for well over a year. Hey, and do you have any preliminary thoughts as the virtualization stuff goes out, kind of where the relative economics would be in terms of selling higher end server subscriptions because you’ve got more powerful hardware out there versus the amount of money that’s spent on management tools versus the amount of money that’s spent on storage, just qualitatively? It would be fairly objecting, which I’m unwilling to do Brent, but as you know a great concern that I have is that the opportunity for virtualization to be implemented successfully is going to become time consuming, require careful planning, a very clear understanding of what the customer’s business objectives are. We don’t believe that the solution is going to be delivering incremental functionality. It’s a complicated internal matter for most of our large enterprise accounts that we’re speaking with, so I don’t really have a good opportunity to quantify that for you, but it’s something that our strategic enterprise accounts are beginning to take quite seriously now. Hi, good day gentleman. I have three questions for you. The first would be in reference to the deferred revenue, and you had the customer that pushed off into March. If that had occurred as you expected, what would have been the mix of the deferred revenue? It’s important to Red Hat, it’s very important to our government customers, and I think it is strategic to the long-term security strategy of our global market. The last question is in reference to your most closest competitor, Novell. At their most recent analyst day in Brainshare, they announced that with Dell on their provisioning software that they were going to target Red Hat customers, do you have anything you’d like to say about that? Certainly I know that Novell and Dell have had a long-term relationship. I read the same things that you read. I think that we have been very pleased by the productivity of Dell and their Red Hat relationship and all of OEMs got highlighted in our earnings announcement tonight, and we’ll continue to focus on the things that we do correctly with Dell. Great, good afternoon. Just a question on the guidance; if you take the midpoint for the full year, 370-375, and Charlie, if I heard you correctly, you said you could add 300-400 basis point above the fiscal ’05 operating margin number and using a 37% tax rate, it seems like you’re getting around $0.40 assuming pretty much everything else is equal below the operating margin line, does that sound right? The guidance I did was just a guidance I gave, Chris. Anything else you said other than your conclusions, I’m not going to try to confirm you conclusions, but the revenue earnings is correct…the operating margin improvement of 300-400 basis points we think is realistic again before you factor in FAS 123R, and then it goes on down from there, but this seems reasonable. And in terms of the head count growth that you’re expecting in the plans for expansion, can you talk to specifically geographies or is it mostly international, what areas it mostly sails, can you just walk through that? I think it’s fair to say that we work everywhere around the world and if you look at our hiring this past year, it was probably a little bit more than 50% international and a lot of it in Asia Pacific. As to where it will be this coming year, I guess I wouldn’t get into that now but I probably do think a fair amount will be international, may be at 50% international. In terms of functions, as I said before, we won’t be adding a lot to the G&A functions. We will be adding engineering and we will be adding on sales and marketing. Just to followup, Charlie, I think you said that roughly about 61% of your bookings were from your OEM partners in the channel, is it safe to assume most of that is North America or is that North America, New York, across the world evenly distributed? Yeah, the 61% is from all the channels and it’s fairly evenly distributed. As the majority of our business is done outside of this country, a very large part outside of this country is through channel partners. Yeah, thanks very much. Charlie, I know you’re not going to quantify but may be try to qualify how you feel about the visibility into the indirect renewals through your OEM partners. I know it’s been a big focus for you guys to try and make that automated. I was wondering where that’s may be today versus say 12 months ago? Well, I think the good news as we continue to get better and better, we have taken a number of steps this year to improve it including some specific steps with each partner in terms of better data collection of that end-customer, in some places it is automated and some places it’s still manual, but we’ve come a long way in the year. We’re certainly not there yet, in terms of being everywhere we want to be, but it has gotten substantially better than where we were 12 months ago. I would expect to be able to report a year from now a continued and very good improvement. Okay, and then may be, Matthew, you talked about the bookings around layered solution were up 4X versus last year. If you could maybe breakdown which ones you guys are seeing the most traction in right now and I guess what you expect over the next fiscal year for each of the solutions? Hi Kirk, this is Dion. In terms of that metric, I’d say that the fourth quarter was probably one of the more diversified quarters in terms of seeing a spread between the various player offerings, but again as Charlie said in the past, we’re not going to be too specific there given that that business felt fast growing is still small and it’s still more than 10% of our revenue. Hey guys, good afternoon. Some questions on operating margins; 300-400 basis points as improvement for ’06-’07 is pretty robust, may be a contrary question here, with all the growth opportunities you have in front of you, why are operating margins growing so quickly and could you perhaps accelerate hiring to take advantage of some of the new areas that you could build your business? First of all, consistently, I think quarter after quarter, we want to invest for growth. We are agreeing with you that this is the time to invest. The thing that makes this possible is the graphic growth of the subscription revenue line that has 93% gross margins. So, it offers gross margin that we could use at the OpEx level before we get down to the operating margin. I think what the guidance I’ve given there is some very good room for investment. Roughly 100 per quarter. The other thing, Jason, is that we have invested quite a bit — Matthew mentioned almost $17 million in CapEx this past year with probably another $20-23 million of CapEx in the year we’re now in, and most of that investment is going to internal automation systems to help this become more efficient and effective. Okay, then maybe just one last followup; the share count that you’re assuming to get to the $1.05 to $1.10 in operating cash flow? Hi, thank you. I was just wondering if you could give us an idea, Charlie, of it; if you’re looking at your optimal business model, following up on Jason’s question, where do you see operating margins peaking over the next few years. How long do you think this…I mean I know you’re still investing for growth, but 300-400 basis points is an improvement, do you think that you can replicate that aside from just fiscal year ’07, where should we expect margins to top out? Then my followup would be on head count growth; where specifically is that focus, if you could give us a sense for what the SG&A, sales and marketing, etc., and where by geography? Okay, first the operating margin, I think that what we fully demonstrated this year is the leverage in the model and that there is room for gradual operating margin expansion at the same time that we’re investing. I’ve also said in the past that there’s no reason in the long term that we can’t be as good as the best, but we are still very early in the growth opportunity and there’s a lot of investments to be done. So, I don’t want to try to project now how much the operating margin expansion might be next year, and I would say again because I know it’s going to confuse lots of people, but this was before the FAS 123R and I just don’t know how the analysts and investors will factor those numbers in. But when you say you could be at their best, are you talking about other companies like Oracle where they’re at 40% or are you referring to…how should we think about that comment? I’m not talking about fiscal year ’08, I’m talking further out than that. Like I said, it is in the very long term. Given our ability to scale and the gross margins we have, there’s no reason over quite a long time that we can’t be included with the best. Your second question had to do with the head count. As I mentioned to someone else about this question, the principle investment in terms of the numbers of people, where they’re going to be hired, engineering, sales and marketing would be the functions principally and some in support, very little in G&A, and then geographically probably at least 50% and may be more outside the United States. Actually Heather I’ve got some statistics from last year that may be helpful as you do your modeling. If you look at our head count additions for last year, our growth in G&A was in single digits while the growth in the various functions that Charlie talked about -- operations, sales, and research all grew at rates anywhere from three to five times the pace that growth in G&A. And in terms of geographic mix of hiring last year, nearly half of our hires in last fiscal year were in Asia Pacific, relatively downswing EMEA and the Americas given some hiring here in the fourth quarter, but I would intensify it against what Charlie said, more hiring overseas. Thank you. I was wondering if you guys could tell which geography was the mid-seven figure deal that was pushed to March, which geography would that have popped up from? Okay, great, and then regarding operating expense guidance for next year, is there any stock-based compensation expense in the operating expense numbers that you mentioned for next year or is it all not being broken out based up on 123R? I don’t know if that question is clear. In the numbers that I mentioned, this does not include stock compensation expense. I did say separately that for FAS 123R our initial estimates are for the full year, about $33 million pretax and then you have the 35% tax benefit that offsets it, so that $22 million after tax, which works to about $0.025 per quarter earning per share impact per quarter. Just one other piece of detail that might help us if in trying to build the model, our initial estimates of how you’d spread that FAS 123R expense by category, probably 5-6% of it would be in cost of revenue, probably 7-29% of it in sales and marketing, 17-20% of it in R&D, and 47-50% of it in G&A. And the reason I’m giving the ranges is because none of those numbers are at this point absolutely final, but it gives you some idea if you’re trying to build a model. Okay, great, just a couple. And then just you thoughts for fiscal year ’06, was your recognized stock-based compensation expense around $4.7 million? Yes, good afternoon. Just a question on the tax benefit of $1.6 million in the quarter, Charlie, was that as you said related to all employee stock option exercise? Yes, we had substantial exercises in the quarter which as I said generated an additional $1.5 million of payroll tax expenses, ended up in OpEx, but tax benefit on the income tax more than offset that down below the line. So yes, it was all related to the stock option deductions for the quarter. And then I think, Dion, you mentioned that you’re still gaining share in paid Linux versus Novell, but are you seeing anything unusual in customers’ willingness to deploy unpaid Linux or any competitor, in fact from Solaris 10 on AMD Opteron? Chris, I had the opportunity to recently spend some time traveling with Alex Pinchev, our head of sales, and in terms of the competitive environment, consistently over this quarter we’ve really seen no change. Yes, good afternoon everybody, congratulations on the good quarter. First question, on the bookings numbers of the breakout you gave between the various geographies, was there any impact there from the revenues you couldn’t recognize because you didn’t have all the manuals and stuff last quarter in Asia, and if so can you give us a sort of quantification of how much that impacted either revenues or deferred revenues? It wouldn’t have had any impact on the bookings because the order was in, so a booking is basically an order. Yeah, bookings were not impacted. It’s essentially billing obviously and so you ship it and send the invoice and at that point in time it also becomes part of deferred revenue. So, if you look at the billings proxy last quarter, which was relatively flat, and when you look at the billings proxy this quarter, which was up 16% sequentially, that will explain some of that. Okay, and then sort of the next one goes on the quadrupling of the value-added solutions, can you give us an idea of the maturity of that market? Is the sales there coming from direct sales going into your existing accounts, are you seeing some traction with the resellers and into new accounts with those products? Tim, I think as we’ve consistently said over the last couple of calls, we’re seeing an adoption curve for these value-added solutions very similar to the adoption curve that we saw with the introduction of Red Hat Enterprise Linux in August 2002, and initially the sales were predominantly driven by sales organizations, as the customers become more familiar and comfortable with the solution, as the community continues to build…revenue invasion that Matthew talked about, then we are increasingly seeing that business start to be picked up by our channel partners. However, it’s fair today to say that sales is already best being driven by the inside team. Hi Matthew, I had a question in terms of you’ve guys have had great success with renewals in your top 25 accounts. I think last quarter you may have even quantified when those top 25 accounts were renewing, they also had an increase in the subscriptions. Can you may be talk qualitatively or quantitatively in the fourth quarter how that played out? Actually Terry, I’ve got that number, and so if you look at the top 25 deals that we’ve had in the fourth quarter of fiscal year ’05 and then again an apples-to-apples comparison for the same application within that customer, not including additional deployments the customer may have rolled out, the value of the contract of those top 25 deals in the fourth quarter of ’06 was 16% higher than the initial value last year. Okay, great, and then Charlie, a financial question. I know we should be looking at cash flow as the key parameter of the health of your business, but as it relates what first call is on earnings, the estimates are all over the place. I mean it’s a wide dispersion of estimates. I know that you’re talking about kind of margin assumptions with that 123R. If you’re really going to do apples-to-apples and considering the tax situation where you’re only paying 5% cash taxes, shouldn’t we be doing an adjustment on taxes, some sort of EPS adjusted for that tax rate? That’s a judgment I need to leave to the analysts, but I think I provided all the data for which you can do that. I do think you hit on a chief point that the because of the vast discrepancy between the GAAP tax rate that we report and the actual taxes that we’re going to pay for a very long time and the fact that we have these non-cash stock compensation expenses, many people will factor those out and do some sort of pro-forma. I’m not trying to provide guidance one way or the other as to how you should do it, though. Understandable, but I were to fully and accurately reflect your cash tax situation and publish the non-GAAP number, the rate I would use is 5% for the next several years? It certainly is five or six years. If were saying that cash tax rate, five or six years is a long time or may be longer. Yes Charlie, and just to talk about that previous question, because it would seem to me the 5% tax rate is benefitting from the EFO, so I’m not sure we should give you the credit for the 5% tax rate, must be penalize you for the EFO cost, I mean wouldn’t that be inconsistent? So just to clarify from a tax perspective, we have substantial tax loss carry forwards, in excess of $450 million of tax loss carry forwards related to deferred tax asset, almost $185 million, which is fully reserved. And so, the fact is the accounting has nothing to do with it. We simply will not be paying taxes for a long time. And in terms of where you should put it through the P&L, the higher tax rate and the FAS 123R, they certainly should be tax effective I think in the P&L, that would have it done that way. I think the key thing is to make sure from a cash perspective you understand what the real result is going to be. Absolutely. Okay, let’s see, Matthew, as far as Oracle, I’d be curious whether your views are if Oracle moves on to open source, it would seem that it would be positive for Linux and therefore positive for you, I’m curious on your observations. On the other hand it might be preempting some market opportunities for you longer term, I’d be curious what your views are on that. And also if you could comment on virtualization, it’s not real clear to me your relationship with XenSource and who gets paid as you move virtualization in? First of all you should know Red Hat and Oracle have had a successful relationship for a long time and I believe that Oracle is certainly one of the beneficiaries of the continued growth and adoption of Linux in the enterprise. So, I think Rick, as you know, it’s proven validation of open source, I think the more contributors that we have and the more communities of open source development, I think the better it will be for customers, so I would see that as a near term positive, Rick. Regarding virtualization and XenSource, I think it’s a good question. I was recently out in California and spent a fair amount of time with Peter Lavine, their new CEO. I think as you know, we’ve worked very hard with the founders of XenSource regarding the hypervisor and support of the GPL implementation of the hypervisor. Our teams are in active discussions within the Fedora release, and I think that that financial and technical relationship is evolving, and I think we’ll see what the results are within Fedora 5. But I think clearly the Red Hat’s business, we don’t view it exclusively as the incremental functionality within the hypervisor. We’re really viewing it in tandem with the completeness of the file systems, the question that I got asked earlier regarding the policy management within security with an SELinux, the tools that we are building now so that customers can build virtualized solutions, and I think this will be a complicated problem for customers to solve as they look at deploying virtualization across their enterprises. I have a question, I think Matthew mentioned something about moving to a global account base in sales, can you talk more about that? You know, we have a strong lead by our core enterprise accounts which we’ve defined as arguably the 60 largest global accounts. As a desire to bring the know how that we have in open source, the technical proficiencies, matching technical roadmaps with our strategic OEM and ISV partners and having a service delivery competency all under one single executive with a targeted focus, direct selling and services organization, that organization is segmented of course from the global 3000, it is also segmented from the inside selling channels, so that these core global 60 accounts are having a single face globally, a single support organization globally, and minimizing and reducing any of the complexity of doing business with Red Hat. And I think as I highlighted, Katherine, on the call, we’ve already seen benefit of that in terms of both vertical understanding of the industry we’re selling into, consistency and delivery, and certainly better day-to-day account management. Okay fair enough. Then, directly, what was the size of a large deal that you didn’t get paid that flipped into March? It’s a mid-seven figure deal. It wasn’t that we didn’t get paid, we actually didn’t bill them. After we talked with the customer, we took the booking, but they had their own budget issues and wanted to be billed in March. I realized a lot of investors and analysts will make the assumption that all our one-year bookings get billed in quarter as part of their modeling process. If you’re working on that type of function this quarter, you’d probably be best served by assuming that approximately $6 million or $7 million of one year bookings weren’t billed this quarter, the largest obviously being related to this one contract Charlie just said. Hi, most of my questions have been answered, but if it’s correct, I’m just assuming that FX did not have an impact on deferred revenue this period, is that right Charlie? And just lastly, Dion, you mentioned you were out traveling and had the opportunity to go out with your head of sales, is there anything anecdotally, may be qualitatively you could discuss regarding if more of your customers are having conversations around standardizing with Red Hat in the data center? I think absolutely. I think one of the things I was very happy to see was customers really coming to Red Hat as in many of the accounts as the point person for their IT infrastructure needs, and whereas historically these may have been very large multi-billion dollar revenue companies that were sort of leading the technology roadmap. I think in some of these key accounts that Matthew referenced, we’re now to the point where Red Hat is the point person now working with these partners together come up with a comprehensive strategy to solve the customers infrastructure needs. Thank you, congratulations on a very strong execution especially in the international market. Two questions, first on XenSource virtualization; I was wondering what is your strategy regarding go to market, are you thinking of migrating the customers of the N-ware and into XenSource or probably going after Greenfield opportunities. And I have a second question. Trip, as you know, right now there is a strong opportunity for the Greenfield opportunities because we continue to see the historical unit machines being so underutilized. So, as far as we can see there is more than enough market breadth for us to go after those Greenfield situations. The second impression I had is regarding the stacks that you have been in a way not so vocal about, but our contacts are very vocal and very excited, first was the technology stack you talked about last quarter and I think probably you may have some more concrete plans to be announced in the month of June. Recently, we picked up some more interesting news from our contacts regarding business stacks, the education stack, the small and medium business stack, and the government stack in which Red Hat is the platform; and all these initiators are in the ____, have you thought about bringing those initiatives to the US, and if not why not? Trip I’m impressed by your diligence, because I think you’ve appropriately highlighted a number of key product marketing initiatives that we had in those _____countries. As you know the computing environment, the hardware platforms, the network topologies certainly vary from one region to another. Those have been some of the determinants of why we have not brought those vertical stacks to the domestic US stack and I think quite frankly that our hands are fully right now readying and getting prepared to deploy the LAMP stacks, the certification and testing initiatives that we announced about 60 days ago and readying those for the domestic US and international markets. Good afternoon, congratulations on the quarter. I just wanted to be clear on one thing, the stock compensation. The guidance that you’re giving includes no stock comp, not even what you get under APB 25? Right, but the guidance for operating margin improvement is not including any stock compensation at all, because half of the margin improvement then is coming from there because under APB 25 you add about 147 basis points of ops and costs in FY06 could be knocked out in guidance for FY07, and ___ so it will be a marginal improvement there, does it not? You’re talking about the existing deferred comps, so may be I’ve misspoken. The guidance I’ve given you assumes basically the similar sort of expense that we’ve had this year. Not what you see in the footnotes of the financial statements, which is more representative of the FAS 123R expense. That was already there, for example, restricted stock amortization. Hi, good afternoon gentleman, most of my questions have been answered. I’ll just ask on the deferred revenue assuming as you clarify that some of the inventory that slipped last quarter was included in this quarter’s shipments and the number was up by 16%. If you had this sort of straight line there, what would have been the sort of pro-forma growth for the two quarters? Just to clarify on the third quarter comment about the inventory, I think we made it clear on that call that we were talking about only a couple of million dollars in the third quarter, though it is not a big factor in terms of the fourth quarter change. Hi, I just had a followup question. Matthew, I was just curious where do you think the growth in Linux is coming from compared with two years back or so? It seemed like two years back we were replacing a lot of UNIX and may be even other versions of UNIX if you will, just curious to see where you find the incremental growth coming from. Are we seeing as much as UNIX replacements or are we seeing actually new applications and new boxes being both on new projects increasing your drive and demand? Well Kash I think there’s still a large amount of UNIX that is being transitioned over to Linux. What we are seeing of course is that we’re getting deeper penetration into the data center. The question I think should be asked ____ and I think that is feeling quite a maturity in the operating environment in a related ISV support in and around that. Secondly, we’re also starting to see very strong support in software development. So, as Linux now starts to be used as both a development platform and a host and targeted platform, the tools are maturing in the Linux and open source category, we’re starting to see strong deployments in those categories as well. And thirdly is the growth in the small-to-medium sized business, whether it be a hosting solution or direct implementation, we’re starting to see broadening as evidenced by the growth in new customers that we saw during our FY06. So I think it’s those three core factors. Are we at all seeing evidence of new projects in large enterprises being completely built ground up on LAMP stack or is it still too early to make that call? We are definitely seeing that and that to me is perhaps one of the bright spots during my tenure at Red Hat because customers five years ago that would claim if they would never deploy or build a software development organization or internally develop application in around the LAMP stack, now through technologies such as the existing Linux kernel, SELinux open source technologies like AutoBuild and Red Hat Network are really building sophisticated software development environments and therefore really secure open source applications as a part of their key core operating environments, and that’s kind of a very bright spot for me to see this quickly in the market. Research 2.0 combines in-depth, theme-oriented technology investment research with a lightweight business model. Our approach is to concentrate our research energy and resources into areas not well-covered by existing firms. 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EarningCall_233878

Here’s the entire text of the prepared remarks from Sony’s (ticker: SNE) Q2 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 day ladies and gentlemen and welcome to the Second Quarter Sony Corporation Earnings Conference Call. My name is Mika and I will 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 your assistance please press “*” follow by “0” and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host facilitate conference Mr Jonathan Bates. Please proceed sir. Thank you very much for the introduction Mika. Thank you all for joining us today October 27 2005, for the discussion of Sony’s results in the second quarter ended September 30th 2005. 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, incharge of cooperate development and M&A, Sony Corporation EVP and CFO Sony Corporation of America. Thank you very much for joining us today Mr. Yuhara, Wiesenthal. In just a few moments I am going to give a brief summary of today’s announcements. Then Mr. Yuhara and Mr. Wiesenthal will be available to answer 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. And at least 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 www.sony.com. With that I am going to turn to our announcements. Consolidated sales were flat year-on-year at Yen1.708 trillion. A consolidated operating income increased 52% to Yen55.9 billion. This increase was due the one time gain of Yen73.5 billion from the transfer to the Japanese governments of the substitutional portion of Sony’s employee pension funds. Consolidated restructuring charges in the quarter were Yen32.9 billion versus Yen18.8 billion last year. With Yen32.3 above Yen32.9 billion recorded in electronics. Income before income taxes was Yen95.4 billion an increase the 50.8% year-on-year. This increase was mainly due to a gain of Yen 20.7 billion on the change in interest resulting from the sale of a portion in stock in Monex Beans Holdings Inc. previously an equity affiliate. Our effective tax rates for the quarter was 68.3% this high tax rate is primarily due to the recording efforts and additional tax provision for undistributed earnings the foreign subsidiaries and additional valuation allowances against differed tax assets. Equity and net loss of affiliated companies is Yen 2.6 billion an Yen 8.7 billion deterioration year-on-year. Although S-LCD registered an equity loss of Yen 2.8 billion for the quarter, it recorded operating income in September. MGM recorded an equity loss of Yen4.4 billion and Sony BMG an equity loss of Yen 3.2 billion. Sony Ericsson on the other hand had equity and net income of Yen7 billion a Yen1 billion improvement year-on-year. Net income for Sony was Yen 28.5 billion decreased the 46.5% year-on-year due to the tax expense and equity affiliate losses. Sales in the electronic business were largely unchanged year-on-year while operating income increased Yen10.2 billion to Yen 17.3 billion. This increases due to the recording of Yen63.9 billion from the pension funds transfer to the government. Excluding fixed assets there was Yen53.7 billion decrease in operating income. The primary reason for this proforma operating loss were a Yen22.5 billion impact to operating income from a decline in sales to outside customers and Yen16.7 billion increase in restructuring expenses, a large portion of which where impairments of CRT television manufacturing facilities in the US. Next let me talk about some of our new products. We have high hopes about several new products which are gaining traction in the market place. Firstly in Japan we launched the new Bravia TVs on October 7th and its market share is steadily increasing. In North America we launched Bravia at the end of August. And it is selling very well. In the first week of October it captured the number one market share and there were 30% on a value basis. The digital high-definition Handycam launched in Japan in July, so phenomenally well for the week of October 17th to 23rd the Sony brand maintained its number one share position at 40% on a value basis. In November we will introduce the new Walkman A series which has an intelligent shuffle push function which when on random play automatically selects your most listen-to songs. And offers list link function which allows you to search for artistes of similarly zone to the ones you’ve already listened to. And at Sony Ericsson the W800 Walkman phone is proving to be a successful hit. We will introduce the W900 a UMTS phone, which has enhanced music features at the end of the year. Sales in the game business increased 79% year-on-year reflecting a large increase in sales of both hardware and software, especially the contribution from PSP. Approximately two thirds of over all sales in the quarter came from hardware and accessories direct, the rest from software. The PS2 business continue to runs smoothly, with a number of units sold in US and Europe increasing significantly. As for the PSP we had a successful launch in Europe in September. I think that regions Japan the US and Asia at places where PSP is currently sold. In October PSP reached cumulative worldwide production shipments of ten million units. Meanwhile strong sales of PSP software led to an increase in software sales for to the segments as a whole. And the ratio third party software increased from 11% to 14%. The favorable performance of both these businesses PS2 & PSP caused operating income for the segment to increase from near breakeven last year to Yen8.2 billion this year. We’ve raised our forecast for both PS2 & PSP hardware production shipments from 13 to 14 million units. Pictures segments sales decreased 17% year-on-year and an operating loss of Yen6.6 billion was recorded. Compared to an operating profits of Yen27.4 billion in the previous year. Both sales and profits were adversely affected by the difficult comparison with the previous year in which Spider-man 2 performed well and the current year’s disappointing performance of Dell. An increase year-on-year of marketing cost for upcoming releases, also press down with pressure on profits. Financial service segments revenue increased 40% year-on-year and operating income rose Yen25.2 billion to Yen40 billion. Sony Life led to the improvements with an improvement in gains and losses from investments and an increase in revenue from insurance premium. As many of you know on September 22nd we announced an organizational restructuring and adjusted our forecast to reflect additional restructuring cost of Yen52 billion. Again from the transfer to the Japanese governments of the substitutional portion of Sony’s employees pension fund was greater than what was forecast in September. Our performance in the second quarter was also better than our expectations. Despite these improvements we have not revised our full year forecast from September. From the September numbers as we are entering on the side of caution when taking into account the business environment for the second half of the fiscal year. That concludes my opening remarks. With that I would like to turn over to Q&A. 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_233879

Good afternoon and welcome to the Microsoft 2006 fiscal year 2nd quarter earnings conference call. Your lines have been placed on listen-only until the question and answer session of the conference. This call is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Miss Colleen Healey, Senior Director, Investor Relations. Please go ahead. Thanks Laura. Good afternoon everyone and thank you for joining us today. This afternoon I am joined by Chris Liddell, Senior Vice President and Chief Financial Officer, Scott Di Valerio Corp. VP, Finance and Administration, and Chief Accounting Officer and John C. Todd, deputy general counsel. Today’s call will start with Chris providing some key takeaways for the second quarter of fiscal year 2006 and an overview of expectations for the rest of the fiscal year. Scott will then provide detail around our second quarter results and then turn it back to Chris for a more detailed discussion of our guidance for the third quarter and full fiscal year. After that, we’ll take your questions. We filed our 10Q today in conjunction with our earnings release. Therefore, you have available the earnings release, MDNA, financial statements and footnotes. We have also posted our quarterly financial summary slide deck which is intended to follow the flow of our prepared remarks in order to assist you. The slide deck offers highlights from the quarter, outlines our guidance and provides a reconciliation of differences between GAAP and non-GAAP financial measures that we will talk about today. You can find the earnings release, the 10Q and the quarterly financial summary slide deck on the investor relations website at www.microsoft.com/msft. Today’s call will be recorded. Please be aware that if you decide to ask a question it will be included in both our live transmission as well as any future use of the recording. As always, shareholders and analysts can listen to a live web cast of our call at the Microsoft investor relations website. A replay of the call will be available at the same place through the close of business on January 26, 2007. This conference call report is protected by copyright law and international treaties. Unauthorized reproduction or distribution of this report or any portion of it may result in civil and criminal penalties. Any recording or other use of or transmission of the text or audio to this call is not allowed without the express permission of Microsoft. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk and uncertainty. Actual results could differ materially because of factors discussed in today’s earnings press release, in the comments made during the conference call and in the management discussion and analysis section of our 10Q or 2005 10K or other reports and filings with the securities and exchange commission. We do not take any duty to update any forward-looking statements. Thank you colleen and good afternoon everyone, thanks for joining us on today’s call. I’d like to begin by highlighting the key points from our second quarter performance and take a look at the rest of fiscal year 2006. We had a very good second quarter with highlights being three extremely successful product launches, good growth in our core businesses and delivery of operating income and earnings this year in line with expectations. We have been looking forward to this quarter as we kick off the broadest multi-year product cycle in the company’s history. Looking back on quarter 2, we’re off to an excellent start. During the quarter we had significant on time and successful launches of products for both consumers and businesses. The quarter’s new product launches created a lot of justifiable excitement in the marketplace. For example, the highly anticipated XBOX 360 had a phenomenal reception by consumers. Demand for the product has been high and we look forward to increasing the console availability in the second half of the fiscal year, with the addition of our third manufacturing partner. Just as eagerly anticipated and well-received by business customers was SQL Server 2005 and Dynamic CRM 3.0. And during the quarter, we positioned ourselves well for continued momentum and setup pipeline success with two community technology preview releases of Windows Vista, the initial Beta releases of Office 12 and Exchange 12 and many Beta versions of our Window Live Update. Our core software businesses enjoyed healthy growth, driven by strong demand from corporate customers and strong PC and Server unit segments. The real highlight for the quarter was that Server Tools continues its impressive string of double digit revenue growth. SQL Server generated over 20% of year over year revenue growth during the quarter, significantly outpacing the database market and our expectations from last quarter. SQL Server 2005 is quite simply an outstanding product, meeting the needs of customers and we were delighted to have seen the faster than expected adoption at and after the launch. We were pleased to see both business solutions and mobile and embedded devices continue their recent momentum and, in both cases, achieve operating profitability t his quarter. While we do not expect them to remain consistently for the remainder of fiscal 2006, their strong revenue and profit performance reinforces their trajectory to exit emerging status sometime in fiscal 2007. Lastly, during the quarter, we continue to have momentum on returning cash to shareholders. We announced a one cent increase in our quarterly dividend, equating to a 12 _ percent increase. And we purchased 7.7 billion dollars worth of our stock, our largest ever quarterly stock buyback. So now, I’d like to make a few points about how the rest of the fiscal year is shaping up. First, we continue to expect double-digit revenue growth for fiscal 2006, driven by sustained momentum in our core software businesses and by strong demand for the XBOX 360. Second, we will continue to invest in our businesses. As we mentioned on the last call, we are investing in our core businesses of client Information Worker and server tools for product launches. We will also continue to invest in MSN in order to bring rich and compelling services and content to our users and a world-class advertising platform to our advertisers. I’ll discuss a little bit more about the investment in MSN later in the call. We’re confident that we’re making the right investments for products in the near-term horizon as well as initiatives and products that will benefit us longer-term. And even with these investments, we expect to deliver strong double-digit earnings growth the second half of the year. So with those opening remarks, I’d like to turn the call over to Scott for more details on the quarter and then I will provide you with more details on the rest of the fiscal year. Thanks, Chris, and good afternoon everyone. As Chris mentioned, Q2 is a good quarter overall, with revenues slightly below our guidance and bottom line results largely in line with our expectations. During the quarter, revenue was a record $11.8 billion up 9% from the prior year, driven by growth in our core software businesses and home entertainment. Operating income was $4.7 billion, which is at the high end of our expectations entering the quarter and driven by operating profitability in six of our seven busy seasons. We delivered good earnings growth with earnings-per-share of $.34. When adjusted for tax-rated benefits realized in the quarter of $.01 per share, this is also at the high end of our guidance. We kicked off a significant multi-year product cycle with launches of XBOX 360, SQL Server 2005, Dynamic CRM 3.0 and a host of other products. And, lastly, we returned over $8.5 billion to shareholders in the form of stock repurchases and dividends. So while revenue is slightly below our guidance, we had a successful quarter, which I will highlight over the next several minutes. I will start by discussing topline financial and business points and will follow with the revenue performance of each of the business units. Then I’ll wrap up with an overview of operating income performance as well as balance sheet and cash flow information. Our core businesses had another good quarter. Overall revenue growth was driven by server and tools revenues which grew 14% on the strength of SQL sales and client revenue growth of 8%, driven by the strength of PC hardware shipments. Add in a good quarter by Information Worker, and our three largest businesses grew revenue by a combined 9%, representing $785 million in absolute revenue growth. Another key driver for the quart4r was the launch of XBOX 360 which drove home entertainment revenue growth of 13%. We’re also pleased with the continued momentum in our Microsoft Business Solutions and Mobile Imbedded Business units which grew 17% and 40%, respectively. The IT spending environment was also largely in line with our expectations. The clear highlights were strong demand in the enterprise and continued strength of the PC and Server harder market growth. Demand was generally healthy across all customer segments and, from a regional perspective, EMEA and the emerging markets were relatively strong. We estimate PC market growth during the quarter at 14-15%, which is stronger than we expected 3 months ago. A very strong holiday sales season resulted in consumer PC shipment growth outpacing business shipments for the third consecutive quarter. From a form factor perspective, growth in notebook PC shipments continues to outpace desktops. PC unit demand was broad-based regionally with double-digit growth rates in all geographies, except for North America and Japan and emerging market growth rates continue to significantly outpace mature markets. Our mix of product billings for the quarter was generally consistent year-over-year with roughly 35% from OEMs, 25% from multi-year licensing agreements, 20% from license-only sales and the balance from our other businesses. We had good results, overall, from a volume licensing perspective with the strongest growth in enterprise agreements, where our renewal experience remains within our historical range of 65-70%. Select and open annuity results for the quarter are also very good, relative to non-annuity licensing. Our unearned revenue balance ended the quarter where we expected it, at $8.8 billion, up slightly from the prior quarter and represents an 11% increase over the prior year. The sequential change in unearned balance was impacted by the relatively small amount of multi-year contract value that was up for renewal during the quarter, relative to prior year amounts. Before I get into the revenue details for each business group, I’d like to point out that the foreign exchange rate impact on revenue was not meaningful to our overall revenue growth. Client revenue grew 8%, driven by OEM revenue growth of 10%, offset by a 2% decline in commercial and retail licensing. The OEM revenue growth resulted from 15% license unit growth. The different between OEM licensing growth and revenue growth is caused primarily by a shift in channel mix toward larger OEMs with volume pricing, growing volume in emerging markets, and the relative strength of the consumer segment of the PC market, which results in higher volumes of Windows XP Home Edition and Media Center Edition, relative to total units sold. As we discussed last quarter and consistent with the relative strength of the consumer segment of the market, we continue to see a change within the sales mix of our premium edition operating systems, licensed to OEMs. Our OEM premium mix is up 2 percentage points from the prior year, at 49%. A larger percentage of premium edition sales were made to consumers purchasing Windows Media Center, which carries a lower priced premium relatively to Windows Professional. All in all, we were pleased to see the significant market traction and continued growth for Windows Media Center edition, which has sold over 6.5 million licenses to date. Server Tools continue to deliver double-digit revenue growth for the company, reflecting broad adoption of Windows Server System products and an exceptionally strong SQL Server 2005 product launch. SQL Server 2005 provides a data management and analysis platform that enables organizations to reliably manage mission-critical information entered in complex business applications. Its business intelligence capabilities enable companies to gain greater insights from their business information. The value proposition of the product is outstanding and we’re delighted to see that many customers agree. Revenue for the quarter was $2.9 billion, a 14% increase over the prior year. Continued share gains in the enterprise resulted in SQL Server revenue growth in excess of 20%. During the quarter, we also successfully launched digital studio 2005, BizTalk Server 2006, and Windows Server 2003R2, adding to our already strong product lineup. Information Worker revenue was in line with our expectations, growth 5% to $3 billion. Revenue growth related to volume licensing and pre-installed versions of Office in Japan were strong. This quarter we experienced an increased annuity mix in our overall billings, which we attribute to customers desiring to acquire both Office 2003 and Office 12 upon its release later this calendar year. During the quarter, we also released a preview of Office 5, our future services offering targeting small businesses as well as the technical data of Office 12, which garnered positive reviews from the industry. MBS revenue was $242 million, which was higher than our expectations and up 17% from the prior year, driven by the early release of Microsoft Dynamics CRM 3.0 and strong results in EMEA. As a result of the strong revenue growth, we were pleased to see MBS achieve operating profitability in the quarter. MSN revenue was $593 million, down 2%, driven by advertising growth of 12%, offset by an expected decline of 33% in narrow-band access revenue. We are pleased with the display advertising, which grew in excess of 20% for the quarter. We improved display advertising pricing and increased our inventory while increasing the number of users of our services. Active Hotmail accounts grew to 230 million, compared to 191 million in the prior year. And, active Messenger accounts grew to 205 million, compared to the 156 million of the prior year. As you know, we’re in the middle of a transition in search advertising business, moving from Yahoo’s platform to our own proprietary platform called MSN Ad Center, which we began testing in the US during the quarter. The ramp-up of a new ad platform requires significant investment from Microsoft, both in development costs as well as in reduced revenues related to fewer numbers of overall advertisers and resulting lower key word pricing. The good news is that response to our platform has been great and we are ramping up deployment by rapidly envoying advertisers and moving more search traffic to the platform. On algorithmic search, we are continuing to grow query volume, improving relevance and are investing in several search verticals. We have recently launched mapping, the birds-eye flyover mapping service and are soon to launch news and images. We continue to invest in search for long term and believe there’s lots of innovation yet to come. The decline in our narrow-band access revenue is in line with our expectations as customers continue to move on to broadband. MBD revenue for the quarter grew 40% on broad strength across the Windows Imbedded and Windows Mobile product lines as we continue to capitalize on growing market demand for connected devices. Windows Mobile licenses for connected phone-enabled devices grew in excess of 70% from the prior year. Windows Imbedded product growth of 64% was driven by the increasing use of Windows CE and Windows XP Imbedded in a wide range of smart devices such as point of sale terminals and thin clients. Home and entertainment revenue growth for the quarter was 13%, driven by the XBOX 360 launch and solid growth of our consumer hardware and PC games product lines. During the second quarter, XOB 360 achieved an unprecedented video game console launch, and we are thrilled with the results. We were first to market in 19 countries with XBOX 360 and have garnered record software attach rates, indicative of the strength of our games portfolio. On XBOX Live, we continue to lead the way in online gaming. Whereas, on XBOX Version 1, about one in ten customers are connected to the XBOX Live service, on XBOX 360 more than half of all consoles are connected. We’re off to a strong, early start with all these factors and coupled with the continuing uncertainty of our competitors entering the next generation, we are right where we want to be. Demand for XBOX 360 consoles has been incredibly strong and feedback on the platform has been incredibly positive. Our previous challenge in the quarter was meeting the high consumer demand for the console. We sold 1.5 million XBOX 360 consoles in the 2nd quarter, with 900,000 consoles in North America, 500,000 consoles in Europe and the remainder in Japan. This is lower than we expected due to component charges stemming from challenges in ramping supply of a complex product like XBOX 360. We believe that this is a short-term manufacturing challenge and we have taken steps to increase supply to meet the strong consumer demand for the console. A key indicator of platform health is the attach rate for games and accessories. According to NPD, software attach for the XBOX 360 in the US was more than 4 per console and accessory attach was more than 3 per console for the quarter. Both are records with consumers purchasing nearly double the amount relative to any other console launch in history. The software results, in particular, highlight that we have launched XBOX 360 with an incredibly strong lineup of games. XBOX Live continues to lead the way in defining online entertainment and is regarded as the standard by which all other online gaming services will be measured. Since the launch of XBOX 360, XBOX Live members have downloaded over 4 million pieces of high definition games, music and movie content from the XBOX Live marketplace. Lastly, our XBOX Version 1 platform remains a great value to consumers. We sold over 2.2 million XBOX 1 consoles in the first half of the fiscal year, bringing the installed base to over 24 million worldwide, with 16 million in North America and 6 million in Europe. All the demand for XBOX 1 consoles and software sales was negatively impacted by the momentum and excitement surrounding the XBOX 360 launch. While revenue increased 9%, cost of revenue increased 19%. This increase was due to costs primarily associated with the XBOX 360 console volumes. The remainder of operating expenses increased about $750 million or 18%. As we discussed in the past, we are investing aggressively in our businesses to satisfy customers and to compete and win in the marketplace. Investments this quarter were focused around the following areas: strong levels of high end investment in research and development focused on new product development examples of which include Windows Vista, Office 12, Longhorn Server, Exchange 12, MSN Ad Center, Search and Communications Services. Advertising focused primarily on our clients and worker information businesses as well as overall corporate branding. Increased hiring for field sales and marketing positions is scored in future revenue growth. Specifically in our enterprise and small and medium businesses sales forces as well as our Information Worker specialists. And, marketing spending associated with the product launches in the quarter including SQL Server 2005 and XBOX 360. As you know, we have always taken a long-term view of our business. Today’s investments in product R&D and Sales and marketing lays out the foundation for future revenue and profit growth. Investment income in other totally $400 million including $212 in net gains on investments and $185 in net losses on derivatives, primarily related to losses on foreign exchange contracts and commodity positions. Our effective tax rate for eh quarter was about 29%; lower than expected due to a $108 million tax benefit associated with the settlement of state audits. We generated over $2.2 billion in cash from operations, a 38% decline from prior year due to increased spending on XBOX 360 inventory and other changes in the working capital. Of the over $8.5 billion returned to shareholders during the quarter, $7.7 billion was for the repurchase of 283 million shares, with the remainder for dividends. During the quarter our board of directors also announced a $.01 increase in the regularly quarterly dividend; bringing it to $.09 per share, per quarter. Cash and equivalents in short term investments were down $5.4 billion and 13% sequentially for the first quarter, to $34.7 billion, reflective of the record amount of share repurchase activity in the second quarter. So in summary, we achieved record revenue of 9% growth driven by our core businesses, representing over $1 billion in absolute revenue growth versus the prior year. We will continue to invest to fuel revenue and profit growth in the future. Our earning per share was at the high end of our expectations, excluding tax benefits for the quarter. We executed on key product launches kicking off a significant, multi-year product cycle and we repurchased our stock at record levels. With that, let me turn it back to Chris who will provide you with our expectations for Q3 and the rest of fiscal 2006. Thanks, Scott. As some of you may know, Scott’s in the process of transitioning into his new role as the head of the OEM group. Microsoft OEM Channel is obviously critical to the company’s success and we look forward to his contributions there. I’d certainly personally like to take this opportunity to thank Scott for all of his hard work and dedication in driving functional excellence across finance. Moving into his new role will allow Scott to continue forward in his already substantial impact here at Microsoft. However, I’m sure he will also dearly miss joining us here on these quarterly calls. Now I’m going to spend my remaining time on the call giving you a view of what we are expecting for the third quarter and the rest of the full fiscal year. Please keep in mind that all of the gross figures that I am using reflect year-over-year grow to comparable period, unless otherwise noted. Before giving specific financial guidance, let me outline some of our key assumptions around the economy and general demand in the industry. With calendar 2006 underway, we expect overall IT spending to remain healthy in the new year. We feel good about our ability to participate in any growth in the overall marketplace in the coming year. We estimate for the 3rd Quarter PC unit growth should be 11-13%, primarily as a result of higher than expected growth in the first half of fiscal 2006, we are raising our full fiscal year estimate to 12-14%. For our forecast, we’re assuming that changes in foreign exchange rates will not have a material impact on our year over year growth rates. So now for some detailed guidance. For the full year, we’re tightening the revenue range that we gave you in October, as we now expect revenues to come in between $44.0 and $44.5 billion, representing growth of 11-12%. We’re forecasting the Q2 strength in our core software businesses to continue into the second half. Revenue by business group is as follows: For client, expect revenue growth to be 7-8% for the full fiscal year and 7-9% for the third quarter. We expect OEM units to grow roughly in line with the market, aided by growing traction in emerging markets. In server and tools we’re raising our expected revenue growth to 15-16% for the full fiscal year and 15-17% for the third quarter. We are forecasting continued corporate demand for our server products with SQL Server 2005 continuing to show strong market acceptance. Information Worker revenue should grow 5-6% for the full fiscal year and 6-7% for the 3rd quarter. As we move closer to the launch of Office 12, we expect corporate customers to increasingly prefer annuity licensing programs when evaluating Office purchases. For Microsoft Business Solutions, we expect revenue growth to be 14-15% for the full fiscal year and approximately 16% for the 3rd quarter. Demand for our new Dynamic CRM 3.0 has been above our expectations and we’re forecasting the recent strength to continue through the 2nd half. For MSN, we’re expecting revenue to be flat for both the full fiscal year and the 3rd quarter, which reflects slightly lower revenue expectations for this business in fiscal 2006, driven primarily by our plans to accelerate the rate at which we ramp up Ad Center to deliver our paid search results. While this is an important strategic decision for the long-term, it does have a dampening effect on revenue for search in the short term. Additionally, as I spoke about earlier in the call, we will also be making additional investments to strengthen the competitive position of our internet services. Areas of investment include for example, global infrastructure, where we are investing in global infrastructure in order to provide high quality performance and reliability for our customers on a global basis. In Ad Center, we’ll be hiring a thousand support people to provide great end-to-end service for our advertising customers, investing in development talent to increase the range of functionality for advertisers, and thus increasing their ROI, increasing traffic to Ad Center to speed the transition from Yahoo’s network and finally, rolling out Ad Center to more countries globally, to provide end to end advertising solutions to our customers everywhere. In Search, we’re investing in search verticals by increased development resources and via acquisitions. For example, we bought GeoTango, which is a 3D internet visualization technology company, to enhance Windows Live Local Search. We’re confident that we’re making good investments for products on the near term horizon as well as for initiatives and products that will benefit us longer term. Mobile and Embedded devices revenue should grow greater than 30% for the year and about 35% for the 3rd quarter, driven by a number of exciting new devices, based on Windows Mobile 5.0. Home and Entertainment revenue is expected to growth between 35% and 45% for the year and between 80% and 100% for the 3rd quarter, which reflects a reduction of the revenue guidance that we gave you in October, primarily as a result of 2 factors. First, lower expectations for the XBOX 1 business as the moment around XBOX 360 has drawn some attention away from the previous platform. We expect to continue to sell the XBOX 1 console well into the calendar year 2006 and certainly see this as a stretching out of the sales cycle. There are 800 games currently available for the platform and we expect there will continue to be a great deal of new content from third party publishers in the coming years. Second, we have slightly slower expectations for our consumer hardware, software and PC games business. We’ve also lowered our estimate of XBOX 360 console sales in the first 90 days of launch from 2.75 – 3 million units to 2.5 million units due to supply constraints. Even so, we estimate that consumers will spend over $1.5 billion in total retail value on XBOX 360 consoles, games and peripherals in these first 90 days, which is indicative of the health and magnitude of the XBOX 360 launch. As you know, we’re bringing on a third manufacturing partner, Salistica, next month to help in meeting strong consumer demand for the XBOX 360 console. For that reason, we are not adjusting our previously announced fiscal year console sales guidance of 4.5-5.5 million consoles and our revenue guidance, which is based on unit sales within that range. We continue to expect great software sales for XBOX 360, resulting from a strong flow of new games for the platform over the coming months. By the end of June, XBOX 360 will have more than 50 high definition games from the best names in publishing. We delivered an unprecedented global launch during the quarter and by the end of March, XBOX 360 will be available in nearly 30 countries and will remain on track to be the fastest selling video game console in history. Operating income for the full fiscal year is expected to be between $17.9 billion and $18.3 billion, representing growth of 23-25%. Brief note, this full year guidance includes the charge we took in Q1 of $361 for the settlement of Real Networks. Before significant settlement and other such items, operating income for the full fiscal year is expected to be $18.3-$18.6 billion, representing double-digit growth of 10-12%. For the 3rd quarter, operating income should be $4.5-$4.6 billion, representing 36-39% growth over the prior year or 11-13% growth if you exclude the $768 million settlement charge taken a year ago to quarter. For diluted earnings per share, we’re tightening the range that we gave you in October by raising the low end of that by $.01. The range is $1.28-$1.31 for the full fiscal year on a GAAP basis. If you were to adjust for the Real Networks settlement charge of $.02 from the first quarter and the $.01 tax benefit in the 2nd quarter, earnings per share will be $1.29-$1.32. We expect GAAP earnings per share of $.32-$.33 for the 3rd quarter and expect to have an effective tax rate of 31% for the 3rd quarter and the remainder of the year. On the balance sheet, we’re still expecting unearned revenue to finish the year up 8-10%, and it’s likely to be at the higher end of that range. We’re also raising our estimate on our contract and our billed balance to now finish the year above $9 billion. This is up from our prior guidance of finishing the year at $8 billion. When you combine our overall revenue growth with the net increase in unearned and contracted not billed, you’ll find that our year over year booking performance for the company for fiscal 2006 is strong and we feel confident about how we will end the year. So in closing, I’d like to say that I’m pleased with our 2nd quarter and our fiscal year ’06 performance on three counts; first, the customer reaction to our newly launched products has been fantastic. Second, our ability to deliver our products on time, which – given the style and complexity of our product range – reflects a great performance and an increasingly improved operational discipline. And last, we made our expense targets for the quarter. With that, I’d like to hand the call back to Colleen so we can take some of your questions. Thank you. Thank you Chris. Let’s now proceed to questions. We want to accommodate questions from as many of you as possible, so please avoid multi-part questions and limit yourself to just one question. Operator, will you please repeat your instructions? Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1. To withdraw your request, you may press star 2. Once again, to ask a question, please press star followed by 1. Our first question comes from Adam Holt with JP Morgan. Good afternoon. Two questions on the unearned commentary. To get to the higher end of the 8-10% growth for the year, when would you expect to start to see an acceleration in the Information Worker bookings in front of office? And secondly, can you talk about some of the things that you’re doing to try and accelerate client bookings as well, particularly with Vista enterprise? We do actually have quite a large number of contracts that are maturing and that’s one of the reasons that we feel confident about the balance being at the high end of that range. The first half of the year was a relatively modest period for expires and the second half is a relatively high one. On the Information Worker side we’re actually already starting to see what we think is a shift away from fully-priced products to the enterprise side. So, we’re starting to see that impact already and we believe that will continue through the first half of this calendar year, second half of the fiscal year. On the client side…what was the question about client? What other number of initiatives in place to try and drive long term contracts on the client side in the context of the Vista release? I was hoping you could update us on that and also talk about when we would expect to see that acceleration. We haven’t built in the expectations on the enterprise side for the 2nd half. We certainly think we’ll start to see some year on year benefits as the calendar year proceeds and as we get closer to the Vista launch. We are seeing some benefits, for example, in the new software assurance product that we launched last year. So, as opposed to a declining trend that we’ve seen in previous quarters, that’s flattened out and it will improve but we haven’t built a lot of that into our expectations for the 2nd half of the fiscal year. Thanks. Just first on a technicality…can you reconcile why the cash flow statement shows $7.4 billion of stock repurchase and you’re saying $7.7 billion in the text? What’s going on there Rick is that not all of the buy-back fell within the quarter. So, the difference that you’re seeing is inter-quarter settlement. We’ll catch that up next quarter when it’s settled. Okay. And the constraints on supply for XBOX 360, if you could just talk for a moment about that. Could you be more specific with us about what that is? It doesn’t seem that if it’s a supply constraint that adding Salistica necessarily helps that. If you can kind of add some clarity there. As we said in our prepared remarks, we had some issues with some of the components. There’s nothing that we think is systematic to the extent that we’ve solved some of them or will be solving any that we haven’t resolved, in the short term. So, it’s not a constraint that we see that’s going to be significant going forward. Let me just reiterate, in terms of the volatility that we can expect in the first few weeks with a product of that significance, launched across 90 countries, loss is at the low end of our expectations and it’s not surprising from our perspective; we don’t think this is a significant issue for the first six months. Thank you so much, Rick. Next question please? Hi. Can we turn to MSN for a second here? It looks like your search ads are slightly down year on year and basically flat sequentially. You talked a little bit about the impact that Ad Center’s having on your pricing, does that mean that in areas where you’re not Beta testing Ad Center that you’re not seeing any deterioration in search pricing? And then, what has your experience been in France and Singapore as you’ve gone live with the product? Are you seeing a recovery in pricing there? And a related question would be, what are you doing so that the deteriorating leverage you’re getting on your community in your partner ads? I’ll take those in parts, Charlie. In terms of the Beta test thing, no there isn’t a positive impact from that. In fact, as we initially ramp up because the volumes are lower than what they are on the combined Microsoft/Yahoo platform, we actually see a deterioration in the pricing. That will take some time as we need to ramp up the critical mass and volume. So that has a negative impact. In terms of the expectations that we had of receptivity, that’s going in fact better than we had hoped for which is one of the reasons why we’re accelerating the ramp up. But it does have a negative impact. In terms of the overture of pricing, no I don’t believe we saw a deterioration of pricing on the non-Ad Center-based ads during the quarter. But as we’ve said before, we don’t have a lot of visibility in there, so the trends that we are seeing, unfortunately is something that is opaque to us. One of the reasons why we’re moving faster on Ad Center and taking control of our own destiny. It’s not significant in my mind, from a financial point of view. So I’m not entirely sure what you’re referring to from a numbers point of view, but there’s nothing systematical. The partner issue is the partner-driven prices. So that’s the same question as overture. What we’re seeing a bit is for the partner-driven…in other words, the parts that we don’t control our own fate on, we’re seeing pricing pressure which surprises us a bit. We’re going to take our fate into our own hands and we’re going to ramp up ad center. Given that we’re ramping that up, we probably don’t have tons of life left on these partner-driven prices; it sort of is what it is and we’re sort of focused on making our Ad Center platform best-in-class. Thanks. I have a quick question; I think Brian may have one as well. Chris, for the last couple of quarters you’ve had very strong PC unit growth but client revenue growth has not been as strong. You drilled down all the reasons for that, emerging markets, mix, etc. But the delta is large, is this the kind of delta we should just expect on a go-forward basis as we go through our modeling? I think you can realistically expect if not all that delta then some large part of it for the rest of this fiscal year. You take our guidance on PC unit growth and on revenue, that’s the delta that we expect based on those mix factors. Going into fiscal year ’07, I don’t know if you want to get into forecasting that at this stage, but we would certainly see for example fully-priced packaged product sales being different in our launch year with something like Vista, so that impact which is being measured would be something that would be different. To some extent, we’re already seeing in the quarter some narrowing. If you remember sort of last year we were down sort of mid- to high teens on commercial retail. We did see some narrowing this quarter, we’re down 2%. If you look at our guidance on the back half, it continues to narrow in terms of where we think the PC market is coming and where our revenue is coming and hopefully that’s some sort of indication about our expectations. Mary, the other factor is it depends a little on the absolute size of the PC growth. So as it gets larger, it’s tending to come from the consumer area which is tending to make it get bigger. So in a year where the PC growth was say lower, you might expect the gap, all things being equal, to be narrower. Just a quick question to follow up on the 360. Are you still on target for the 4.5-5.5 million consoles by June? I know you put down a number of 4.25. Hi, thank you. I just wanted to follow up to Mary’s last question. I was wondering if at some point if Skeet Balmer said there’s a mix to higher-end SKUs, could you see the fact that the consumer is making the gap bigger right now as he just mentioned? Do you see that change with Vista in the big uptake of things such as Media Center with PC edition? And I guess the follow up would be there’s some concern in the market that Vista might not make it out for the 2006 holiday season. Is there any update you could provide for us on that? Thank you. From our perspective we’ll still talking about Vista launching in the 2nd half of this calendar year so, nothing’s changed there. In terms of the swing in mix, we are seeing inside the consumer side of things a positive mix swing. For example, as you mentioned Media Center, so that is helping. But on the other side, in terms of emerging markets, and the growth that’s there relative to mature markets, if like a negative mix we have a lot of price points in those. So there’s a number of moving parts. But in terms of the consumer, consumer side of mature markets, we definitely see Media Center traction and that is helping us. I’d like to add to that…going back to our financial analyst’s meeting we have made some general comments about SKUs and having more differentiation within our SKU strategy, what you’re seeing for example with the SQL Server 2005 launch is we had 4 different SKUS, took the high end up, had a nice lower end SKU. In terms of software assurance announcements, Heather, you’ve heard us talk about Vista enterprise edition available to customers. So I think what you can expect to see and what you’re beginning to see from us is differentiation within our SKUs. Hi, thank you very much. I was just wondering given that you’re seeing better attach rates with the XBOX 360 and the software component makes it look richer versus your prior expectation, why would that not be even a little bit more profitable to the degree that you might want to reconsider where you stand on BPS guidance on the positive side? That’s it, thanks. With better than expected attach rates for the game cartridge for the XBOX 360, and if you’re maintaining your forecast for unit shipments, it sounds like the high margin software component of the total revenues should be a positive that you might consider revising your APS forecast for fiscal 2006 on the upward side. Thank you. Offsetting that to some extent is the XBOX 1 sales and the software associated with that and also HRB revenue in each of the segments. To the extent that they are profitable elements and we’re lowering those, then that has an offsetting impact. And Kash, we’re just thrilled to see the unprecedented attach rate with the game console. Keep in mind that at this point it’s really the hard core enthusiasts that are getting involved in midnight madness. They may be more inclined to take the extra game, the extra peripherals. We want to be nice and conservative there and not necessarily forecast that too aggressively. The other thing, Kash, is outside of the FCB segment, as Scott mentioned in prepared remarks, we are making some investments in MSN and Ad Center and some of the impacts of the small acquisitions that we’re doing in that area, for example GeoTango. So, that is also offsetting – from an operating income point of view – some of the other benefits. Got it. Finally, in unearned revenue you talked about 8-10% growth in fiscal 2006; it looks like it’s growing actually north of that. The last 3 quarters it has been 12-13% so, is it just conservatism as you head into a product transition or anything else behind that forecast? Yes, quite often on a quarter-by-quarter basis, relatively big swings depending on the seasonality and the expiration pattern. So, the 8-10% is just how we see it year on year, given what we see in the 2nd half. There’s nothing that’s more significant than that. Thank you. Chris, you mentioned that CRM 3.0 was exceeding expectations. Are there any metrics to back up the success of that product in the market that you gave out with SQL Server 2005? Just the revenue growth inside the overall segment. I don’t know if we split up the CRM in terms of growth, coming off such a low base, it was an extremely high number and I don’t think it will … it was triple digits, from memory. I’m not sure it will give you a good indicator. But in terms of actual dollars, it was just extremely well-received. And, if I could put it this way, the reason for the out performance in that particular segment, it was virtually all CRM, so that’s one way in order of magnitude form it. Just to follow up to Heather’s question around Vista, you’re saying second half of the year; is there any more granularity. Will it make it in the back-to-school segment or should we expect a late ’06 ship? At this stage, we really aren’t saying anything more than what we previously hit. Obviously, in the next quarterly call that we have in April we’ll foreshadow ’07 and we’ll certainly be happy to talk about it at that stage. Hi, good afternoon. Given your interest in AOL, could you maybe talk from a corporate development perspective how you’re thinking about MSN and some of the other sort of advertising related businesses around that market? Outside of the investment that you’re making, obviously, in building better and whatnot? I don’t want to obviously speculate on anything having to do with acquisitions. I think Steve has spoken quite openly and I certainly talked on previous calls on our willingness to consider acquisitions as a way of fueling growth. We have been doing a recently significant number of them. In fact we’ve been announcing roughly one a month. They’re small to medium-sized and to a large extent that’s the ones that we think really give us good value for our money. And, we certainly expect to continue to do some of that. But in terms of speculating on larger transactions or their impact on particular businesses, that’s not something I really want to do. That’s fair. Maybe just any color you can give us on the composition of the strength of your SQL Server, like geography or if you can give a little detail on where you saw the… Very broad-based really. It didn’t peak in any particular area or any particular segment. It was just incredibly well received across the board. Great, thanks. Kind of a follow up to the Ad Center questions. Outside of France and Singapore, what are the milestones you have for launching Ad Center? Can you give us any specific dates or rough dates for the rest of this calendar year in terms of deployment of Ad Center? Thanks. In the US I believe we have around 15-20% of our ads served in the US through Ad Center and trending towards 25%. I’m not sure I want to say there’s a particular date, but certainly by spring of this year I would say we’d expect the bulk of our US business to go through Ad Center. Fantastic. Thanks so much everyone for joining us today. As I mentioned at the beginning of this call, this conference call will be available for replay on our investor relations website through close of business January 26th, 2007. In addition, you can hear the replay by dialing 800-695-0673 or for international calls dial 402-220-0304. The dial-in replay will be available through close of business February 3rd, 2006 and of course if you have any further questions, please feel free to call me or my team directly. Thanks again for joining us today.

EarningCall_233880

Here’s the entire text of the Q&A from Sina’s (ticker: SINA) 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. Hi, good morning. I actually has a, several questions. First question is on your online advertising business. Can you actually tell us, were would you see the highest growth going into 2006 and I think on last call you actually guided for about 30% year-on-year growth for 2006, and it seems like the run rate in this quarter has slow down a bit, just 24% year-on-year. Do you think that would pickup in the fourth quarter and also going into this 2006 as you raise your rate? And second question is on your wireless product service business. Do you have, do you think that your return on investment for the SMS product is going to be especially the subscription product is going to be higher than some of the other new applications such as a WAP or JAVA game, especially going to the next year? And how would you want to position yourself going to 2006? Thank you. Okay let me, this is Charles. I am going to talk about the second question first. And yes and we had about 24% growth year-on-year on the pricing, this quarter and I think we talked about that before that this quarter year-to-year comparisons, but not in, I think 30% just because we have higher rate into, towards that quarter or to forth, so because of that 15 in that quarter. And so, we have offered very high rates for that comparison and we recall also that in the first quarter of last year, we had a flat quarter from the third quarter actually with the flat decline in current quarter just for the same reason. And so, I think that’s really in about 15 value, where we did not get 30% for the third quarter and for the first quarter, and we did expect that, we’ve been in a range, I mean, but not necessarily, I think that something radically will be very close to hit that range in our guidance between 24 million to 25 million, for the first quarter where we can go into higher units. And as I mentioned in my press, in my presentation, we think we might, now that we are meeting our rate counts for some of our prime inventories. And so far, that has been treated well in the, on all our customers. And we did not see too much negative impact that tells us again that we will still have the potential, I mean, to increase the pricing going forward. And so, with the, comp, we are comfortable with the hiring been in general, I think, its demand is good and hoping about 2006, I think the growth will come from federal, obviously is the price up, so there we have impact, of course we always help people, that the price increase on rate count is not necessary transfer into, leading to increase because the compact structure for our pricing model. And the way we feel advertising in China, but it does have, in general, for the revenues. And some of the areas where we believe will, will drive the growth next year, when we actually be, that real estate will be still increasing, pretty nicely next year. Especially, for SINA it tends now, we’re regarded that is, we’re not the best product for real estate advertising, for its effectiveness. And, we give up the potential data and in transformation in the discussion just not meant, internet in-taking market share away from the traditional media especially newspaper and one of the important area is for that is been actually traditionally a lot, few asset enterprises spend, and a lot of money on newspapers for advertisement and the market account, the market, as you’re aware of that, and the net loss was shift recently and the profit margin for these industry also got decreased significantly, and they become much more cautious, cautious in terms of their return on investment, for their net pricing and increasingly more and more these in of a kind to discover that internet actually is a very big media for these kinds of pipelines, especially it will tend to the target, that generated target entirely on our website. And so, basically we did see advertising, pickup in advertising probably next year. And another area of course, despite the internet company, that into the industry and website and, we will be having another investment in this sector in China or with the Russia or two. And that could broad new companies, excuse me, which will demand these advertising on our website and of course you have seen that, at eBay and the top of the larger auction site, spend a lot of money on advertising and as we have got pretty much, which would, we expect there was been pretty good turn over in our auction joint venture Yahoo! in near future, so we’ll be receiving advantages on this e-Commerce sector advertising in China next year. And this area of course, we spoke about and which media advertising before, especially for FMCG prospects going forward. And we still have, we have increased our investment in confident areas for we go and come again and the work is going to continue to prevent according to 2006, in so that will bring in a, I think a more advertising dollars from FMCG product with the presentation of, which maybe a comment. So, I think, overall, I think, I think the 30% unit growth, on unit growth was for next year, will be bit note of information we have, we believe at SINA Corp., frankly saying. So, and that’s so far to advertising, and, the wireless business, I’m sorry, can you, if you repeat that question again, again, I think, I’ll talk to on that advertising profit. Yeah, sure. So for wireless, I was just wondering whether the return on investment on that is going to be better than some of the more advanced application such as WAP, JAVA game. Since for these 2 areas are growing financially for you, that would you consider investing more in these new applications going to 2006 and what would be your overall product positioning going to next year? Okay. And so that to bring that settlement to WAP and JAVA the new products rate. And, I think SMS, I mean, is a product in general, and generate quick profit margin. But it’s also a product service that SINA is depending on a distribution channel. On cost of our promotion basically, I think on the content side, its not a big problem and but on distribution side, and promotion side and you have to be very careful in terms of, how you spend your money and what’s when exchanging cash. So it’s the various I mean, I mean it depends on channel-wise, moves to your website with promotion, than they’re basically use cost but if we use TV, that which we just talked about, then the cost there significantly and that can generate very high returns when you spend $1, you get the $3, $4 back but, some of the TV, in general, if you say that you spend $1, you get $1.2, $1.3 back. So, basically it depends on the promotions and the distribution channels. And, on the domain key side, and I think there’s cost involved and because inflationary was providing a content on the mobile platform, and, then not much promotion involved in this particular limit and that also within the thing that we can take advantage, leverage our total strength to extend on other internet offering to mobile platforms. So, I think, that there is definitely domain id you would generate higher margins by going forward, if we can successfully penetrate this. As far as to expand our portal offering to wireless space and so that we think it happen. And, as you take another game is another area that we got cost cuts to core NOI, excuse me, in fact, mobile worlds, in the future are now found upon very small base right now, US$800,000 for the quarter. But the basic thing, at final stage we do some JAVA game and other large scale. But most of games would also have the platform with some, with the games that we like this for 100, 110 providers. And so, when you got to pay the content fee a revenue share for that matter. So, these revenue was in the nature we tend to have very high cost. But in JAVA game from other service offerings from wider service and all these revenues fit within some bright future. And, we will continue to invest in each of the areas, but the margins are very important and you think in this front, it was very reigning, even China was in promotion effort so on so forth. And, I hope that answers your question. Well hi, Yan, Charles and Hurst. I have 2 questions, number 1 given your heavy marketing expense for the TV campaign, and we should reasonably expect the revenue benefit should’ve come from 4Q onward on your mobile value-added service side. And yet you only guide modest sequential gross for your mobile WAP in fourth quarter, and why is that? Okay, let me just talk about this question, a little bit here. I think, we do, in general, stop we’re going to decrease revenues funding campaign we had in Q3. And in fact, we continued on the campaign into Q4. And, also apart the decision in terms of how much we spend, how long we continue to generate depending on the mutual investment, for these in present campaigns at any point, if you think. And so, if we don’t increase the expenses, and because we have a very good monitory system, or we can probably campaign very quickly, and so, hoping about that we will be going to carry revenues for sure, above these inventory we made. And but, on the other hand, we’ve talked about that newest pattern, actually, I thought it was a initial pattern was not generating on these TV campaigns, actually we are, we had income, a decline in these business, because there are some of our partners have a timing, having therefore a long-time. And, we have to really, spend a lot of efforts and to, produce in about new partners, hence there is, in order to grow in present again and for the product and we’re still to our west and websites want our plan in distribution channels so on so forth. That impacts all these, we are talking those areas, and towards the outside of course by the revenue swing according to the TV campaign. And so, its our major picture and of course in the none-SMS revenue side, we also saw main picture that MMS in outgoing, but WAP is growing and JAVA is growing and IVR may growing to. But, the intense of the, ring-back tone, we’re not seeing too much growth in the first quarter. So, overall, the revenue picture and TV campaign is only part of our voice business and if, we have just mentioned about the new rate of rotating, we are generating about 5.5 million revenues in the third quarter. So, the majority of these revenues from mobile, the others were actually from other sources, not from TV campaign though, overall, lays a big picture here. And of course, we are going to continue to explore new area, on new product. And, as we have already said that’s just a competitive kind of market. Thanks, and I am next question is regarding online advertising. And at this quarter you saw around 13% of sequential growth which primarily came from the volume growth of, for your new advertiser base. And can you comments on which sector, you see the strongest, goals for new customer acquisition and which sector you’re expressing some difficultly? Well, I think, overall, we are not risking more apparent diversified picture of Chinese a customer base and as the present revenues and in previous question it was said that, overall, we feel that the company categories in fact we have the Auto and IT industry, are being the major contributors. For advertising revenues and did not seems too much, decreased 50% up to the revenues to 47% up to the revenues. I think, the only the thing that came down little bit was auto industry, just because we had a very big auto show in China. In Q2, there was traditionally high season for auto, high demand in China, and so there is just a price there. And so basically, we are not seeing very much in the cost category but in terms of the new categories of course, I mean, I mentioned FMCG and also in webhost, website areas and some of the new important contributors for the revenue growth in the third quarter and if you remember in time, then multiple year contract with so many channel for the, on the recruiting and also with eLong, but at the end of Q2 and we’ve done it for penetrate, to contract and in the third quarter and the FMCG of course. Given that some more times at the drinking industry, Coco-Cola, top of world, I think, has invested more money than in the previous half, I mean, in it’s area. So, I think that, of course these areas are depending as the total amount in, in total invested dollar amount spent but they contribute, meaning for a, in terms of growth, I mean for the revenues and I think basically, we’re through more diversified pictures and we’ll have growth from a lot of different sectors, in the market basically. Good morning guys. Two questions, one is, if you were to capitalize your TV ad percentages, how long would you amortize it for? And then, my second questions is, in your 4Q guidance, do you factor in increase in your TV ads or decrease? Thank you. In terms of amortization really the literature acquired in amortized expense is about so called, at the expected benefit, here in a picture which one would appears to be realized revenue, and in the future quarters. And so the great affect on how much revenue generated in that area that your base recognize proportionately expanded, associated with this revenues, well that’s a rule here. And, so basically, South Korea, I mean, we had big kind of progress and of course as far as new product while we have 3 fall to establish panel. And typically it takes at least 6 months to capture about 18% of the revenues based on historical experience. And so we cant describe that, it will be amortized over a 6 months or more and but that of course that amortizing was a little bit more well noted because either you have a higher user base in the beginning of the period and before than the high cost subscription basically. And in Q4 guidance basically, I mean, we are not accepting a slowing down, in to the pricing, the advertising for subscription base, for subscription base and this is probably in the quarter, and probably because I mean, the new Pod have been, is used for the prime core for lances. And so there is another, there is already we need a lot of attention for these products. So you imagine that the pricing has to come down little bit, I mean in the first quarters. So we had better impact ahead of it. In the first quarter, and so we’re not expected to generate, to spend much on advertising for SMS in fourth quarter than to third quarter. Hi guys. A few questions here. First of all, when do you expect to see MMS coming back, I mean nearly we’ve seen three sequential quarters of decline in that business do you expect that to rebound here in the December quarter? We’ll as I’ve said just at a beginning of that. We’re not seeing a time that MMS is coming back in near future. And, they’re probably because that the usage and adoption for MMS is not really kicking off, that significantly in the recent fronts in China. And so, we’re currently seeing that MMS could be more traditional theory, you can generate revenues in the future. But I mean, we’re not pretty sure how much gross we can have. I mean for this particular product going forward at least the way it don’t have a visibility at this point. To know exactly, either the Russian going for MMS. Okay. That’s fair enough. And then how much of the subscription SMS revenue you generated in the September quarter? Do you expect this is going to be recurring here in the December quarter? And how much of, I guess, this expense do you expect to be recurring again in the December quarter? Well, I think that these product just have question I mean revenue recurring basically was totally about revenue generated these users who are acquired in Q3, that will continue in Q4 right? And, I think I said, I mean, there’s no specific number I can give up. But in general, that was of entering the other question, but previous quarter basically we have historical and experienced and our current experience to take 6 months to, to catch about 80% of total revenues of the life time of a subscription. And formally users and so we think than we can capture precaution of the revenues in the first quarter. But I don’t have exact number I mean, that I can tell you but in the ballpark, I think what I said in probable will give you intense in this, and how much revenue we can generate. In this recurring cost, recurring cost, I think the new cost we’ve been recurred really is supposed to deploy on new users so that will be the kind of, the users, newly those and then probably just subscribers and they will have the deferred revenue going forward that in content. And, so that how much was spent in on a new campaign and it really became, the effectiveness of the advertising and we are planning back for the advertising we’re currently doing in Q4. And so, if we feel that on those camping’s we will continue to spend as we have, have spent in Q3. But if we’re not seeing good returns as we can monitor for our system, almost spontaneously, that, we can stop or we are going shift into another product going forward. So, there is a degree on such statement and how much we’ve been spending in Q4 depending on those attractive events especially when it is for that campaign. Okay. Fair enough. And then last question here. On your other advertise other revenue line, that was, if you exit out 0.5 million, you generated from hotel bookings last quarter as a result of the feel of the business. That was fairly flat. Can you talk about whether search grew in that business or whether that was pretty flat and can you talk a little bit more about that? Yeah on the search site, Jason, on the search site, we focus more on the, on the product developments and less on the revenue generation. So we saw a modest increase probably in the neighborhood of about 5%. And so what happens is that, as we wrapping up our new iask product, we’re now, we chosen not to put advertise on the iask platform. So, that’s the reason why the revenue hasn’t gone down as much. But right now, we are kind of, going for try and to get up the unique users in page view. So trying to get the adoptions of people who are involved our iask platform. Well, I think, as you guys probably know we’re not, in the, we’re not in the dominant positions in the search area so, I think for the time being focused on product its still going to be first and foremost upfront in front of us rather than trying to get some short-term gains in sense of our search revenue. It’s right now related to our brand advertising searches still, I’m used to these smaller, much, much smaller than our branded advertising so, I think its really a judgment, I think when we feel that our radio type is ready we will then begin come more heavily to the advertisers to get their, to get their revenue. Good morning. I have two questions. First and you may have answered this but, we seem to have a fairly poor connection that was difficult to understand some of your comments. But, could you explain the, the marketing spending that you’re doing on the SMS? Why it is so large and why was it so concentrated because as I recall, this is somewhat unprecedented for you to spend such a large share amount in the short period for a single product? And then I have a couple of follow-ups, thanks. Well, I think we didn’t talked about it of course any deeper already and basically I think, yes, this amount was much higher than we have spent in previous quarters and much high of operating cost, so, higher than we have originally up, projected a decrease. And I was caring that the comment basically has, in mid-half of the quarter, I mean we were beating present competition because of, on one hand we see, positive returns on these advertising, and over the long-term of the subscription theory and nor distribution theories of the, as we intended to acquire product campaign and we have a very sophisticated system to monitor that, now we’re having to spend money but we have the criteria, as we need subsequent numbers where we’re going to spend. And, but the number basically was that, if we keep spending a lot more than we’re going to have alternate quarters profit because if you can imagine that, the revenue patterns are really, it was of course several months, but then the cost will incur in the current quarter, and in the current quarter if we do this in this way, than we will probably increase some of these, I mean from certain campaign. And, so we’ve spent 6.7 million and we generated about US $5.5 million on these campaigns. And obviously, it doesn’t make sense on current quarters but obviously we anticipate we will get a lot more revenues in the future, trying to follow the campaigns. And so, it is quick decision, because we didn’t think that we may, basically to get the channel whether with simpler products short-term costs and for long-term benefits, while we hear the more about that certain profit. Of course, we plan to have to stop the campaign with feel fact are not on our campaign, being ordered to really show much higher costs for current quarter. But I, we believe that it was rather sounding that we naturally feel, in fact it’s the go forward with more campaigns, in order to generate more revenues coming over the longer term. Well, basically that, duration will be high and it was in competition. Okay. I have a follow-up question on search. If I understood you’re right, you were saying that you are not concentrating in monetizing yet. Could you say us, that kind of, difficult becomes there? How you’re doing compared to others in the search space? But, do you have a sense of world market share of search queries in China, has yet the Chinese margin improved, or was it by the same as last quarter? They’re various reports out there, and I read every one of them and I think the, I think the, I think the rankings varies wildly from report-to-report, depending on, the perspective of the people who actually created the reports, I think the general sense that we have is, most of all traffic, file search is coming from, the users have SINA portal and when they’re using our SINA portal, they, when they’re thinking of searching something, they search directly on our sites. So in that sense, I think we’re, we have market share given our positions in the quarter, while our market share probably is in the top, probably top there or four, in terms of the total traffic coming, total traffic coming to our search. In terms of, as I was talking about before, in terms of our monetization, I think we have to get our search traffic higher than adjusting the, what we have right now, in order for us to monetize because it doesn’t make any sense, given that the amount of revenue that we’re generating right now on our service is not all that material relative to our primary advertising. So we think that, instead of trying to get that extra $0.5 million in terms of advertising revenue, it probably makes more sense for us to get up the traffic first. Hi good morning. My question is on the wireless side again. Just want to understand that you mentioned that from the TV advertising additional revenue from SMS is about 5.5 million. And, could you take that out from your third quarter SMS revenue, making price about $0.24 sequentially down on SMS revenue? I wonder, what is the reason for that? Is that the end-market is declining? Or, is that feel owed on acquisition, cost from acquisition channel us, does not defective anymore? Just comment on that please. Well, I think, I mean that, that the effort that will grow our revenue strong at, TV campaign and the non accessories other than this I mean with declining actually said, that normal and I think this is TV campaign just right in I will get promotion we’re not taking the past, we’re not taking the past. I was just for, SMS in this actually most of our revenues will from this descriptions but that before I think the large will not from TV campaign will from our website from our conformation from either sources. And I think the natural chain end I think for all these subscriptions every month and every quarterly retrieve. So naturally you will have meet the client every quarter and every month revenues particularly into that new rate familiar product so it require new users I think to offset that. So I think that it is the load really, the company has basically the TV which is currently, revenue expect where to do that actually is little more. And that does not mean the necessary in the near trend where other than this I mean if other than this to what is the current churn rate, churn rate increase but not nearly anything that would cause significantly I mean, so that I think hope that answer your question. Yeah, my last question is up, so how many unique to mobile phone users, do you have in that first quarter? Okay, I think that the end of this conference call, and thanks for all your participation and I will see you in next quarter. Ladies and gentlemen thank you for your participation in today’s conference call. This does concludes your presentation and you may now disconnect. Have a great day. 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EarningCall_233881

Welcome to the Fiserv Fourth Quarter Earnings Conference Call. All participants will be able to listen-only until the question and answer session begins following the presentation. This call is being recorded and also it’s being broadcast live over the Internet at www.fiserv.com. The call is expected to last about an hour and you may disconnect from the call at anytime. Now let me turn the call over to Jeffery Yabuki, President and CEO. Thanks and good morning. As all of you know this is my inaugural Fiserv Earnings Conference Call. I am very happy to be here. Joining me on the call today are Norman Balthasar, Chief Operating Officer; Kenneth R. Jensen, Chief Financial Officer and Tom Hirsch; our controller. Before I get started I’d like to remind everyone that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are a number of factors that could cause Fiserv’s results to differ materially from our expectations including but not limited to statements regarding 2006 earnings and revenue targets, sales pipelines and acquisition prospects made during the course of this conference call. These statements may differ from actual results and are subject to a number of factors. Please refer to the company’s year-end earnings release, which can be found on the company’s website at www.fiserv.com for discussion of these factors and a reconciliation of non-GAAP financial measures discussed in this conference call. As shared in our earnings press release Fiserv had a strong fourth quarter leading to record revenues and earnings for the year. We are very pleased with our results and believe that we are well positioned going into 2006. For the full year 2005 revenues were up 11% to $3.7 billion with increases across each of our business segments. Organic revenue growth was 8% for the full year. The financial segment’s internal revenue growth rate was a solid 7% in the fourth quarter and 6% for all of 2005, excluding a large contract termination fee received in the fourth quarter. This was a dramatic improvement over the 2% level achieved by our financial segment in 2004. Adjusted 2005 earnings per share from continuing operations was $2.30 per share. While overall GAAP earnings for the year was actually higher. We believe that adjusted earnings from continuing operations is the best earnings measure for investors to evaluate our performance. For the fourth quarter our results were driven by a combination of strong organic growth and a mix of business that delivered solid results. Revenues for the fourth quarter were $988 million and when excluding the large contract termination fee were $961 million. Our adjusted earnings per share from continuing operations for the quarter was $0.56 per share. Our balance sheet was strong at the end of the year. In 2005 we generated over $430 million of free cash flow and over $900 million of operating EBITDA. We deployed our capital in 2005 primarily to value enhancing acquisitions and repurchasing company stock. We repurchased 4.4 million shares in the fourth quarter and a total of 15.2 million shares for the full year at an average cost of $42.84 per share. Looking forward we will continue to build the company for the long-term while continuing to deliver solid financial results. In 2006 we will be primarily focused on three key areas of opportunity. First, we will continue our focus on delivering sustained organic growth across each of our business lines. We will accomplish this by acquiring new clients as well as increasing wallet share with existing clients. This is a critical element in continuing to build our base of recurring revenues and related earnings. We recognize that consistently achieving above market growth rates is not easy given our size and market share. However, we believe that our 2005 performance is a strong indicator of our ability to do just that. Next, we will allocate our strong cash flows in ways that maximize long-term shareholder value. We will continue to acquire businesses and specific capabilities that enhance our market position. Additionally we will repurchase shares when it makes sense compared to other choices in allocating our capital. We have 3.1 million shares remaining under our existing repurchase authorization that could be completed this year. We will revisit the question of additional share repurchase during the year. Finally we will invest in areas of the business that lead to long-term differentiation for the company and have the attributes to drive growth for the future. We will continually monitor the emerging market opportunities and work closely with our clients to identify value-added solutions that will further our marketing leading capabilities. During 2005, we invested in a number of initiatives that have potential to drive significant growth. Examples of future drivers including expanding our presence in Electronic Payments and in particular, Bill payments. We enhanced our position in 2005 through the acquisition of BillMatrix. We view the payments based as a significant opportunity for the company and will focused additional resources on high growth areas such as debit, credit, stored value, ATM processing, debit and ATM networks and merchant in brands check-image capture. In 2005 we also introduced the Fiserv Clearing Network. This proprietary network allows our outsource and in-house check processing clients. The ability to clear both paper and image items in network and via external clearing options such as the Federal Reserve on a more cost effective basis. This service allows financial intuitions to take advantage of the aggregation power of Fiserv. And is an example of how we can create unique advantages for the financial instutions that have a relationship with us today and those, which we will serve tomorrow. In the lending group we are responding to our clients desire to bundle more mortgage for film and services and move to an all electronic paperless loan experience or eMortgage. In 2005 we made additional technology investments to provide a unique, fully automated system that electronically takes loans from origination through a secondary market sale. These types of innovative technologies solutions lead to cause and process efficiencies that are only available for our clients and further differentiate Fiserv as a technology leader in the lending industry. We also began ramping up our capabilities last year to compete more effectively in the global economy through the formation of Fiserv Global Services or FGS. We plan to leverage FGS to more effectively and efficiently serve our clients. In January we announced the acquisition of Caregain in Fiserv health. Caregain provides advanced technology enabling customers to cost effectively create and administer consumer directed health plans. This acquisition allows us to better equip financial institutions and help plan providers to deliver products that will further accelerate the consumer-directed healthcare movement. Our broad set of capabilities which include health plan management, electronic payments and core banking uniquely position us to intermediate nearly all of the touch points between patient, health provider, health administrator and financial instutions. We see an opportunity for Fiserv to emerge as the ultimate market leader in the expected convergence of health and wealth in the United States. I am excited about the long-term growth potential of these and other initiatives that are currently underway. We will continue to update you on our strategic progress throughout 2006. Looking forward to 2006 results, we estimate full year operating earnings to be in the range of $2.46 per share to $2.53 per share compared to adjusted earnings of $2.19 in 2005 which includes the effect of incremental share based compensation expense due to the adoption of FASB 123R. Based on what we see currently we anticipate our results in the second half of 2006 to be moderately stronger than the first six months of the year due largely to sequential quarter-over-quarter growth in our lending and payments businesses. Beginning in 2006, we are modifying our precedent on earnings guidance. Historically we’ve provided updated annual guidance as well as an estimate for the succeeding quarter in our earnings call. I believe it should be in the best interest of shareholders to focus on the delivery of annual results in the context of longer term targets, in that regard I view specific quarterly guidance as less meaningful and therefore we will no longer provides specific quarterly guidance. We will continue to provide annual guidance updated quarterly and focus our primary energy on delivering those results on a year-in and year-out basis. As you would imagine we are in the midst of reviewing many aspects of our businesses. We are planning to host an Investor Day towards the end of 2006 at which time we will provide a comprehensive update on our long-term plans and vision for the future. We hope to see all of you there. As was announced in November, Kenneth Jensen will retire as CFO sometime in the mid to late summer of 2006. Kenneth is actively engaged in the business working closer with me, and the rest of the management team. I intend to name a new CFO in a timeframe that will allow a smooth transition and our plans are on track. I also wanted to recognize the efforts of our nearly 22,000 employees who deserve the credit for our strong results. In the short time I’ve been here, I have been impressed by the organization’s collective focus on delivering both for our clients and our shareholders. For that and the efforts of all of our colleagues I say thank you for a job very well done. Lastly I want to recognize Leslie Muma who wasn’t able to with us on today’s call. Les, one of Fiserv’s co-founders retired on December 1st after more than 20 years of outstanding service to the company. Thanks Les for all you did to built Fiserv into a great company it is today. Valerie, we’ll now open the lines for questions. Congratulations on the quarter and welcome aboard. My question relates to the strategic fit between the three reporting units now at Fiserv and what your view is longer term as it relates to the various different segments of the business? Thanks. Sure, you know we are looking at all the different businesses, and making determinations on what are the businesses that we have today, how do they fit together, and importantly where might there be other opportunities for us to expand the business. For today, the Financial Institution Segment, the Health Segment – I think we mentioned during the call that there is some interesting opportunities that come together in the health savings area, clearly the investment services business provides nice profitability and cash flows for the company. But we are really in the process of looking at how it all fits and how it comes together to build value for shareholders. I would expect that by the time we come out publicly towards the end of the year at our investor day that will have all of those issues resolved and be able to communicate where we are going. The financial segment margins were down year-over-year for the second consecutive quarter when we exclude termination fees. And I am wondering what was the timeline is there for when you start to expect expansion again and maybe you could just explain a little bit why they were down year-over-year? Why don’t I start on that then I will turn it over to Tom too. If we look at it on a year basis, our margins were actually probably 10, 15 percent going 24.1 to 24.2. And as we’ve discussed before there are lot of moving parts in terms of what happens to our margins, they will vary fairly significantly from quarter-to-quarter. For example, I am talking about the margins without the large termination fee of $26.3 million. For example, the margin in the fourth quarter was affected of course by our investments in particular Australian investment that has an impact on our margin of over 5-10 of a percent just by itself. The fact that we no longer having our Canadian business entry items has an impact of a little bit less than 5/10ths of the percent, and of course other things that had positive impacts too. We would expect that our margins next year in this area would be approximately equal to where our margins were this year. Tom, would you like to add some stuff? Sure, Ken. I think the other thing is, when you look at our business through the year, what we indicated is that the margins do jump around historically in the fourth quarter, our margin have been a little bit lower due primarily to the mix of business. In the first half of 2005 our margins were higher primarily due to increased software license sales and also some contract termination fees. In the second half of the year, they were slightly lower because we continued to make some additional investments primarily in the lending group. And those investments have come through in both the third and fourth quarter. The other thing I would say is our health segments is down a little bit also in the fourth quarter primarily these are investments there in our BPO operation. So I think those are the primary factors for the year. It has been I think going forward as Ken indicated we anticipate ’06 will be equal or slightly above ’05 for the year. And Dave, let me just add one other thing. I think from my prospective coming in a little bit on the newer side of the coin, it’s an interesting challenge to find the right point between maximizing current year margin in building for the future and the quarter was strong, there were opportunities for us to make investments and we took those opportunities and made them given the termination fees and frankly driven the healthy growth in revenues. And I would expect that as we continue to grow, where we have opportunities to incrementally invest because of strength in a quarter or strength in a period of time that we will make that, but all of that is geared towards continuing to deliver I think very solid margins over an extended and sustained period of time. Yes, thank you. Good morning, quick question on just kind of a qualitative discussion by termination fees, they have trended up the last couple of years, I think you guys have done a good job kind of keeping them out of guidance and they have been kind of above average on your typical quarterly rate. Just kind of wondering, why – what you see in these termination fees, it’s from a consolidation most likely but I just want to get an understanding of what ’06 and ’07, do you continually to see them kind of at above average rates for those coming years? And just kind of again qualitatively what are the reasons that they have above average, is that just all are due to consolidation? And Chris this is Tom. You know these fees are very unpredictable, you go back two or three years ago they are probably around $10 million. The last two years, excluding the large in the range of 30. And our plans for ’06, we have budgeted a less amount of those termination fees, but they are very unpredictable and they do range and this is primarily just due the acquisition in the marketplace. And I think Chris, what you are hearing is its environmental, it doesn’t have any – its not related to the business model and you know we are to some extent subject to the whims of the environment. So, to the extent that M&A activity ramped up and it happened to be the banks that we have relationships with obviously that would increase the level of our termination fees. Frankly, my prospective is I would rather have no termination fees because of the impact that has on our future earnings. Yeah, just to clarify one more thing and that we do benefit also from our clients when they are acquiring other institutions also. And so it does go both ways. Okay, and a question on the BillMatrix, it is more of a Biller-Direct type model. I was wondering about as you integrate and leverage that infrastructure, do you feel that you could move it more towards a bank centric model or would you have to kind of acquire some assets on that side to kind of move in that direction, to favor, to help support some of your banks in their efforts to bring down their cost of bill payment? Overtime it will probably become more integrated with our bank business. But, right now they are growing so well on their Biller-Direct model that that will be overtime. And Chris, the other thing is the payment space is a pretty interesting space overall where you’ve got bank facilitated payments, you got Biller-Direct payments, you are going to have – I think ultimately you are going to see consumer, kind of direct consumer to consumer payments, different times in micro payments and other opportunities that we think loom very large for Fiserv and I expect that we will put – as we mentioned in our prepared remarks continue to put real emphasis on, what are those different elements of the value chain that we can own today as well as looking into the future how do we want to our invest to make sure that Fiserv has more than its fair share of payments in the future? Can you size the flood claims processing revenue in 4Q and expectations prospects, just trying to get an idea of how big, now that you have a little more visibility into it, the impact from Katrina and Rita it is going to be on the business? Yeah, we have a – as we anticipated we have a good fourth quarter. We don’t disclose the dollar amounts there at that level of a business unit, but it was good activity in the fourth quarter, we anticipate that to continue into the first quarter of next year and then probably tail off into the second and third quarter of 2006. Okay, thanks. And then just a quick follow-up, any way to detail what your assumptions are for buyback in the guidance and also the tax rate we should use for ’06? The tax rate for 2006 we’ll be using 38.7% and just to highlight that a little bit. I think our earnings growth that we have out there for the year-end ’06 is about 12% to 16% on an EPS basis and in 2005 as you are aware. We did have some one-time tax benefits that generate about $0.03 per share. So when you look at the higher effective rate in 2006, our EPS growth rate is above 14% to 17%, which has been double-digits. Regarding the buyback, we are not going to comment on that fab, we do have 3 million shares authorized currently but we will continue to revisit that during the year. And Greg, the other thing is stock repurchases, nearly one of the different options that we’d look at for allocating our capital, I think it depends on a number of different factors, which obviously include in Impact acquisition. Thank you, can you comment on new contracts signings last year in the financial institutional outsourcing business and how you perform relative to quarter? Yeah sure, David, its Ken. We are a little bit above our quota for the year and we had some very good signings, some of it which are listed in the press release and we expect to be able to continue to have very good growth this coming year. Just as a follow-up Ken. Can you comment on the operating cash flow, which was down of 15% in ’05, it looks like the key drivers really were DSO and deferred revenue, how do you see those trending in ’06? I would expect the DSO’s and it’s not even necessarily, I think that the DSO is were up that much as much as our business was up because of the internal growth rate. So that’s going to be something that we will continue to hit drive down the free cash flow from the few point of receivables. I think our receivables should be better next year though than were this year in terms of not being as much of the drag in the free cash flow. As you probably calculated our free cash flow was considerably better in the fourth quarter than it was in the previous quarters. And I think the other thing that’s impacting the receivables is as we continue to do business with some of the larger financial institutions. Frankly they just, they don’t pay quite as fast as some of the other institutions that we deal with. And David, the other thing, when you are comparing ’05 free cash flow the ’04 as we did have that tax side of that where we just had to pay our estimated taxes, that was about $50 million negative impact on ’04, that should not I mean ’05 compared to ’04 that should not be recurring in ’06. So that was a fairly unusual item, which had a significant negative impact. Good morning this John Connor for Kartik. Had a question on the health segment, there has been some headlines out there that there should be some changes with our HSA accounts are planned, and some of the limits that might be set on those, is there any opportunity for health segment to continue to benefit for some potential changes and how HAS accounts are setup in the limit that they have? John, overall we think that the whole health savings, health reimbursement account the consumer driven health area is a really interesting and potentially lucrative opportunity for the company given the relationships that we have with so many financial institutions as well as obviously having a very robust help business on our own. We’ve mentioned that we had acquired in January, CareGain. CareGain is a really is the equivalent of middleware or the interpreter that’s going to allow the banks and the health plan administration firms to work together to make it easier for consumers to make these kind of choices and their services are important to us but also uniquely situated in the marketplace and we see that to be a very important and interesting growth driver. So, yes we do think we are going to benefit from that and I think you will see us continue to make strategic investments in that area. Sure, good morning, I just wanted to ask Jeff this quick question on, as you have been on board now as the CEO here, just trying to get a sense for what has probably been sort of the biggest surprise to you as you look at the company and how do you sort of extrapolate that forward in terms of opportunities for Fiserv as we move forward here? Sure it’s a good question. You know I have been here just about 2 months now, and the biggest surprise is that I would – that are kind of big box of surprises are: The first one is the breadth of the company in total. As you well know there are many different facets of the company. You know within each of our reporting segments we have many different businesses that I think lead to you know some potential opportunities for the company, to some extent diamonds in the rough, things that capabilities that are out there for Fiserv that because they are relatively small in proportion to our core businesses that I think represents some growth opportunities which you know the CareGain acquisition that we talked about a moment ago was an interesting opportunity just because by virtue of the industries that we operate in. So it’s the breadth of the company and the opportunities that maybe adjacent to that breadth. And then number two and this is not a surprise per se but I’ve been pretty impressed by the quality of the people here in terms of their commitment to clients and their desire to do the right thing for shareholders. And you see a good balance there of the people who really care about what they are doing and I think who are going to continue to drive us forward in the future. I guess this relates back to the comments you made about and sort of all the multiple facets I mean the way that Fiserv was currently structured today, do you see any need to rationalize the infrastructure further or rationalize some of the pieces that kind of exist out there on their own to gain that leverage that you are identifying? I think its premature to answer that question in totality but what I can tell you is we will clearly look at the different opportunities to, whether you call it rationalizing infrastructure or sharing capabilities where we have the ability to in a common way access the marketplace. I think you clearly have to do that but I think you have to look at the core, what are the opportunities, how can you best attack them and how much capital do you need to do that? So it’s not as simple as I think you would say coming in to do the rationalization that said because of the dispersion in the company, it feels likely that there will be some opportunities to gain efficiencies by looking for common or shared utilities. Okay great thank you. And one just quick follow up for Tom. On BillMatrix did you guys talk about how fast BillMatrix was growing in the current quarter? No we don’t disclose that type of detail, this continues to grow well and we expect that market to that acquisition and continue to perform well and provide growth in 2006. Thank you. Good morning. I am just wondering if you could talk about the trends in the FI organic growth, that clearly had picked up here in the fourth quarter and I understand you did have some head win I guess with CIBC coming off this quarter. So I want just some color on the commentary related to the organic growth trend in the quarter and serve your outlook heading into next year, you clearly have some more difficult comparisons in the first half than the second half, just some color on what the drivers overall in terms of FI organic growth? Let me give some higher-level observations then I’ll turn it over to Tom, who can correct me I’m sure. The big growth for the year we had obviously the new venture in Australia, which was very helpful for us. And then we saw some really strong growth in our lending operation, and frankly we saw some very solid growth in our core bank. And basically a number of the businesses we are hitting on all cylinders but some of the things that got more public display: Australia. I would say that we’re very pleased with what’s going on in lending, in delivering different services or new services and some more innovative services, and frankly not only are we seeing revenues in that area but we are continuing to invest because we see a lot of opportunity there. Tom, why not you add some more color there. Yeah I’d thank Glen too in the fourth quarter, we really had a great quarter of organic growth. I would say it primarily came from what Jeff indicated previously about our bank and credit union areas that performed very well in the fourth quarter. And that have to do with a lot of products and services that we sell into our existing customer base and we just did very well at that in the fourth quarter and sequentially over the year we will continue to grow that. And as I look down into 2006 we’d given mid single-digit organic growth guidance for the year. And that strong guidance given the fact that as we indicated previous quarters were loosing about $40 million of annualized revenue. So when we look at that mid single-digit organic growth we feel good going into next year, and the quarters are going to bounce around the penny as we talked about software license fees and other types of factors but overall for the year we are confident the financial segment to be in that mid single-digit range. And some more drivers in ‘06 as ‘05 in terms of the macro and also give some color in the Australian JV, how that is progressing? Yeah I would say similar areas, I think we are going to continue the push on the payments then as Jeff indicated earlier and that’s going be an area avenue of growth that we didn’t have as much maybe in 05. Regarding Australia that continues to move forward, it will be slightly dilutive in 2006 and towards breakeven towards the end ‘06 but it continues to be on track. Thank you good morning. Just a follow-up on the prior question about the core bank market. Can you talk about what you were saying just in terms of competitive trends and maybe if you are seeing any impact from the Certegy, Fidelity merger? We’re seeing really no impact from the Certegy, Fidelity merger yet or if ever we will. I would say that the competitive marketplace remains pretty much the way it has been. There are pockets where it’s very competitive and we seem to win more than our share. Alright then this is a follow-up on the health side. What type of it, may be you talked about low double-digit organic growth in ‘06. Can you talk what we should expect for pass through costs there and should that gap between reported and growth as you start to know? I don’t believe so. I think similar trends to what we have in the current year. I think you are talking about the pro forma without the prescription cost. I think we’ll see the real growth in that areas is probably a year to two years down after the HSAs take off. Hi good morning. The financial 7% organic growth, the flood claim processing, did that help or was that about a neutral effect to that in the quarter? It didn’t have that strong of an impact as we had very strong fourth quarter of 2005. The primary effect is that we talked about where our bank and credit union core really have the tick up is like that rate has improved where it is. And then remind me going into Q1 and Q2 ’06, is the flood stuff going to be a positive or negative trend versus the year ago period? Yeah, going and just for modeling purposes when we go into Q1 and Q2 ‘06 is it a positive or negative effect I can’t remember what the…? It will be as I indicated in my previous comments Bryan, the first quarter ‘06 is going to be stronger in that particular area and probably going to tail off in the second and third quarter. Our appetite remains very, what would you say. Robust strong, Yes we want to eat a lot then I think we will continue to have plenty of acquisitions too, we got a great pipeline and you will see more. So we’ll see more than the last couple of years, it seems like - if you look at the last two years it has been a little less than maybe it was the previous years we’ll see a pick backup to more a bit below? You’ll continue to see it bounce around a lot, '03 was a very big year because one of our large acquisitions we closed on I think was December 31st. Yeah Bryan we still spent roughly $450 million in acquisitions in the current year and that’s just another deployment of our capital, you know that’s one area including buying back our stock and other internal investments that we are making. Hi Bryan, I would just add that, well, clearly we will at acquisitions and I suspect as Ken said, our appetite is relatively robust. I think as we think about how to deploy against acquisitions, so things that represent, the areas that represent significant growth opportunities for us are ideally where we want to have more focus. So to the extent that, good properties are available that are well within our targeted opportunity, you should expect to see us to be aggressive in that space. Yeah, as well as, I mean, our core banking, I mean the things that we will do well that we believe that we can bring both management expertise and product expertise and to make those business better both on a operating prospective as well as having them be complimentary to our strategy are areas that are very, very attractive to us. Good morning. I just want to follow-up on a comment you said at the beginning, the opportunity that you’ve got in the Fiserv Clearing Network. Talk about how that rollout is going and uptick but specifically how many FIs are signed out? The network has, we began putting the network together in 2005. We currently have enough partners to cover about 75% of the US. The network won’t be complete until, a kind of the end, say the middle of 2006. And we had about 300 active clients during the year, again we are still on the building phase, and we don’t want to, we are not going to push this really hard, until it’s complete. But we see this to be an interesting opportunity and again one that’s proprietary to us given the size of the install base that we have today. Yeah, just wondering, what’s kind of your outlook for bank spending growth this year, I mean, do you see, how did 2005 shake out, I guess, versus your expectations, where do you see banks spending overall going? Hi Phil, probably be spending about the same rate that they did this previous year, the same percentage increases to be below single-digits for the most part. Neill, the core business, have you seen any shifts in 2005, license revenue is strong one quarter, not that you know, is there any trends as far as outsourcing versus in-house. And then also is the license is that more driven from non-core license sales or can you can give us some color within kind of a strength in the core business? I think that it’s going to pretty much continue as it has in the past, it bounces around sometimes we will have more license sales and up from quarter-to-quarter. I think that there is still most of our software license sales are to existing clients, which also adds to the stability of our earnings. And then I was just trying to understand, they talked about a few months ago, a Chase RFP for mortgage processing. Can you give us some color on the conclusion of that, was there revenue in the fourth quarter, was that deal signed, was it in-house or an outsource contract? We announced or the JP Morgan Chase announced that they have chosen our product in their due diligence space. We have not signed a contract with them, we continue to work on that in the first part year of 2006, well we don’t have a significant revenue in our budget as of right now for that transaction. But we are heading down the contract angle and we will be updating you later in the year as that goes forward. And then with regard to GMAC, I believe you did the mortgage processing for GMAC and that business is up for sale from GM. Is that contractual limitations on change of ownership, is that processing contract could be at risk? We would have standards termination fees in that contract. But today, we have no reason to believe that there is any particular risk. I would guess if the, it is so but we would continue to be the process here. I just wanted to come back to the rationalization question from earlier, specifically I am wondering, do you think is there any opportunity on the product side, I think you historically let the market decide which products succeed in the process and a number of products that seem to overlap and I am just wondering if you are going to be more actively managing that portfolio? You know Roger, I suspect that it’s too early in the evaluation process to add a lot more color to that, what I will say is, we will evaluate this really ensuring that we take the steps that will allow us to both maximize shareholder value over the long-term as well as ensure that we maintain a very strong competitive presence and there are both positives and negatives to having a multiple similar products in the marketplace as it relates to how you fit within the competitive landscape. So, it's a complex problem but one that we are giving a lot of attention to and I believe that when we come out towards the end of the year and have our Investor Day that we will be able to articulate our strategy very clearly in this area including the implications of what actions we are going to take. Roger, just to add to that that we having a core for instance in the core bank area. We’ve continued to consolidate platforms over the years, you know Fiserv 8, 10 years ago will probably had 10 to 15 bank platform. We are probably down in the range of 5 to 6 and for instance in the fourth quarter we took a little bit off a charge for one product that we are phasing out in the bank area. And we have done that behind the scenes and so we have done some of that, and the rest has just been answered. Okay, thanks, that’s helpful. I guess my follow-up question is, on a slightly separate topic is: is there anyway to quantify how much some of the faster growing parts of your business are growing for example, is there any pocket of revenue that encompasses imaging, health, savings accounts and bill payments that you could say is growing at 10% plus or do you have any plans and try to segment that out later in the year? I mean, Roger, one of the things that we are clearly looking at is, how, what are the attributes of the different business is, what businesses might you lump together that in the aggregate would create, could create or create or have higher growth characteristics than the reporting segments that they are in. So, again, I would ask for some patience in latitude and when we talk about the business in depth later on in the year, we’ll certainly talk about areas like that. It’s one of the reasons why for instance, we talked about our payments business and our lending business discretely in the 2005 highlights. Hi, good morning. I lost track over the several quarters of net revenue basis, really how to look at the mix in the health segment. And as we look at the TPA business, the pharmacy benefit and some of the newer services such as CareGain, is there a rough mix of that segment you can provide us? No, we haven’t brought that out. As you can see through the prescription ingredient cost, David, that continues to increase on a quarterly basis. That kind of gives you a feel that business continues to grow as part of the total of the peek and of the health segment. The TPA business as you know, has been very competitive, that’s the nature of that marketplace, we continue to consolidate some of our areas there. We are looking forward into the future, we are going to see greater proportion of growth in ‘06 and ‘07 coming from a couple of areas that Jeff indicated earlier, one of those areas is CareGain and the administration of these the HFAs and consumer directed healthcare. And we are also going to see in the BPO area with our relationship with EDS, some more growth in that area as we look out into ’07 and ’08 so that’s the kind of mix there that we see going forward from that standpoint. When I think about the comments you’ve included in the last couple of press releases, particularly the growth in competition in large commercial employee market, I assume that it refers primarily to the TPA area which is probably still the majority of that segment, is that competition coming from carriers who are offering their own administration services or is that coming from other TPAs. And is your mix that heavily weighted in the larger market, I thought it was more focused on small and medium sized self-insured employers? Yeah it is focused more on the small, medium and, so that the overtime that’s going to have less of an impact in the large employer market its United Health, Blue Shield. You know we are not disclosing that Nik, you know where we are at in the current quarter, as far as our share count goes so you can use that for your model as going forward. And then the only other question I’ve got is left is, if I look at the hiring that you guys have got, and my understanding is that we have to hire a new CFO and a different person to run M&A, is that correct a) and b) do you expect that to be internal promotions? To the a) question, we could make the decision to split Ken into pieces, and take his roll and split, we are still evaluating that as an option, and we have a strong internal management team and so we are evaluating our internal folks as our primary desired result. Well, without being specific my goal if I could have one in this area would be to make the decisions, make the hiring decisions within the time that would allow maximum crossover between the time that Ken is here and the time that we have new candidates in place. Thanks. Lot of my questions have been asked and answered but one question I had is, Jeff, if you could talk to us about how you look at Fiserv relative to essentially speaking about what on the margin you might want to change about the company for example, you now we noticed for example that you put guidance in the press release and you indicated during the call that we are not going to be getting quarterly guidance, can you give us any inside as to other changes you might be thinking about in terms of how the company is run or how you are communicating with the investor community, that would be helpful? Thanks. Sure thanks. There are a variety of areas that not to be overly repetitive, that we are looking at, but my personal goal is for us to identify where there are opportunities for us to grow at levels that are in excess of market growth and to invest accordingly in those areas. Philosophically how we think of – the things that are important to me is what do we have to do to make our products and services put them at the highest level of competitive differentiation. What are those streams of earnings that we can create that are sustainable over a very long period of time and that translate into very high levels of cash flow and then lastly how do you take those cash flows and invest it in a way that delivers the best return for shareholders. So philosophically the way I think about the businesses are where do you get real differentiation and sustained cash flows. How do you take those cash flows and invest them, and then lastly what are the attributes of management that you need to have to make sure they are organized in way that perpetuates the first two items. So that is a little bit of a philosophical statement. Things like quarterly guidance, I have a hypothesis that where you have a quarterly guidance out there that you may stand a disproportion amount of time ensuring that you are obviously meeting the targets that you’ve set, well I’ve not seen that per se, I want to make sure that we make decisions that are good for the long-term, 100% of the time which is why I have moved us away from quarterly guidance, but it’s reinforce I believe whole-heartedly in annual guidance and long-term guidance when we get together towards the end of this year. We’ll certainly give framework for what the people should expect from Fiserv over the long-term, be that revenue growth and earnings guidance. So certainly we’ll put long-term targets out there that are based on the evaluations that we are doing today. Good morning, really just a modeling question as we look at 2006 I wondered if you could help us understand how the additional equity compensation expense will break out across the segments? We are not disclosing that at this particular time but most of our operating income and earnings are primarily in the financial segment, so correspondently you are going to have majority of our expense that’s going to be correspondingly in that particular segment. And our expense will be if you look our ‘05 ramp-up by quarter it’s generally higher in the first quarter that will be the remaining part of the year, mainly to the nature of our option programs. So I would anticipate that trend will continue in 2006. Thank you. Well thanks for joining us this morning, if you have any further questions please don’t hesitate to call our Investor Relations team and thanks for your support. Have a good day.

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Here’s the entire text of the prepared remarks from Amerada Hess’ (ticker: AHC) 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 day ladies and gentleman and welcome to the Third Quarter 2005 Amerada Hess Earnings Conference Call. My name is Kelly and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. OPERATOR INSTRUCTIONS. I would now like to turn the presentation over to your host for today's call, Mr. Jay Wilson, Vice President Investor Relations. Good morning, everyone, and thank you for joining us for our third quarter 2005 conference call. As usual, with me today is John Hess, Chairman and Chief Executive Officer; John O’Connor, President of Worldwide Exploration & Production; and John Rielly, our Senior Vice President and Chief Financial Officer. I'll now turn the call over to John Hess. Thank you, Jay, and welcome to our third quarter conference call. I would like to make a few brief comments after which John O’Connor will provide an update of our exploration and production operations; then John Rielly will review the financial results for the quarter. Turning first to exploration and production. Our third quarter results benefited from record oil and natural gas prices. Production averaged 312,000 barrels of oil equivalent per day. Hurricane related downtime in the Gulf of Mexico and temporary facilities issues at several non-operated fields in the North Sea resulted in production being 3% below the year ago quarter. As of today we have restored about 50% of our total Gulf of Mexico production of 51,000 barrels of oil equivalent per day impacted by the hurricanes. We expect to have over 85% of our production restored in November and more than 90% in December. Despite these short-term production effects, our exploration and production business is progressing favorably. Our development projects are on schedule and on budget, and we will drill some key exploration wildcats over the next two quarters. Two weeks ago we announced an agreement with Apache Corporation to acquire its 55% working interest in the deepwater section of the West Mediterranean Block 1 concession in Egypt for $413 million. In a separate transaction Apache will acquire, subject to the exercise of preferential rights, Amerada Hess' interest in eight fields located in the Permian Basin in West Texas and New Mexico for $404 million. This West Med acquisition fits with our strategy to grow our international natural gas business and we believe that our deepwater and sub sea experience will be a significant advantage as we develop the existing gas discoveries. In addition, we see further exploration potential on the block, which will enhance our global exploration portfolio. Also in October our Russian venture, Samara-Nafta, acquired two additional leases in the Volga-Urals region bringing Amerada Hess' investment in Russia to approximately $230 million. With regard to refining and marketing, our operations performed well during the third quarter. The Hovensa joint venture refinery benefited from a strong margin environment but operated at somewhat reduced throughput as a result of a scheduled turnaround of the number six crude unit. Our marketing activities were negatively impacted by lower margins during the quarter. I will now turn the call over to John O’Connor. Thanks, John. Good morning, everybody. As with other operators in the Gulf of Mexico, we continue to make progress recovering from the effects of the two storms. Katrina destroyed our shore base at Venice, Louisiana and severely damaged production facilities in the Main Pass Breton Sounds area, which had been producing 4,000 barrels of oil equivalent per day. Hurricane Rita didn't harm our production facilities, but we've been impacted by the damage to downstream gathering and processing infrastructure. We're grateful, however, that none of our people were injured. Overall the hurricane-related reduction to third-quarter production averaged 9,000 barrels of oil equivalent a day. Hurricane-related production effects will continue into the fourth quarter which may cause as much as an average of 17,000 barrels of oil equivalent per day to be deferred. The third quarter is typically a period of intense maintenance activity in the North Sea and West of Shetlands. This year was no exception. However, several partner-operated turnarounds took longer than expected, the net effect of which was a deferral of some 5,000 barrels a day for the quarter. In addition, the buyer on BP's Schiehallion facility in July resulted in a deferral of some 4,000 barrels a day of production during the third quarter. In the fourth quarter a major turnaround is now scheduled at the Schiehallion Field. This, together with a number of short-term facilities issues in the region, will likely lower production by an additional 10,000 barrels of oil equivalent per day. At the Malaysia-Thailand JDA the buyers of the gas remain in the commissioning phase with their onshore gas plant. While the gas is contracted with take-or-pay agreements, thus keeping us whole economically, we're reducing our production forecast for the fourth quarter by 12,000 barrels of oil equivalent per day. In consideration of these issues, we've revised our fourth-quarter production forecast to a range of 320,000 to 330,000 barrels of oil equivalent per day. In addition to production, the hurricanes have impacted rig availability and thus the timing of our Gulf of Mexico wildcat program. Ouachita and Barossa are now scheduled to spud near year-end, and Turtle Lake is now moved to mid 2006. The Pony well, however, remains on schedule for a November spud and will take 100 to 120 days to reach total depth. I'll turn the call over now to John Rielly. Thanks, John. Hello, everyone. Our earnings release was issued this morning and it appears on our website. In my remarks today I will compare third quarter 2005 results to the second quarter. Net income for the third quarter of 2005 was $272 million compared with $299 million in the second quarter. Included in the third quarter 2005 earnings are charges of $31 million related to the repatriation of foreign earnings under the American Jobs Creation Act of 2004 and $14 million related to hurricane activity in the Gulf of Mexico. Turning to exploration and production, income from exploration and production operations was $235 million in the third quarter of 2005 including the $14 million hurricane-related charge compared with $263 million in the second quarter. Second-quarter earnings included income tax benefits of $11 million reflecting a tax rate reduction in Denmark and a tax settlement in the United Kingdom. Excluding these items E&P earnings were $249 million in the third quarter of 2005 compared with $252 million in the second quarter. The after tax components of the decrease are as follows, average crude oil and natural gas selling prices increased by $67 million; crude oil and natural gas sales were lower by $65 million; all other items net to a decrease in earnings of $5 million for an overall decrease in third quarter adjusted income of $3 million. The Corporation incurred incremental third-quarter expenses related to the hurricanes of $14 million after income taxes. The pretax amount of this charge is $21 million and is recorded in production expenses in the income statement. It is estimated that future hurricane-related repair costs will be approximately $10 million before income taxes and will be expensed as incurred. As indicated in the press release, lost production amounted to 9,000 barrels of oil equivalent per day, which is estimated to have reduced earnings in the third quarter by approximately $25 million. The effective income tax rate on exploration and production earnings for the first nine months of 2005 was 42%. The full-year 2005 effective income tax rate is expected to be 43% to 45%. The after tax impact of crude oil hedges reduced third quarter 2005 earnings by $294 million compared with a cost of $231 million in the second quarter. The press release provides details on the portion of our future production that is hedged and the related contract prices. The after tax deferred hedge loss included in accumulated other comprehensive income at September 30, 2005 amounted to $1.7 billion. Of this amount $45 million was realized. Turning to refining and marketing. Refining and marketing earnings were $125 million in the third quarter of 2005 compared with $98 million in the second quarter. Refining earnings consisting of Hovensa and Port Reading operations, interest income on the PDVSA note and other miscellaneous items were $144 million in the third quarter of 2005 compared with $77 million in the second quarter. The Corporation's share of Hovensa's income after income taxes of $58 million was $93 million in the third quarter compared with $66 million in the second quarter. Port Reading earnings increased significantly in the third quarter of 2005 compared with the second quarter. After-tax interest income on the PDVSA note amounted to $3 million in both the third and second quarters. The balance of the PDVSA note at September 30th was $212 million and principal and interest payments are current. Marketing operations principally consisting of retail and energy marketing activities had a loss of $22 million in the third quarter of 2005 compared with income of $14 million in the second quarter. The decrease was primarily due to lower margins reflecting the higher cost of post-hurricane product supply. After-tax trading results amounted to income of $3 million in the third quarter of 2005 compared with income of $7 million in the second quarter. Turning to corporate. Net corporate expenses amounted to $54 million in the third quarter of 2005. The third-quarter results include an income tax provision of $31 million relating to the repatriation of foreign earnings to the United States under the American Jobs Creation Act of 2004. The Corporation's Board of Directors has now approved repatriation plans at the maximum level permitted under the Act. No further tax provisions for the Act are required. By the end of the third quarter, $1,655,000,000 was repatriated under the Act. Second quarter net corporate expenses were $28 million including $7 million after-tax for premiums on bond repurchases. Excluding the tax charge and bond repurchase premiums, net corporate expenses were $23 million in the third quarter of 2005 and $21 million in the second quarter. Turning to cash flow, net cash prodded by operating activities in the third quarter, including a decrease of $80 million from changes in working capital, was $484 million. The principal use of cash was capital expenditures of $657 million. All other items resulted in a net increase in cash of $15 million. We had a net decrease in cash and short-term investments in the third quarter of $158 million. At September 30, 2005 we had $760 million of cash and short-term investments. Our available revolving credit capacity was approximately $2.1 billion at quarter end. The Corporation had debt maturities of only $1 million during the remainder of 2005 and $78 million in 2006. This concludes my remarks. We will be happy to answer any questions. I'll now turn the call over to the operator. 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Here’s the entire text of the prepared remarks from Williams Companies’ (ticker: WMB) 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. Good day, everyone, and welcome to the Williams Companies' third-quarter 2005 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Travis Campbell, Head of Investor Relations. Please go ahead, sir. Thank you very much and good morning, everybody. Welcome to the Williams third-quarter earnings call this morning. Thank you for your interest in our company. Today, you will hear from Steve Malcolm, our CEO, Don Chappel, our CFO, and the heads to each of our business units -- Ralph Hill from Exploration and Production; Alan Armstrong from our Midstream business; Phil Wright from the Gas Pipeline; and Bill Hobbs from our Power business. But before I turn it over to Steve Malcolm, please note that all of the slides that we will be talking from today are available on our Web site, www.Williams.com, in a PDF format. Slide number 3, entitled "oil and gas reserves" -- the disclaimer is important and we urge you to read that slide as well. Also included in the presentation today are various non-GAAP numbers that have been reconciled back to GAAP, Generally Accepted Accounting Principles. Those schedules follow our presentation. We urge you to look at those slides as they are integral to this presentation. Thanks, Travis, and welcome. As always, thank you for your interest in our company. Our story continues to revolve around the fact that we are opportunity-rich in terms of investment options around our world-class natural gas assets. We are delivering on our growth strategy with solid investments, as you will hear more about this morning, in E&P, Midstream and gas pipes that are earning well above cost of capital returns. Looking first at some of the major takeaways from the third quarter -- and I'm on Slide 5 -- recurring earnings after mark-to-market adjustments increased nearly 150% over year-ago levels. That's $357 million for the first nine months of 2005, versus $139 million for the same period in 2004. We continue to believe that this is the key financial metric to focus on as you follow Williams. Yes, third-quarter results did take a significant non-cash hit from a mark-to-market change, but this is the first significant negative mark-to-market change following six consecutive quarters of positive and at times fairly significant mark-to-market movements. Exploration and Production growth continues on all fronts. Nine-month recurring segment profit has more than doubled. Nine-month production volumes are up 19%. Continued strength in liquids margins have driven Midstream profits higher -- (technical difficulty) -- on a recurring basis, a $39 million improvement in segment profit for the first nine months. The gas pipeline continues its steady performance, and mild weather in California, high gas prices and the hurricanes combined to depress power margins. Turning to some of the developments that will impact our future growth, Slide 6, E&P will be ramping up its activities with the arrival of new H&P rigs in the Piceance Basin. Expect to see 25 rigs running in the Piceance by the end of 2006. Midstream captured a significant deepwater production commitment from Chevron and Kerr-McGee in support of infrastructure development in the blind-faith field in the deepwater of Gulf of Mexico and is preparing to expand our processing capacity in the West with the TXP5 expansion at Opal. As Phil Wright will describe, we have a number of open seasons that have been successfully completed, or are in progress, which have the potential to significantly increase capacity on Transco -- in fact, five expansions on Transco within service dates ranging from this month to November of 2008. As well, the Northwest pipeline capacity replacement project is scheduled to be in-service in late 2006 and we have an open season covering an expansion of capacity out of the Piceance Basin. As Bill Hobbs will describe, one of the several deals completed by Power was the resale of 1500 megawatts of tolling rights through 2010. We are proceeding with our first drop-down transaction with WPZ and are planning to sell at least a 25% interest in gathering and processing assets in the Four Corners area. Of course, the terms of this proposed transaction, including the price, will be subject to approval of both the Williams Board of Directors and the Board of Directors of Williams partners -- general partner. Assuming such approvals are obtained, we would expect that sale would be completed in the second quarter of '06. Finally, as Don Chappel and the business unit leaders will describe in more detail, we are raising capital expenditure and profit guidance in 2005, 6, and 7. Slide 7 -- the effect of hurricanes Katrina and Rita. We've been pretty proactive about issuing press releases, so I'm not going to talk about this in much detail. Overall, the impact on Williams is expected to be minimal. Generally, with the exception of the Cameron Meadows processing plant, which did sustain significant damage, our operations were relatively unscathed by the hurricanes. I would want to point out the last bullet on this slide. The original delivery schedule of the H&P flex rigs has been impacted by approximately one month due to disruptions caused by Hurricane Rita at a fabrication facility. I will quickly run through a summary of our second-quarter financial results and then turn it over to our business unit leaders for a deeper dive on each of their businesses. I will come back later in the call to review our consolidated guidance and other matters. Now, let's take a look at Slide number 9, our financial results summary. Income from continuing operations of $5 million was obviously relatively small and it was impacted by mark-to-market effects. I will dive into that more so as we move forward. On a year-to-date basis, that 249 million also impacted by mark-to-market, so it's difficult to see with clarity the real results on the reported earnings level. I'm going to move right to the bottom line here and you can see recurring income from continuing operations after mark-to-market adjustments. Here we strip out the cumulative effects of mark-to-market accounting, and that's our most clear and important measure of our earnings progress. As you can see there, on that adjusted basis, we are reporting $0.22 as compared to $0.09 a year ago -- on a year-to-date basis, $0.60 as compared to $0.27 a year ago. I'd like to say I am pleased with our results, which are well above our own plan and our forecast for the year is also above our plan and prior guidance. Even more importantly, the outlook for 2006 through 2008 is continuing to solidify and improve as we continue to seize growth opportunities that will create value and do so with a great deal of discipline. Next slide, please, number 10. I will walk through a calculation of the nonrecurring items. First, impairments and write-offs total 5 million for the quarters -- excuse me, $61 million year-to-date. Expenses related to prior periods, nothing in the quarter; $28 million on a year-to-date basis. Gain on sale of assets totaled $22 million for the quarter, $38 million year-to-date. Then finally, just other $18 million on a year-to-date basis. That totals up to a $17 million deduction in the current quarter and adding back $13 million on a year-to-date basis. Moving to the next slide, number 11, please, I will walk through a calculation of recurring income from continuing operations after mark-to-market adjustments. Again, these mark-to-market adjustments eliminate the cumulative effects of mark-to-market accounting, which distorts our reported earnings. Earnings after mark-to-market adjustments will correlate much more closely with cash flows from operations. Beginning with the recurring income and loss that we looked at on the prior slide, we will move into the mark-to-market adjustments for the power business. The first adjustment is to reverse the forward unrealized mark-to-market gains and losses in the current quarter. We had a $153 million loss as a result of gas price increases on the net short gas contracts that do not qualify for hedge accounting. Again, I would just reinforce that we maintain a balanced book of derivatives. However, some of those derivatives do not qualify for hedge accounting and as such, they were mark-to-market, and we had very large changes in gas prices during the quarter. The comparable period of the prior year, you can see we had $187 million gain that we are reversing out. The change of those two is quite significant. On a year-to-date basis, we would be reversing $90 million of forward unrealized mark-to-market gains, as compared to $280 million in the prior year. The next line is adding realized gains from mark-to-market previously recognized, and that captures the cumulative effects of prior mark-to-market accounting. In the current period, we would be adding back $60 million to accommodate that, as compared to $250 million on a year-to-date basis. The total mark-to-market adjustments in the third quarter totaled $213 million -- additional income, or to reverse the mark-to-market expense, as compared to 142 million going the opposite way in the prior year, or a $355 million change. That change, on a year-to-date basis, is 247 million. Tax affecting that -- we get to the after-tax mark-to-market effects of $130 million in the quarter and $98 million year-to-date. Thus, the calculation of the recurring income from operations after mark-to-market adjustments of 125 million in the current quarter as compared to the 49 a year ago and 358 million on a year-to-date basis, as compared to 141 million a year ago and then the per-share amounts that I mentioned earlier. Again, this is our most important and clear measure of our earnings power. The next slide, number 12, let's review a summary income statement. Again, segment profit is distorted as a result of nonrecurring items and particularly mark-to-market adjustments. I won't spend a lot of time talking about that but you can see the large variation. Net interest expense is down as a result of the significant debt reduction that we undertook over the last couple of years and then early debt retirement expense is nonexistent in 2005. We have reduced some debt, but it has all been (indiscernible) maturity dates. Then other income and expense has increased in terms of the net expense, and that is principally as a result of nonrecurring items included in the current quarter. Next slide, please, number 13 -- let's review third-quarter segment profit by business unit and consolidate it, focusing really on the recurring column before and after the mark-to-market adjustments. Again, each of our business unit leaders will drill into these but you can see a sharp improvement in E&P; Midstream and gas pipelines relatively steady; and power reported -- excuse me, recurring basis but including mark-to-market is down sharply, moving from a profit to a loss. If we total it up, you can see the mark-to-market adjustment there for Power that we spoke to earlier. The segment profit after the mark-to-market adjustments total 382 million for the quarter as compared to 317 million a year ago. It's up 65 million or about 20%. We note power, on an after mark-to-market basis, reported $13 million loss as compared to a $33 million loss a year ago. Again, each our business unit leaders will speak in some detail on the results. The next slide, number 14 -- review the same format of data on a year-to-date basis to get E&P on a recurring basis up sharply. Midstream up nicely as well -- excuse me, this would be the next slide, please, number 14. Okay. Midstream is up as well on the strength of strong liquids margins. Gas pipeline is relatively steady and then again Power's earnings distorted by mark-to-market. Moving to the bottom of the page, after mark-to-market adjustments, Power is just below breakeven. This compared to a $34 million profit a year ago. However, the profit a year ago was largely as a result of liquidating certain positions within the Power portfolio. Again, on a segment profit after mark-to-market comparative basis, we have 1.130 billion in consolidated results as compared to 965, up 165 million or about 17% year-over-year. Next slide, please, number 15 -- let's review a summary of major changes in quarter recurring segment profit after mark-to-market, again starting with the third quarter '04 -- 317 million; moving to the third quarter '05, 382 million, a $65 million increase. That's largely attributable to E&P's higher volumes and higher net realized prices. Again, the business unit leaders will go into some detail. The next slide please, number 16 -- I will walk you through key cash flow items, beginning with unrestricted cash at the beginning of the quarter of about 1.3 billion; cash flow from operations for the quarter was 289 million, nearly 1.1 billion on a year-to-date basis. We had proceeds from the sale of LP units -- Williams Partners, $111 million. We had debt retirements during the quarter of 23 million or 244 million on a year-to-date basis; capital spending of 369 million or 886 million on a year-to-date basis. "other" is principally related asset sales in the third quarter -- yielded an improvement in cash of 64 million, an unrestricted cash balance of 1.361 billion plus our unused credit facilities gives us about $2 billion of liquidity, which is certainly a very large amount. However, I would say we have some pretty substantial needs at this point in time. First, I would footnote too on that schedule, it includes international cash totaling about 200 million and cash that's earmarked to settle some legacy matters, including an IRS settlement that's approximately 200 million and a number of other contingencies. As well, we also have margin volatility and potential margining requirements. We currently have margin posted -- adequate assurances margins and prepays totaling 1.785 billion -- and that's on Slide 92, I believe -- up from the end of the second quarter, where it was 1.108 billion, an increase of about $650 million between June 30 and 9-30. At the same time, we can see the potential volatility of another $900 million or so as a result of hedge positions and commodity positions we have with the extraordinary volatility we see in energy prices. So again, we need very substantial liquidity to manage our commodity positions, as well as to provide for other working capital needs. The next slide, please, number 17 -- debt balance. Debt balance at 9-30 is 7.721 billion and I mentioned down 241 million for the year and 23 million in the quarter. In terms of variable-rate debt, again I would note that the variable-rate debt is limited to $648 million. I'm pleased again to report another very strong quarter for Exploration and Production. Our volumes continue to rapidly increase; our profit more than doubled again; and we are also again increasing our guidance. Turning to Slide 20, our third quarter 2004 to third quarter 2005 financial highlights include that the volumes have increased 17% quarter-over-quarter. Our net realized price is up 44%. We did have a hedge ineffectiveness expense of 15.8 million in the third quarter of 2005. Recurring profits increased 96%, or if you exclude this hedge ineffectiveness, it's up 119%. You will note that we did have this hedge ineffectiveness during the quarter. This is based on the NYMEX collars that we have. Please recall that we did the NYMEX collars to retain the price upside versus fixed-price hedges, and we did obtain that upset, though, with NYMEX collars, you have a risk of some ineffectiveness, particularly if you are a Rockies producer, which we primarily are. Also, going forward, these NYMEX collars do continue through 2006 and then drop-off, which is a little bit in 2007. Please also recall the most recent collars we did we put on during the second quarter are Rockies-basin-specific and they should avoid this ineffectiveness. Looking at the base business sequential quarter, it also improved, increased our recurring segment profit by 16%. Including the hedge ineffectiveness, it was up by 30%. Our volumes are up 5% sequentially in the quarter. Overall, we've had a $186 million negative hedge impact for 2005. Turning to Slide 21, this is the continuation of the slide I've shown you this year through the last two calls. It's updated through September. As you can see, our domestic volumes continue their impressive growth and are up 16.4% since January of '05. If you look at just third-quarter '05 volumes, versus the entire year of 2004, our volumes are up 21%, so again, continue to have a substantial increase in our volumes. Looking at Slide 22, accomplishments -- the volume growth is impressive. Full year --we've gone over one year with no loss time accidents for E&P and with the amount of activity we've ramped up, it's something I'm very proud of our team for. Not only are they increasing the results very impressively but they are doing it very safely, and we are actually at 390-some days of no lost-time accidents. Big George gross production is up to 135 million at day. I have some -- a slide on that in just a minute. Looking at the Piceance, we have 12 rigs operating in the Piceance Valley, 3 in the Highlands area, which I'll talk about again. As Steve mentioned, the first H&P rig will be delivered in November. It was scheduled to be delivered in late October; it will now be delivered in late November, and we will be spudding in early December. Our Highlands production, which I will talk about, which is the new projects, which we call Highlands, are now reaching production of 13 million a day on a gross basis. We've attained another Piceance/Highland opportunity I will talk about. The Fort Worth acquisition is progressing. We've drilled five wells; we have two more drilling. We have two rigs operating, and we have a total of about seven rigs -- pardon me, seven wells waiting on pipeline. So we are progressing in Fort Worth. San Juan continues to be stable, which I think is a compliment to that team. They are stable at really record volumes. It is a very mature basin, but our team continues to find a way to keep our production stable. Turning to Slide 23, the Powder team is the leader in the Powder River Basin. I firmly believe this. Our production in the Big George is up 67 million a day or 98% over a year ago. We are now at 135 million at day. Sequential with quarters, we have 25 million a day and again, the Big George production is offsetting the Wyodak decline, basically keeping it flat in the entire basin, but volumes continue to increase. Our production is about 49% of the industry's Big George production, so we are a leader in this area. On the permitting side for 2006, we have about 65% of our permits already in hand and the rest we expect to receive in plenty of time to achieve what will be a record drilling program in the Powder River next year. Slide 24 is a continuation of the Piceance volume growth I've showed the last few times. The Piceance team continues to do a great job. We are about 84 million or 34% in volumes over a year ago and we again grew 6% sequentially from quarter to quarter. Slide 25 is a review from the last call. Our 3P reserves remain at the 8.5 trillion cubic feet, which as you will recall are up 21% from what we had at year-end, 2004. I put this in as a refresher and to stress to you that the next several slides -- when I talk about the Piceance/Highlands, those reserves are not include in this 8.5 Tcf that we have 3P reserves. So when I talk about Trail Ridge, Ryan Gulch, Red Point and Alain (ph) Point at the next few slide, those reserves and potential reserves are not included in these numbers. If you move to Slide 26, we included a map of the Piceance/Highlands and the operations update. If you look at it, this depicts the entire Piceance Basin and if you look to the south part of it, it includes our traditional operating areas of Grand Valley, Parachute (ph) and (indiscernible) which are along the Colorado River. North of these are all of our new projects. Looking first, the northernmost, Ryan Gulch -- that's a farmout we've been paying for a major (ph) during 2004. We drilled three wells there in 2004 and we planned eight wells in 2005. It's due west of Exxon's Love Ranch and Piceance Creek field, and our drilling to date has established a presence at the same hydrocarbon system that it's found in those field. Trail Ridge is just south of that and just to the north of the Grand Valley field. It is continuing to be developed this year. We drilled 3 wells last year and an additional 12 this year. Geologically, we believe this area has proven to be similar to the Grand Valley area, which is just to the southeast, which is one of our core areas. The Red Point is just due north of Grand Valley. Numerous industry wells have been drilled in this area, and we plan to drill two wells ourselves this year. These industry wells and their results have established that this area is very productive and similar to our Grand Valley area. The final area I will discuss is the Alain Point area. It's a new area that was again obtained from a major and one where we've started drilling this year. Our initial results there showed it to be an extension of the adjacent Parachute field you'll see just to the south of that, which again is one of our core fields. Looking at Slide 27 on the Piceance/Highlands project summary, I won't go through all these numbers but this table does provide details for each of the areas. Two key points to make -- again, these figures are not included in the previous 3P reserve figures, actually three -- that's one. The second one is we've applied for a ten-acre application at Trail Ridge, and we are on the December docket for that, which is in front of the COGCC for December 5. Finally, if you used a ten-acre density in all of these areas, which we are not saying they will go there -- you'll notice Trail Ridge, Ryan Gulch, and Alain Point are currently listed on this slide as 40-acre density -- but if each of these areas would go to ten-acre spacing, and we are currently in the process of moving to ten-acre spacing on Trail Ridge, assuming approval, then we have additional potential reserves of approximately 5.5 trillion cubic feet, which would go on top of the 8.5 trillion cubic feet of 3P reserves that we have. So that number again totals up to be 5.5 Tcf. Slide 28 gives our year-to-date results of the Piceance/Highlands. Our current rate from all Highlands wells is 13 million a day. We are very proud of that. Let's go area by area. First, at Trail Ridge, it has been our most active area this year; we've drilled 12 wells and we have 9 completed. All of these wells have been successful. They are averaging about 1.1 million cubic feet a day over the first 30 days of production. This leads us to believe that the reserves will be in the range of 1.2 to 1.4 Bcf per well. We've also modified our completion practice in this area in the 2005 program from the 2004 program to shorten the intervals we treat and to begin flow-back operations sooner. We done that most in our traditional manner, and it's also -- early in this program, we have employed Halliburton's Cobra Max (ph) completion technique in several wells and will continue to evaluate that technique. What this process does, it's intended to further shorten the completion intervals by precision perforating, and it also stimulates the individual sands and hopefully provides immediate flow-back and does provide immediate flow-back. There are other completion methods in these areas and also in the Piceance Valley in technology we will be utilizing this year and next year. These changes have been successful at increasing both the rates and the EURs for Trail Ridge from last year's programs, so 2005's program has improved substantially on 2004, which typically happens in these types of resource plays. The current producing rate from Trail Ridge is 10 million a day on a gross basis. Moving to Ryan Gulch, it's an area where we will drill eight wells this year. Today, we've drilled two and completed one of these. We have one rig operating in this area and we have a second rig we will be adding this month. It's not an H&P rig; it's a neighbor's rig. That will bring us to 16 before the H&P rigs begin running in the Valley. So we will have 16 -- not in the Valley, 16 total in the Piceance. Our wells and offset wells suggest initial rates of about 1.4 million cubic feet a day of production, and EURs ranging from 1.2 to 2.0 Bcf per well. It's still early in the Ryan Gulch program but we're pleased with it and we believe we can move those reserves up to the upper end of that range. Red Point drilling is scheduled to begin again this month. We will drill two wells this year in Red Point. Looking at all of the other operators there in the Grand Valley -- or nearby Grand Valley field makes us confident we will see very similar results to what the other operators have and what we have in Grand Valley. This area is already ten-acre spaced. The newest project that we have is Alain Point. We drilled four of six wells there this year. We've completed one. We have two rigs operating in Alain Point and expect to be complete by the end of the month -- these two wells. The one well we have on production is averaging 1.1 million cubic feet a day, and we expect ultimate recoveries of reserves to be in 1.2 to 1.4 Bcf, based on all of the data we have in the very nearby Parachute field where we've drilled literally hundreds of wells and also the wells we're drilling so far. The Parachute area is already spaced on ten-acre spacing, and we expect that Alain Point ultimately can be developed on this density also. So in summary, we are very excited about all of our Piceance/Highlands areas. We are now producing 13 million a day gross, about 10 a day net to us. We expect these areas to provide material proved reserves to us in the future and also we believe, this year, we will be adding on the order of about 100 Bcf, 100 Bcf of reserves to our year-end report based on drilling we have so far. We expect substantial reserve additions in the future. Turning to Slide 29, with industry costs going up and also prices going up, I thought it's important to refresh the three-year average cash margin analysis I showed in March. As you can see, our realized gas price assumption is up from the previous. It was 5.52; previously it was 4.56. What we are using is, for our unhedged volumes, we are using a NYMEX average, if you will, of $8.07, which is several dollars, probably $2 below market, so we're still somewhat being conservative if prices stay high. We are using the $5.52 net realized price and to get to that, we take the approximately 8.07 and we're taking out fuel and shrink, basis, hedge loss to get to the 5.52. So the 8.07 goes down to 5.52. Then looking at cash margin, we deduct for the cash costs -- to get to cash margin, the cash costs, we did a lease operating expense of $0.47, gathering at $0.48, operating taxes at $0.53, and SG&A of approximately $0.33. That equals our cash costs of $1.81. They are up from the March costs, obviously, as many costs are up in this industry, but again, not up as much as our revenue side on our conservative outlook here. If we used market prices, they would be up substantially more, the market prices would. All in all, this equals a cash margin of $3.71, a very profitable business. The F&D costs on this slide remain at $0.78. Remember, that is an '02-through-'04 average. We will be updating that when we are done with our drilling program this year, but I do not expect that $0.78 to vary much at all. It will be right in that range. The cash margins remain very strong, based on what could be a conservative price deck. If you look at our operating profit margin, if you take approximate $1.20 or so DD&A rate from that cash margin, you will see that our operating profit margin is very strong also in the 2.50 range. If you take that number times the midpoint of our volume range, you'll see that it's very close to the midpoint of our operating profit range. So again, a very strong business on both cash and operating profit margin, and it does have upside based on what current prices are versus what we are actually showing on this slide. Slide 30, we have increased our guidance substantially in all areas. You will note that the segment profit is up. I won't walk you through all of these numbers. Our guidance for profit is up, on a midpoint-to-midpoint basis, at a higher rate than our CapEx guidance. We are also increasing our capital spending. I have a slide -- the next slide will reconcile this. But as you can see, we are up in profit, Cap spending and production in all areas that we have. We also have, on the bottom of the slide, the hedge volumes, which have not changed from the last call. So our guidance is up substantially from last time. I would point out that 2006 is using an unhedged NYMEX price assumption of 8.50, which is below market, and also that 2007 is using an unhedged price assumption of $7 at NYMEX. If 2007 numbers would stay flat in the 8.50 NYMEX range, then that segment profit range in the very top of the 2007 column of 775 million to 900 million would go up by 200 to $250 million on both ends of that. So, you would add 200 to 250 to the 775 and also to the 900, if we stay in the 8.50 range instead of dropping to the $7 range that is in this assumption on this slide. Slide 31, guidance reconciliation -- very simple. On the CapEx side of the world, industry costs are up although much less than the market prices are up, and we also have significant new projects, particularly in the Piceance/Highlands, which are beginning to contribute to us, as I mentioned. We had 13 million a day of production in the Piceance/Highlands. As you can see, on our CapEx side, we are up $190 million for 2006. A number of that is for facilities that we're building both in the Valley, the Piceance Valley and also for the Highlands, also for additional drilling in the Piceance/Highlands and in the Fort Worth area. Then industry costs overall are up on the $100 million range. You can see, in 2007, again CapEx is up, both in the industry cost and on the new project side. The segment profit side -- both segment profit on both Lyons (ph) (indiscernible) price and production are up on our existing assets and also for our new projects. Again, I've talked about that our unhedged price that we're using for these numbers is significantly below market prices. Finally, on Slide 32, our strategy does remain rapid development of this premier drilling inventory. You can see that we have meaningful volume growth quarter after quarter; this is all through the drill bit. Our history of high drilling success and low finding costs continues -- again, short time cycle investments. We are in the top quartile in all majors we look at, in both G&A, drilling costs, efficiencies, LOE; we remain in the top quartile and typically in the top three or four. This inventory is expanding, as you've seen, in the 8.5 Tcf and you see as we start to move into the Piceance/Highlands -- these new opportunities that we have a significant opportunity to expand our 3P side of the world. This workforce I can't complement enough. They are very experienced; they're very talented; they are working very hard. In doing that, they are also at 380 to 390 days of no loss-time accidents, so I also complement them for being incredibly safe as they grow our volumes. I will make three main points this morning in the Midstream presentation here. First, we do have another guidance increase we're pleased to report on. I'm going to give you an update on the impacts from the hurricane, both in the third quarter and what we think that looks like residually in the fourth quarter, and then finally, going to talk about the additional growth opportunities that keep coming at us and that are right in and around our core business, including two recently awarded contracts that are going to anchor nearly $250 million in expansion. With that, we will move onto Slide 34, please. I am going to start here with comparison to last year's third-quarter performance and the year-to-date comparison. Good news on 2 fronts here -- first, this is the best performance through three quarters that Midstream has ever had. We are leading last year's numbers by about $39 million. Secondly, despite a $12 million impact from the three hurricanes during this quarter, we've still posted a strong third-quarter performance. The key drivers for the quarter were overall higher fee-based revenue, driven by higher gathering and processing fees in our Western region. This was partially offset by the lower deepwater fees that were due to the hurricane outage. Overall, fee-based revenue is up $22 million for the year and again, this is even in the face of hurricane outages, where our deepwater fee-based business robbed us of about $7 million in fee-based revenues. Also our olefins business quarter-to-quarter and year-to-year increased modestly and helped us out during the quarter. The geographic diversity of our business did help us out in the third quarter, as we saw margins increase out West as a result of the NGL production losses from several damaged plants in the Gulf Coast. But overall, our NGL production was down sharply due to Mobile Bay, Cameron Meadows and Marcum (ph) all being without production for an average of nearly 20 days during the third quarter. Our largest plant, the Mobile Bay plant, was out of production for about 32 days for the quarter. So you will note a strong decrease in our production, but we did enjoy the margins out West. Moving on to Slide 35, we did manage to respond very quickly to get service returned to our customers in the Gulf of Mexico. In fact, our discovery partnership at Lerose is providing backup service to several damaged plants in the New Orleans area. So not only did we quickly repair and restore service, we were able to weave our way through the FERC to provide alternate flow paths to approximately 500 million cubic feet a day that would otherwise be shut in. We expect -- some of that has already started flowing and we expect that to ramp up throughout the month of November. So, kudos to our discovery team in helping get production back up in the Gulf, and we will actually see our volumes on our discovery system more than double as a result of the efforts there. We do not know how long that will last. It's obviously dependent on when the infrastructure that is supplementing gets repaired. So, we fared pretty well on Katrina, but our Cameron Meadows plant took a near-direct hit from Rita. We're hoping to have this back up in partial service by the end of the year and probably back returning to full-service sometime in the second quarter of next year. We do expect our business interruption insurance to kick in this month, and the property damage deductible was reserved in the third quarter, so fourth-quarter impact should be less than $2 million at our Cameron Meadows facility. Also some good news coming out of our Canadian olefins business, as our Fort McMurray extraction plant is now running at design capacity. This is following the return to service by the SunCor upgrader there that was fire-damaged at the first part of '05. So, back up to higher volumes than we've ever seen there, and we are hitting that at a pretty nice margin environment. We also signed up two very large contracts, as forecasted in our last call. That has allowed us to move ahead with the expansion of our fifth train at Opal and also an expansion for Devils Tower facility out to Chevron, Texaco and Kerr-McGee's Blind Faith prospect. I previously advised on the continued increase in our fee revenues out West. Here's the last note -- that continues to increase, in terms of the rates that we have out there, as demand and drilling remain very robust in the area. So we expect continued, steady increase in that and I think that's a very healthy signal for our business going forward out there. Moving on to Slide 36, there's going to be three main points to make with this slide. First, we're raising guidance again for our '05 segment profit. This time last year, we were at 300 to 400 -- sorry, 310 to 410 this time last year. This increase has been driven largely by our NGL and olefins margins, and this has driven us to this new range of 440 to 480. This remaining range has driven the 40 million of remaining range we have (indiscernible) 440 and 480 is driven by what -- we are seeing some very volatile NGL margins right now, as gas prices are swinging wildly, so we're seeing our margins move up one day and down the next. If we saw October-like margins again in November and December, this would certainly drive us to the upper end of this range. Also, our olefins business -- we've seen very strong margin increase, as there's a lot of ethylene capacity out in the fourth quarter. But we're seeing reduced volumes at our facility because we're not able to get our hands on enough ethane there to produce the ethylene. So the story there on the olefins is higher margins but lower volumes. The second point -- with the announcement of our Opal's fifth train and the expansion of Devils Tower infrastructure to Chevron's Blind Faith project, we're raising capital in '06 and '07 with a slight increase in our '07 operating profit due to a partial year-over-year contribution from the fifth train at Opal. So you can see we're raising that from what was 400 to 520 up to 410 to 530. Obviously, the punch from those investments shows up in '08. Finally, an update on what we showed you'd last time as three categories of potential expansion opportunities. First, we had the nearly done package of about 250 million in the last call. We now move that into the category of contracted and committed. We're moving ahead. That is the Opal plant and the Blind Faith prospect. Secondly, we announced a category we called high probability of success. That was in the 200 to $300 million range. Our probability of success on several of these projects has enhanced significantly since the last call, and we hope to be announcing these at our next call, as we announce fourth-quarter earnings. Then finally, we have several large projects that continue to develop nicely and that were earlier quoted as being in the proposal stage. These projects -- I suspect several of those will be moving into the highly profitable category at our next call as well. So this last category, most of that investment is largely '07 and '08, but a point to be made here is we do have a robust group of opportunities moving forward through our pipeline right now, and we expect to continue to seek to bring those to fruition. I would comment that these are not acquisition kind of prospects for the most part; this is all just organic growth in and around our existing business. Moving on to Slide 37, this just kind of gives you a graphic, again, of what's going on as we further invest in this business. There's really three points to make on this slide. First, our base business is neutralized to our current forecasted margin, and our base business, even with that, is continuing to grow. You can see that with the dark blue bars there and the dip in our range for '06 you can see there is really driven by just a forecasted lower NGL and olefins margin. So, the base business is again this solid dark blue, and then the diagonally hatched bars represent the margins in '04 and '05 that came in above what we are forecasting the margin to be in '06 and '07. So it shows a very healthy base business that continues to grow even without the capital investment, which is shown on top there in green. Finally, or sorry, the second point to make here is the running-in-place capital as we call it. It is still continuing to be about 50 million. That's about half maintenance and half well connects. This is shown there in the grey and yellow bars, so we continue to be able to hold that line. This is allowing our base business to remain healthy and spinoff significant free cash flow from our core business. The light-blue expansion bar there are delivering returns in the later years, as you can see, and that shows up in the green with about 14 million of cash flow coming in '06 from about $70 million of investment in '05. Of course, not all of this capital is put in service during 2006, and this is especially true for the Blind Faith capital, which is occurring in '05, '06 and '07 but doesn't really contribute until 2008. So hopefully, that gives you a picture of what's going on with our base business and where we expect that expansion to take us. Hopefully, when we show 2008 in the not-too-distant future, we will be able to show you how that's really going to turn us up. Moving on to Slide 38, we are excited to be expanding our strong relationship with Chevron-Texaco and Kerr-McGee once again out in the deep water with this Blind Faith prospect. This just shows you a little bit of detail about what's going on there. First of all, this contract comes with a large area of dedication, and we have reason to expect reserves and production to flow through this infrastructure for years to come, based on our analysis of the area. The producers plan to invest approximately $900 million just to develop this first prospect. As I said, there's several other prospects in the area that we are very excited about that will feed into this infrastructure. Just a few more details on it -- we will have the line ready for service in third quarter of '07. Our investment plan doesn't have production starting on the first part of '08, but we will be ready for service in the third quarter of '07. The producers expect a November start-up and we are just adding some conservatism into our investment strategy there. It's about $177 million; it feeds both our existing Devils Tower infrastructure; it feeds our Mobile Bay gas plant; and it provides nice supply base through the Transco and Gulfstream infrastructure as well. So, we're very excited about this and this is right on strategy for us and particularly excited about continuing to expand our relationship with Chevron-Texaco and Kerr-McGee. Moving on to the short explanation here on 39 of the Opal TXT5 (ph) plants, we received a very large volume dedication from Ulter (ph) petroleum, from their Pinedale anticline field, and the volume dedication that we have from them more than anchors this expansion. In fact probably our biggest question on this one is whether or not we are expanding this large enough, given the remarkable performance from the Pinedale anticline field. So we're very excited about this. We are able to -- our reliability increases as a result of this, making us very difficult to compete with out here, as does our unit cost continues to get lower and lower as we expand this important facility for us. Moving on to slide 40 here, just to wrap up, first, our geographic diversity yielded Midstream strong earnings despite the impact of three hurricanes, and we expect minimal residual impact from the hurricane aftermath in the fourth quarter. We were very excited about how our strategy of complementing the Midstream business plan with WPZ is coming together. Specifically, we are pursuing several opportunities to expand our footprints and throughput in our core basins that are leveraged off of WPZ investments that we feed into our existing assets, so everything is right on track there and we couldn't be more excited about that. Then finally, our pipeline of opportunities is moving ahead as predicted, and we look forward to describing this and more details of our business at the Midstream tutorial, which is scheduled for November 30 in New York City. Thanks, Alan. Consistent with Steve's message that the story from gas pipes is continued steady performance, operational and project execution performance is excellent. We continue to see robust growth opportunities in markets served by our pipelines. Turning to Slide 42, please, considering the absence of expansion projects contributing to this year's earnings, I'm very pleased with both the financial and operating performance of our gas pipes during the third quarter. Recurring earnings for this quarter and for the year 2005 continue to be in line with prior-year results. We had unfavorable impact on recurring earnings from revenue improvements on Gulfstream attributable to new contracts signed during the year. Those were partially offset by the loss of revenues from the termination and prepayment of the Gray's Harbor lateral transportation agreement. At $161 million, reported results for the quarter are ahead of prior year due to the effect of a FERC ruling issued during the quarter, which resolves a very old issue related to a full tracker which was filed in 1999. Based on the order, we were able to reverse a $14 million reserve we had on our books. Slide 43, please - in September, we received final FERC approval to construct and operate our 26-inch capacity replacement project on Northwest pipeline. As I've noted in prior calls, the project is expected to cost 333 million and we project a November, 2006 in-service date. These costs will be fully recoverable starting with our January, 2007 rate case. While the twin hurricanes did cause supply disruptions on Transco, we are gradually resuming flow of previously shut-in production. Much but not all of the disruptions were the result of liquids extraction and transportation infrastructure being down. By mid-November, we should be pretty close to pre-Katrina and Rita gas supply levels. Overall, as Steve said, we fared well through two of the worst back-to-back hurricanes to hit the Gulf of Mexico. Repair work on our pipelines due to storm damage is estimated to be just over $20 million and will, for the most part, be covered by insurance. The impact to revenues has been minimal. I should note, at this point, the dedication of our people who have made it possible to recover quickly from these storms. Working long and hard hours, these people have returned to show up for work on time, even though they didn't have a home to return home to, and we are grateful for their fine effort. In October, Gulfstream Pipeline in which we are a 50% owner with Duke was successful in placing an $850 million nonrecourse financing, which, after retiring an existing loan, produced about a $310 million cash distribution back to Williams. I'm very excited about the growth activity that we're seeing across all of our pipelines. In August, Gulfstream began providing transportation service to Tampa Electric under a new, long-term firm contract to provide 48,000 dekatherms a day of capacity. With addition of this contract, Gulfstream's capacity is now more than 70% subscribed under long-term firm contracts. I'm pleased to say that, on November 1, we placed our $16 million central New Jersey expansion on the Transco system in service. This project will provide 105,000 dekatherms a day of firm transportation to South Jersey gas. Because this project is classified as incremental, we will commence earning on our investment concurrent with the in-service date. We expect this project to add just over $2 million of segment profit to our 2006 results. In July and August, Transco conducted what turned out to be a very successful open season for additional firm transportation from receipt points in North Carolina to delivery points in the greater Washington, D.C. metropolitan area under our proposed Potomac expansion project. The expansion has been designed to create 165,000 dekatherms a day of firm transportation capacity and has been fully subscribed under long-term contracts. The estimated capital cost of the project will range to upwards of $65 million. We plan to file an application for FERC approval of the project during the third quarter of 2006 and target having it in-service November 1 of 2007. As well, over the last several days, we've announced open seasons at Northwest pipeline and Transco on the Parachute lateral and the Centennial expansions, respectively. While we will need to await the results of the open seasons to determine the final size and cost of these projects, it again points to the excellent growth opportunities in the markets served by our pipelines. Slide 44, please. Our guidance includes updates to both segment profit and to capital, starting with 2005. We've narrowed the segment profit guidance range by increasing our full-year forecast by $40 million on the low end and $30 million on the high end of the range to reflect the $14 million of nonrecurring earnings we booked in the third quarter, as well as favorable adjustments to our operating expenses. We've also narrowed the range of our 2005 capital forecast. As you may note, we've increased the lower end of the range by $20 million to reflect slightly stronger than expected third-quarter expenditures and higher expenditures in the fourth quarter. We still expect to close the year within this capital guidance range. Our guidance for 2006 segment profit reflects elimination of about $63 million of favorable but nonrecurring items in 2005. As I mentioned in our second-quarter call, the FERC General Accountant's office changed the way we have to account for Pipeline, Safety and Integrity Act compliance expenditures. This change will require us to expense certain costs, mostly related to internal inspections, which FERC previously had as capitalized. So we estimate that we will have to expense $31 million in '06 that we previously had in capital. The result of our Gulfstream financing will be incurring $20 million in interest expense. But again, that financing provided $310 million of cash to Williams. As well and as I noted in prior calls, we're not bringing any major expansions into service, nor do we have any rate cases coming into effect in 2006. Yet, we have normal inflationary and other pressures on our operating expenses. Boiling that down, we are adjusting the lower end of our segment profit guidance range down by $15 million. Please note, the cash effect of the FERC order to accounting change is something moving dollars from the capital side to the expense side. As such, we've accordingly lowered the top end of our capital forecast by $30 million and have left the bottom end the same, narrowing the range. In 2007, as you are aware, we are planning rate cases at both Northwest pipeline and Transco to be effective first quarter of 2007. As a result of these rate cases, we anticipate being able to recover, through our new rates, the previously discussed internal inspections costs and so do not believe that our 2007 earnings will be impacted by that change. Our 2007 capital expenditure forecast has been increased due to the recently announced Potomac expansion. Slide 45, please. I've already discussed the major changes in our capital forecast, but to recap, we are anticipating moving $30 million of integrity costs from capital to expense in 2006. Also, we've added the costs of the Potomac expansion projects -project. The projects for which we recently announced open seasons at Parachute lateral and Centennial are not included in this forecast. Next slide -- number 46. Summing up, our strong performance -- (technical difficulty) -- operationally and financially. Gas pipes continues to be a strong cash flow provider. We're having continued progress and excellent execution on our compliance and reliability projects and our expansions. The preparation for our rate cases are on track to be in effect in 2007. Thanks, Phil. Good morning. We are now on Slide 48. As Steve indicated, the third-quarter results were adversely impacted by high natural gas prices, extremely mild weather in the West, and plant outages at Ironwood and our California plants. During and subsequent to the quarter, we were successful in contracting for five power sales contracts, including the CLICO contract that reduce these risks in the future and create cash flow certainty. Segment profit loss of 227 million for the quarter was primarily driven by the mark-to-market losses, as Don discussed earlier. These mark-to-market losses are non-cash and do not reflect real economic value. After adjusting for the non-cash, mark-to-market impact and the buyout of a gas supply contract, we realized recurring segment profit loss after mark-to-market of 13 million, versus a loss of 33 million for the same quarter last year. Slide 49 -- looking at year-to-date cash flows for the Power business, segment cash flow from operations is 44 million positive, and Power standalone cash flow from operations is 5 million positive, year-to-date. Please see the footnote reflecting that these numbers include 36 million of losses on nonrecurring items. Slide 50 reflects the items that are impacting our third-quarter performance. As I indicated in the second-quarter call, we anticipated normal temperatures in the West. Instead, we saw extremely mild weather in the western U.S. with cooling-degree days being 43% lower than last year in Los Angeles. The high natural gas price environment was a benefit overall for Williams but was a detriment to gas-fired merchant fleet. The hurricanes also resulted in stranded firm transportation on Transco's Mobile Bay lateral, resulting in nonrecovery of demand costs. Also during the quarter, we bought out (indiscernible) uneconomic gas supply contract under unfavorable terms -- under favorable terms. Slide 51 reflects cash flow for the quarter and year-to-date segregated into the various categories you have seen in the past. Expected merchant cash flows did not materialized during the quarter for the reasons I highlighted earlier. Segment cash flow and Power standalone cash flow remained positive for the year. Slide 52 -- as a result of our third-quarter performance, we are lowering 2005 guidance for reported segment profit after mark-to-market and recurring segment profit after mark-to-market. We are also lowering 2005 cash flow from operations guidance to a positive 25 million to 75 million. We are lowering the upper end of our 2006 reported segment profit after mark-to-market guidance by 50 million as a result of the Power contracts we've recently closed and that these contracts protect our downside but limit our upside. Slide 53 -- I will now discuss the new contracts to the extent we are allowed under the confidentiality provisions of the agreement. Since deciding to stay in the business a year ago, we have had great success in reentering the market and closing risk-reducing transactions. We've been successful with all targeted customer types, and we've been successful in replacing over-the-counter hedges with more effective hedges that reduce our margin requirements. On slide 54, there is a list of deals we've closed this year. The key deals are the 1500 MW sale in the West, which is listed here twice by mistake, and the 500 MW sale to CLICO of that is awaiting Louisiana Public Utility Commission approval, which we expect by year-end. Slide 55 takes us from our revised 2005 guidance and walks us through our revised 2006 guidance. Although we expect the high natural gas price environment to continue, these new sales reduce that risk in addition to weather uncertainty. These additional hedges create more cash flow certainty and limit our downside. On slide 56 and in summary, our third-quarter results were adversely impacted by weather, a volatile gas market, and unplanned unit outages. But despite the unfavorable environment for gas-fired generation, we expect to remain cash flow positive for the year and we continue to close new contracts that create cash flow certainty, mitigate risk, and reflect our ability to continue to hedge into the future We look forward to providing a more detailed update in our tutorial on November 30. Thanks, Bill. Next slide, please, number 58 -- let's review updated 2005 guidance. The prior guidance is noted on the right column. Segment profit is relatively steady on a reported basis, but this includes the mark-to-market effects that we talked about earlier. As a result, I will drive right to the bottom line here. The last line in the schedule, diluted EPS recurring after mark-to-market adjustments, you can see is at $0.84 to $0.94, up from a previous guidance of $0.70 to $0.90 and reflects strong prices both for natural gas and liquids margins. The next slide, please, number 59 -- this slide summarizes the business unit and consolidated guidance. Again, segment profit is up in each period, primarily as a result of higher natural gas prices. Note that E&P increases in 2007. Despite the assumption of a declining price, we really move from an assumed NYMEX price in 2006 of $8.50 to a $7 price in 2007. Yet, the assumed segment profit increase is despite that as a result of strong increases in volume. The next slide, please, number 60, summarizes business unit and consolidated guidance for capital spending. Again, we peak in 2006 as a result of the Northwest pipeline replacement project, but as each of our business leaders have indicated, we continued to seize value-adding growth opportunities on a very disciplined basis. The next slide, please, number 61 -- a summary of key financial measures. We've previously discussed the segment profit guidance. I will move to cash flow from operations. Cash flow from operations is increasing in each of the periods from our prior guidance and increasing year-over-year quite strongly. Capital spending also increasing as a result of higher industry costs in E&P and accelerated drilling program, as well as new projects in both Midstream and gas pipelines. Then finally, operating free cash flow is up a bit in '05 and then down somewhat in '06 and '07, as we seize these additional opportunities and we remain opportunity-rich for value-creation projects. I would also note that this schedule does not include any MLP acquisitions or Williams asset sales that may occur and in fact, as you know, we announced, this week, the first of such Williams asset sales to WPZ. The next slide, number 62, please -- as we've previously indicated, we are opportunity-rich and we continue to seize opportunities to create EVA and value for shareholders by further accelerating our E&P development, capturing value-adding Midstream projects in the West and the Deepwater Gulf, and expanding our interstate pipeline system to meet customer requirements. As such, capital spending has increased and we have continued to increase EVA and returns. At the same time, we've been focused on improving our credit metrics and you can see, from this chart, we are focused on continuous improvement in credit. The next slide, please, number 63 -- this graph represents segment profit after mark-to-market adjustment. As you can see, 2006 over 2007 is relatively flat and then moves up quite sharply in 2007. For the first time, we are providing some guidance on 2008 and again will be up sharply in 2008. I would just note that 2008 improvement is driven largely by, again, continued strong E&P production increases and that $7 price deck, which is steady with 2007. At the same time, a number of Midstream projects start to kick in as well as interstate gas pipeline projects, as well as that 2007 rate case that Phil had mentioned earlier. Again, as a result, we think that this path will create substantial value for shareholders. The next slide, please, number 64 -- highlight again a few key points. Again, we are focused on driving and enabling sustainable growth in EVA and value for shareholders. We will maintain an adequate cash and liquidity cushion of at least $1 billion and in light of the high natural gas prices and high volatility, that's somewhat higher in today's markets than that $1 billion level. We'll continue to focus on improving our credit ratios and ratings, ultimately achieving investment-grade ratios. We will continue to reduce risk in our Power segment, and Bill focused on a number of multiyear deals that do just that while creating some value certainty. We remain opportunity-rich and we will continue to seize EVA-creating opportunities on a very disciplined basis. Turning to the final slide, Slide 66, a couple summary points -- obviously, we're delighted with the growth generated in 2005. Again, recurring earnings up 150% over year-ago levels but it's not just about 2005 growth; you've heard clear evidence of our opportunity-rich environment that we enjoy. In the Piceance Basin, the fact that we will have 25 rigs working by year-end in the Deepwater Gulf of Mexico and the new projects that we've already captured -- the expansion in the West. Then, as Phil described, many of the expansions that we are focusing on to meet gas pipeline market demand. So, a very bright near-term future. As well, we announced the first planned sale to Williams Partner. That will deliver growth capital while retaining asset control. I think as well, it's a longer-term focus -- the scope and scale of our growth opportunities continues to expand. Ralph talked about the Highlands opportunity and the Piceance. The Powder River continues to develop quite nicely. Alan mentioned the (indiscernible) list of growth opportunities in the Midstream area. Then finally, we are raising our earnings and cash guidance and expect the upward trend to make a sharper incline in 2008. With that, we will be happy to take 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. 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EarningCall_233884

Here’s the entire text of the Q&A from Expedia’s (ticker: EXPE) 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. Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you do have a question, please press the “*” key followed by the “1” on your push button phone. If you would like to decline from the point process, please press the “*” key followed by the “2”, you will hear 3-tone prompt acknowledging your selection, your questions will be pulled in the order they are received. Any of you there using speaker equipment, you will need to lift the handset before pressing the numbers. One moment please for the first question. Hey, good afternoon. Couple of questions. One, on your marketing spend, I know it’s been a couple of quarters now. We keep hearing the shift of spending. Yet you continued to do very well in showing much more efficiency in your marketing spend. Can you give us a little more color in terms of how are you shifting to offline, online? Where are you spending your dollars more? Where are you spending it less? And when you say you’re shifting, where you do think you’ll finish the year in terms of that marketing spend? And the second question is on your corporate side of your business. There’s a good amount of mixed news out there in terms of how that business is. Can you break it down for us and let us know where your holes may be? How profitable is that business? Are you still on track to be profitable in your core business going to next year? Sure. As far as the marketing spend goes, we have been able to drive pretty good efficiency across the board. We’ve been much more careful about our offline spend as far as where we spend it, how we spend it, and what the timing of that spend is. And the results certainly to date have been quite good. And on our online spend, search engine marketing kind of online advertising spend, we have just been very carefully optimizing that kind of spend, measuring it, we’ve improved our measurement techniques over last year. And finally, we’re using email marketing and CRM marketing in a way that we certainly hadn’t been last year and that’s proven to be quite effective. Our email marketing channels have turned out to be one of our most efficient channels. And really wasn’t, we really started on those efforts I’d say 2 or 3 quarters ago. So, the efficiency has been really good. When you look for, looking forward to Q4, the pattern of our marketing spend really isn’t going to change on a sequential basis as far as what we’ve been doing this year. The change is really relative to last year. Last year in Q4, we cut back on marketing pretty significantly. We did it for a lot of reasons including the fact that we weren’t getting access to merchant inventory, as much access or the quality of access that as we have been expecting. If you remember back to last Q4, and this year we feel pretty good about our product going into Q4. So, we don’t think that as is appropriate to cut back on marketing, we think it’s appropriate to keep spending based on the same patterns that we spent in the first 3 quarters of the year. As far as the pattern of, online, offline, generally we’ve been spending half of our dollars online and half of our dollars offline. And I think that that will continue going forward. I think your second question was on corporate, is that right Paul? The corporate business is doing fine. I think that we found that breaking into that market and scaling sales there has been a little bit more than, more difficult that we anticipated. I think, we have a great product on the technology side. I think the functionality is second to none. The user experience is excellent, which is driving adoption, which is higher than I think anyone’s expectations in the 80% range, which is terrific. I think where we still have a little improvement to do is on the service side and getting great, consistent, top shelf service. And I think we made great strides there. And I think we’re only going to get better. As is the job of convincing large corporations, et cetera, to buy into, the future is difficult. But we think over the long-term the trend is our friend. And as our platform becomes more global, I think that we become just a better product out there. I will say that the European team at ECT is doing just great. They are executing both on the top line and bottom line. They have a terrific product. We have an excellent, excellent team. And as you know, we brought in Cheryl Rosner, who was running Hotels.com to run ECT worldwide. And, I think even in the last 2 months that she’s been there, she’s driven a great improvement in kind of the product and the team. So, I’m pretty confident of where we’re going. It’s not going to be easy. But I think long-term we’re going to do fine. And your next question comes from Mark Mahaney with Citigroup. Please go ahead. Mr. Mahaney, your line is open. Please go ahead with your question. Well, thanks. Good afternoon. Two questions, first Mark you mentioned some increasing competition internationally from direct suppliers on the airline side I believe is what you said. If you could just us a little bit more color around that. If that’s a new issue, something you expect to continue to go or maybe there was something interesting or unique going on in the quarter that would be helpful. And, second there is, quite a number of footnotes on your amortization of non-cash comp in the release. Maybe if just conceptually you can give us some guidance on how we should think about the amount of non-cash comp going forward. And then why the logic behind excluding that from OIBA if options are being expensed now and if that’s something different than what’s going on in the non-cash comp line would just be, would may be helpful to get a little bit more color on. Thanks very much. Mark, I’ll take the international question. Just as far as supply direct internationally goes and especially on the airside, I think that the 2 things are different in the international markets. One is that the suppliers, the major flag carriers in Europe, tend to be much more healthy than the carriers in the US. And probably a little bit, if you look at the last 2 or 3 years behind the US carriers as far as their aggression in the supplier direct channels. They are now very aggressively going after those channels. And they have a really good product. If you go to ba.com for example, it’s a very, very good, competitive product. And, BA has a very, very strong share in its domestic markets. So, I do think that supplier direct on the airside in Europe is certainly going to be a factor. I think the other factor you have to look at in Europe is also the LCCs. RyanAir and EasyJet are pretty big players there. And they’re growing quite quickly and gathering a lot of share. And those are, that’s product that we don’t have on our store, so to speak so far. So I think that we felt a bit of that on the airside. There are various initiatives that we have in place to fix that, including bringing in some of the third, some of the second tier LCCs in markets like Germany and some of our other European markets. But, there’s some technology integration, et cetera, that has to take place there before we can get all of that on board. The second question regarding the amortization of the non-cash compensation. First of all, the majority of the cost is coming from amortizing the cost of stock options. And, a decision was reached a few years back to shift over to RSUs, which is a restricted stock units. Those have a much lower cost. And so going forward you’ll see the expense going down as the stock options mature. So on the going forward basis, you’ll see a drop. And the question then comes down to why is this not included in OIBA? This is not what we consider an ongoing cost to run the business. It’s not a cash expense of running the business. Therefore, these like one-time items such as when you go in you true up or review forfeiture assumptions, we have significant impacts to this one line-item, has nothing to do with the way we run the business. Therefore we back it out. Mark, just to add to that. And Mark wasn’t here. But when for example, we brought in, we brought in, at IAC Expedia and also with the spin-off, when we originally brought in Expedia for accounting purposes, we have to essentially reissue all of the options that were outstanding that have already been issued to employees of Expedia way in the past. So, for accounting purposes, it was as if we had issued all of those options day one when we brought in Expedia. We essentially had to do the same exercise on the spin-off as well. So it creates an accounting expense, which is a GAAP expense. And we’re certainly not going to contest that. But it’s not a current cost of doing business for us. If you look at our adjusted EPS calculations, what we do there is while we add back the amortization, we actually add to the denominator all of the RSUs that we’ve issued, even RSUs that are unvested. So, we put in the denominator. We take the pain for dilution. And, as you can see in our numbers as far as the RSUs that we’ve been issuing the dilution, is certainly not that significant. And compared to our piers, so to speak, I’d say we’re in a pretty good spot. Thanks. Can you give us a little bit of detail on the progress you’re making as far as the integration between Ask Jeeves onto the Expedia site as well as Expedia’s presence on Ask Jeeves? Whether or not, just from using the 2 sites if it doesn’t appear like there’s been a whole lot done there. But, if you can give us an idea of what that’s ultimately going to look like and to the extent that there has been progress made and what impact that’s having, if there has been, on your marketing spend? I’ll answer first and Barry, I don’t know if you want to add something to it. But as far as the integration on Ask Jeeves goes, some of that has been delayed, unfortunately, by the integration frankly that we are doing internally here. We talked about Project Apollo and kind of, integrating businesses that had never been integrated, the Expedia, hotels.com, Hotwire where appropriate. And, and a lot of that is taking the management attention right now. So we haven’t been able to integrate the Ask and Expedia services kind of, in the way that we would want to do from a long-term basis. I think that right now IAC is integrating various of their transactional services with Ask. And we’re really going to use that as a blueprint kind of, see what works, see what doesn’t work. And then hopefully once we’re well on the path with our own integration, use that as a guide as the kind of integration that we can do with Expedia and Ask. Now, on the marketing side, for Expedia, Ask is a very good partner of ours. And we’re working with them so that they use, they use their spiders to crawl our sites. And certainly, they’re a pretty good partner as far as spend on their site. The returns that we’re getting are quite good. I think that the plan is, is that after the first of the year, we’ll begin to get Expedia into the Ask Jeeves service. Probably by that time it’ll be called Ask.com. But Ask is quite busy now integrating the IAC sites. And as Dara said, everyday we learn something about it. And, I think Expedia will be the beneficiary of it. While we want to go quickly, we’re in no great rush here. Thank you. Could you talk a little bit about hotels.com? It looks like your merchant hotel room nights definitely picked up and that really helped the results, all right? Was it because of a higher conversion? Or did you add a bunch of inventory because hotels.com became more attractive to hotels to be on the site? The answer to that is both. The first step that we had to take was to change the branding of the site from what was essentially an exclusive pricing message to a message, which was we’re the hotel experts. And, initially that certainly hurt gross bookings. But it made suppliers, especially larger chains and brands, much more willing to do business with us. And, now if you look at, the kind of inventory that we have on hotels.com, it very much mirrors the inventory that we have on Expedia. And so I’d say that in the early days the answer was that the quality of supply improved. Therefore the quality of the customer experience improved, which led to higher gross bookings. With the site re-launch and kind of the additional functionality and features that we’ve improved, we think we’ve taken that to another level. And we’re certainly hoping to see that in the gross bookings going forward both domestically and internationally. And so far, signs are good. Great and one follow-up. International front, any country specifically strong in the quarter or what countries are you most excited about for next year? I think we’re France and Italy continue to grow quite nicely. The growth that we see in Italy is quite explosive. The French team continues to execute quite well. And, the UK is a bit more mature. But it’s a really, really nice, solidly profitable market. So, I think, we’re pretty excited across Europe. Germany is proving to be a little bit more difficult than we anticipated. But, it is the largest traveled market in Europe, so we’re certainly going to put dollars there. And we’re going to keep investing until we break through. But, I think that experience is pretty consistent with the other online providers there. And then of course China we’re really excited about. We are still in the methane mode in China. We are a number 2 player there. But, we are constantly bringing over E-Loan (ph) management, to train them in kind of, the way we do business here and teach them the processes, the procedures. We have a very strong manager there, Barney Hartford, and Justin as well. And, we’re pretty confident then in China, we’re going to make some strides. It’s not going to be overnight, it’s not going to be a month or a quarter. But, as we get into next year, we do expect improving performance, frankly, there. A couple of quick questions for you. On the international side, your hotel margins are a little higher than some of our competitors there. Are you seeing any pressure on the margins? And then secondly, can you give us an update on Hotwire is doing? I also noticed you re-classified some of the gross bookings from Expedia to the others? Can you give us an explanation of what happened there? Sure. As far as the international raw margins go, we talk about the international markets in that it is much more of a market that is dominated by independent hotels. It’s a much more fragmented marketplace. And on average our raw margins with hotels, with independent hotels tend to be higher than raw margins with the chains. If you look at raw margins, track raw margins trends domestically, a fair amount of the negative trends that we’ve seen domestically is because of chain deals, et cetera. That said again, our raw margins. I think, we think that the market focuses on raw margins a bit too much. Really what you should be looking at, are revenue per room night, revenue per transaction. And certainly in this quarter increases in ADRs more than offset decreases in raw margins. But I think, what was the second question about Hotwire? I think they’re doing, it’s very solid performance, the bottom-line performance is excellent. The company is really driving profitability, really increasing their marketing efficiency across the board. And really one area where Hotwire is very much focused on is building their hotel business. I think on the airside of the business I would guess that Hotwire is actually selling more air opaque air tickets than Priceline. But, I would estimate that Priceline is probably selling multiples, 3 or 4 times as many room nights as Hotwire is. The Hotwire team is totally focused on that. And they are driving kind of changing the brand perception of the product itself to from what has been mostly air, to air and hotel. And that has been what’s driving the profitability this year. So I think if we keep executing on that front, we’re going to be just fine. Have you reduced the marketing on Hotwire or are you shifting away from TV a little, maybe going a little more offline? We are, the marketing spend, as a percentage of Hotwire this year is significantly more efficient than it was last year. I’d say as far as the spending goes, a higher percentage of the spending on Hotwire is very direct spent, meaning not TV spend. When you think about Hotwire, Hotwire isn’t a mass consumer brand, right? It is a very specific brand with a very specific consumer value proposition. We estimate that somewhere between 15% and 20% of US customers are, what we will call the Hotwire customer. The customer who is willing to make significant trade-offs as far as flexibility or the amount of time that they spend traveling in order to save some money. So, we don’t think that a very broad mass market marketing medium is necessarily appropriate for a target audience of 15% to 20% of US travelers. So, the Hotwire is really focused on is micro-marketing, email marketing, and online marketing, of really driving efficiency there, becoming much more of a direct marketer on a go-forward basis, which I think is going to drive efficiencies for the company. Thank you. Can you talk about the recent addition of your travel results being directly integrated into Google? How this relationship is working in terms of how money is exchanging hands? Is it on a pay per clip basis or a paper transaction or something else? And then separately, given the Worldspan filings last week, can you talk about what your rationale is in potentially switching, or moving some of your bookings in Europe over to a different GDS? Thank you. Well, on Google, I don’t want to talk about specifically how, kind of, what their arrangements are, whether it’s a cost per clip or cost per transaction. But, but you can be rest assured that they are directly related to kind of dollars that we’re driving. And we think the returns on those monies are well spent. We are a big partner of Google because we’re a big partner of Yahoo!’s and Ask’s. And, we are talking to them about different ways in which we can integrate our product more deeply in their product. And, this is just one example. It’s great to be working with a group that is as innovative as Google. And obviously we work hand in hand because they’re a pretty big partner for us and our dollars spend there and our return is growing year-over-year. I think, what was your second question? All right, the Worldspan. We have, I think we’ve said it before. Which is in an era of deregulation when, or let me go to when GDS’s were regulated. You had guaranteed access to all airlines. GDS’s were connected to all airlines. So you were essentially guaranteed access to inventory. In an environment where, which is unregulated, we don’t feel it makes sense to kind of have only one connectivity provider necessarily. So, we thought it was opportunistic in this situation to perhaps establish another method of connectivity. Again, we’re very happy with Worldspan, our partner. But we’re in a pretty good position that we are, we’re not married to any type of connectivity. So, we will certainly use that flexibility. And ultimately, our goal is to drive value for our customers and our supply partners. And, this was an opportunity that we’ll probably take. Thanks, 2 questions. First, I think, I heard that Marriott is introducing new policies that are going to limited intermediaries’ ability to actually bid on the Marriott trademark brand through search engines. And I wondering if, how you thought that may change your paid search strategy or that of your affiliates? And if you think other hoteliers may actually follow what Marriott has begun in that policy. And then secondly, around the tax provision in the quarter, was 46%. And I may have just missed this, but that’s higher than it’s been historically. Is there something one-time in that and how should we model tax rate going forward? Thanks. Okay, as far as the Marriott question goes, different partners of ours feel differently about that. So, there are certain chain partners of ours who are happy to have us bid on their keywords, our attitude and their attitude is that to the extent that someone clicks on our site and we drive the transaction to them, that’s an incremental transaction. And they’re perfectly happy with that. Some partners don’t want us to bid on their key words. And certainly in the spirit of partnership, we don’t. So, different partners have different beliefs. And, we will certainly honor how they feel about their trademarks in search engines. Obviously, we do our best to convince them to let us bid on those keywords to the extent they’re profitable for us. Mark, you want to take the tax comment? Yes, the, I mentioned on the call that we had a write-off on one of our investments of $23 million. That write-off was a one-time item. We don’t take any tax benefit for that because it’s a capital loss. And so, if you look at the run rate we’ve had on our effective tax rate, this basically makes up the difference in the one-quarter. It’s a one-time item. So, I don’t want to comment going forward what our rate would look like. But that’s what’s caused the significant increase in the quarter. Thank you. That’s Soleil. Just a couple of questions on the merchant hotels, you mentioned your focus on Hotwire that hotels.com has done better. Are all these pulling from the same pool of allocations? Or, the improvements allow you to get better allocations? And sort of related to that, can you talk about what the, particularly in the US, what the allocation market looks like? On the merchant hotels, Hotwire right now is pulled from its own inventory certainly for its opaque product. And, in some rare instances will be pulling from hotels.com inventory as well when it doesn’t have any inventory in a particular market at a particular time, say in a peak time. Expedia and hotels.com are largely pulling from the same inventory base. This is an integration that we are going through now. And, it is I’d say probably three quarters of the way complete. So, we’re not quite fully pulling from the same inventory. But, we are well on our way. And certainly, by next year, we will be pulling from the same inventory base. Generally, the hotel allocation market, I don’t know enough to generalize regarding how the market is. I will say that we are very pleased with the start that our partner services group has had. We recently reorganized the Company and put all of our supply relationships, at least for Expedia, hotels.com, corporate travel, both in the US and globally under one group, a partner services group we call it, under Paul Brown, who’s a new executive here, who’s doing great. And I think having, bringing to bear kind of, all the different options that we have our global scale and presence to our suppliers with one conversation kind of one dataset has really, I think improved, not only our supplier relationships, but our ability to show our suppliers what we have to offer and, how we can really bring incremental demand to them, and, how we can be a great partner to them. So, we’re pretty happy with how supply is looking again. I can’t speak to the broader market. I will say that in Q4 there are certain compression times, in New York at the end of the year. And I think everyone will feel that compression. And we’re no exception. We don’t, we disclosed overall nights, but we don’t disclose kind of US versus global. Do we know what overall nights increases were, merchant nights? Do we have that number? And a quick question, I think you’re talking about Worldspan. In your agreement, is there an escape clause if they get under some supply content? Well, if others drop, if they’re plan is not the first and others drop Worldspan, then do you get out of your minimum contract with them? Of course, at some level they need to supply a certain content and can’t reach it. Yeah, I don’t want to comment on the particulars of our deal with Worldspan. I will say that we don’t expect that, first of all, to happen with Worldspan. We do think that GDS is broadly, are going to get access to broad content. And so, we certainly don’t expect Worldspan over the long-term to be missing any broad slot of content. And, we’re very happy with them as a partner and we’re sending the significant, significant, majority of our segments over Worldspan, which should kind of, speak for itself. That said, we do have very significant flexibility from a contractual perspective to do what’s best for our company. Great. Thank you very much, just one question. This has to do with the AirTran relationship and maybe not specifically commenting on that relationship. But it seems like they recently decided to work with 2 of your competitors and not with you. Is that a trend you can see other major carriers doing, just selecting 1 or 2 leading travel agents and not working with another one? Thank you. Well we don’t, while we can’t speak to what’s going to happen in the future, I don’t believe that it will be general trend. If you look at AirTran, a significant amount of their bookings go through their own sites. They’re a different kind of carrier than the broad flat carriers out there. And ultimately I do think that we are going to be doing business with AirTran over the long-term. While we do look to increase our supplier relations over the long-term, there are times when we may choose not to allow certain suppliers to participate in our platform from time-to-time. That happened before. I’m sure it’ll happen again. And our goal is great content, a great customer experience, great depth of product. And in order to get that we have to get the products with the highest demand on our shelves and that’s what we do. With AirTran it’s an issue not only with us but with Worldspan as well. We couldn’t kind of meet our overall goals with them. We’re still in discussions with them. And we hope those discussions work out. But this has happened in the past. And generally it’s been resolved. And again, our connectivity flexibility is pretty significant. Hey, guys congratulations. Just want to, couple of quick follow-ups here, first of all, while we’re talking about GDSs, Dara can you talk a little bit about the plans to shift some of the bookings over to Sabre? How that timeline is shaping is right now? Next, could you also just talk about the current look to book ratio on the platform and how you’ve been seeing that trending? And lastly, could you touch base on any sort of reward program slash funding programs of other IAC properties to entice people to stay on the platform? Sure. As far as Sabre goes, I can’t be that specific on the timeline but we do have a contract with them and it is our intention to flow segments to them. But, I can’t be that specifics on the timeline. Part of it depends on integration technology issues, which we haven’t quite tied up yet. As far as the look to book ratios I’m assuming you’re talking about a conversion trends. While we don’t disclose specific conversions, the trends have been good. They are kind of as the year has gone on, the conversion trends are pretty encouraging. Hotels.com, the conversion trends have actually improved. So, we’re pretty happy with what we’re seeing. And hopefully it will continue. As far as rewards or loyalty programs, we’re certainly looking into all of those possibilities. And part of what we’ve done already is we’re, I think we approach loyalty in 2 ways. One isn’t necessarily a program. One is through CRM and direct marketing, which isn’t in the form of a program, but it’s trying to encourage customer behavior that’s profitable for you. So, for example, this Christmas, we’ve launched a program which is you get $150 off the trip that you really want to take if you book on Expedia this quarter. It is encouraging not one booking, but a return booking through Expedia and it’s also encouraging booking on a packages path, which is certainly something that we want to encourage. So, that’s an example of what I would call a reward program, which is a micro reward program based on our needs at a time. And based on what we think consumers want and also backed up by a media campaign, which we think is a really, really good media campaign. So certainly we are going to do more of that. As far as other rewards programs or loyalty programs, I’ll just say that we’re working on it. We do expect to announce something. But right now would be too soon to give details to you. But we do anticipate doing something on that front. You bet. I think that’s it. Thank you very much for joining the call. We’re pretty happy with our results. And hopefully we can keep it up. Thank you. Thank you. Ladies and gentlemen that concludes Expedia Inc third quarter 2005 earnings call. Thank you for your participation in today’s conference. And at this time you may disconnect. 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EarningCall_233885

Here’s the entire text of the prepared remarks from Nokia’s (ticker: NOK) 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. Thank you for participating in Nokia’s third quarter 2005 Earnings Conference Call. My name is Judith and I will be your conference facilitator today. At this time I would like to welcome everyone to Nokia’s third quarter 2005 Earnings Conference Call with our host Ms. Ulla James Vice President of Investor Relation, all lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time simple press “*” then the number “1” on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question you may do so by pressing the “&” key. As a reminder if you are on the speaker phone please pick up your handset before presenting your question. I would now like to turn the call over to our host Ms. Ulla James, Ms. James you may begin. Thank you Judith. Ladies and gentlemen welcome to Nokia’s third quarter 2005 conference call, I am Ulla James Vice President, Investor Relation. Jorma Ollila, Chairman and CEO of Nokia and Rick Simonson CFO of Nokia are present here today. One housekeeping matter before we kick off, Nokia 2005 capital market days will be held in New York City on December 1st and 2nd at Hilton, New York. The event will begin next today on the first with senior executive presentation and demo. Followed by cocktails and dinner with Nokia management. Day 2 will follow up with a full day concurrent presentation. The invitation for the capital market days will be going out later today and will contain registration details and hotel reservation information. For further information please contact Nokia investor relations. Looking forward to seeing you in New York. During the call we will be making forward-looking statement regarding presentations and financial performance of Nokia and the mobile communication industry. These statement are predictions that involve risk and uncertainties, actual results may therefore differ materially from the result currently expected. Factors that could cause such differences can be both external such as general economic and industry conditions as well as internal operating factors. We have identified these in more detail on pages 11 to 22 in our 2004 Form 20-F and also in our press release we issued today. I will end as soon as the call in approximately one hour. To view the supporting slides while listening to the call please log on to www.nokia.com/investor. For your convenience a replay of the call will be available beginning two yours after the call ends till Tuesday noon. The call will also be archived on our website. With that it is my pleasure to pack the call over to your modular. Jorma please go ahead. Ladies and gentlemen, Nokia continued to show great progress in the third quarter. During the quarter we shipped a record 66.6 million mobile devices, representing year on year growth of 29% and sequential growth of 9%. Nokia also shipped it’s one billionth mobile phone during this quarter. According to our market estimates our third quarter device market share reached over 33% up strongly year on year and sequentially stable. Nokia continued to show strong revenue growth. Revenue grew an 18% year on year to EUR 8.4 billion. Third quarter operating profit grew 19% year on year and diluted EPS grew 33s%. This was Nokia’s highest quarter in EPS growth in almost five years. Third quarter operating cash flow grew a 140% sequentially to EUR 1.2 billion. During the quarter we bought back almost 100 million shares over double what we bought back in the second quarter. Finally I am very happy to see that, we continued to show great improvement in our product portfolio. It is up to me to remember a time in recent history when we had a better reception for our new product. During the third quarter the mobile device industry reached an important landmark as the number of global subscriptions exceeded 2 billion representing 31% cellular penetration. The third quarter mobile device market at 199 million units were stronger than expected. With year on year volume growth of 25% and sequential growth of 9%, on a sequential basis the North American market was up slightly. Latin America was down sequentially from the very strong seasonal second quarter but still up above the 30% year on year. The China area market was up sequentially from a weaker seasonal second quarter. The Apex market was up 11% sequentially. The year on year growth in Apex was driven by over 40% growth in both India and South East Asia pacific markets. The market in EMEA was up 16% sequentially and 30% year on year. All regions of EMEA grew sequentially but the strong year on year growth was driven mostly by Middle East and Africa, which grew almost 60%. According to our estimates Middle East and Africa now represent over a quarter of the total EMEA market. The wideband CDMA market was up over 40% sequentially with 12 million units shipped globally. We estimate that wideband CDMA market this year will be slightly below 60 million units. Our third quarter mobile device market share increased year on year by 33%. Sequentially our share was stable. Year on year we grew share more significantly in China on Apex, our progress in China continue to be excellent. Our share in China grew 12% points year on year. Nokia has strengthened it’s market share position globally and is number one in all of EMEA, number one China and number one in Apex. Most importantly Nokia continues to be number one in the fastest growing markets of the world. We are number one in India, number one in Russia, number one in Middle East and Africa and number one in South East Asia Pacific. Sequentially we grew share most notably in Apex and China. Our share was down sequentially in Latin and North America. In Latin America our shell out share down significantly less than our sale invent share. Year on year market share development in EMEA was strong. While sequential share in the region was stable. In northern, western Europe our share was up sequentially. With well over 2 million units shipped in the third quarter Nokia continues to be number one in the wideband CDMA market. Nokia now has a very strong Wideband CDMA product portfolio led by the Nokia 6630, 6680 and N70. The Nokia 6680 is the world’s number one selling wideband CDMA phone. We believe that our global market share will grow in the fourth quarter driven by gains in all geographic regions and in wideband CDMA. Overall Nokia and industry channel inventory remain within normal range. Nokia third quarter devised ASP of EUR 102 was down 3% sequentially and 6% year on year. ASP decline continues to be driven by high growth in emerging markets. However the sequential ASP trend benefited from our success in China, Apex and Europe, Malaysia and Africa. Nokia continues to have the most diverse product portfolio in the world. In the entry level the Nokia 1100 family continues to be our top selling products family selling over 15 million units in the third quarter alone. In the mid range the highly successful 6230i was our fourth best seller in volume and our best seller in revenue. In fact the Nokia 6230 family has sold closely to 22 million units cumulatively. Making it the best selling midrange phone in history. The Nokia 6230i is expected to hit record monthly volumes in Q4. In the smart phone 3G segments, the 6630 and 6680 were not in the top ten for volume but we number 3 and 8 in revenue. The 6680 was also one of our top three products in profits contribution. In terms of other Q3 products highlights entry-level firms using Nokia’s new robust engine are ramping up well. The Nokia 1600 and the Nokia 6030 have already reached millions in volume and Nokia 1110 stopped it’s volume ramp up in September. The Nokia 6101 the mass-market family cell phone has been very well received, after only starting shipments in the second quarter it was already one of our top ten firms in revenue in Q3. The 6101 has been very popular in most regions. Especially in the US and Latin America, and demand has outstripped supply. The Stainless steel Nokia 8800 with it’s sleek design has become the must have premium products among the fashion and style enthusiast. Despite selling in comparatively lower volumes, given it’s premium segmentation, in Q3 it was one of our top 20 phone in revenue and top 5 in profit contribution. The smart phone market is one of the fastest growing and highest value segment in the device market. Nokia continues to be number one in smart phones with over 50% market share. In the third quarter smart phones made up 11% of our device volume but were 26% of our revenue. One of our first smart phones the 6600 surpassed the 10 million mark in cumulative shipment in the third quarter making it the beset selling smart phones in history. Also in the third quarter Nokia began shipping the blackberry connect enabled Nokia 9300 enterprise smart phones, and Nokia 9500 communicators to over 30 operators and distributors in Europe, Middle East and Africa, Asia Pacific as well as the United States including (1134) in the US. The third quarter infrastructure market reflects the abnormal seasonality and Nokia network revenue holds about 1 6 billion Euro was sequentially down accordingly. Network revenue was down year on year in China, EMEA and North America. Revenue was up year on year in Apex and Latin America. Network revenue was down sequentially in Latin America and China and EMEA while up sequentially in Apex and North America. Wideband CDMA sales where approximately 20% of total network sales in the third quarter. In the third quarter Nokia won a $125 million managed services and GSM/EDGE network expansion deal with Bharti Tele-ventures in India. We also announced we would establish a global network operation center in India by the end of the year reflecting the importance of our growing services business. In 3G wideband CDMA at the end of September there were $34.5 million 3G wideband CDMA subscribers globally. And the 88 networks in operation with Nokia supplying nearly half of these. And Rick will now cover the key financials in a bit more detail. Thank you Jorma. Ladies and genetlemen the third quarter results in our record device volumes speak highly for Nokia’s execution capability as Jorma said year on year sales growth was 18% driven by strong performance in mobile phones and multimedia. The mobile device market continues to robust and demand for Nokia products continues to be extremely strong especially going into Q4. As earlier predicted Nokia gross margin trended down to 33.7%, the decline was a result of lower gross margins in mobile phones, multimedia and networks. Lower growth margin in mobile phones was driven primarily by a higher mix of entry-level products, gross margins in multimedia was down due to normal product life cycle related pricing reduction. Networks gross margin declined largely due to the combined effects of the very competitive markets, our investments in building presence in the growing network services market and our ongoing push into new growth markets. During the quarter we managed our cost well, and apex decreased over 300 basis points sequentially as a percentage of sales. The decrease was a result of the combined effect of lower research and development in marketing both in absolute terms and also as a percentage of sales. Even excluding the EUR 87 million positive effect of one-time items, the third quarter apex would have been down sequentially by over 200 basis points. Third quarter operating profit was up 19% year on year in diluted EPS grew 33%. Let us take a look at the special one-time items. In third quarter we recorded the following one-time gains, a EUR 61 million gain from the divestiture of Tetra business, 42 million of which was booking networks and 19 million in multimedia. Both for booking and other operating income for the respective business groups. Secondly EUR 8 million gain from real estate sales, the gain was booked in common groups and other operating income and lastly EUR 18 million gain in networks from the sale of minority investment. The gain was booked in networks and other operating income. The total impact of these items was a positive EUR 87 million in operating profits. Reported operating profit was 13.7% in Q3. Without the gain it would have been 12.6%. The impact of the gain on the EPS was positive $1.5. Let me now say a few words about the Telsim operator in Turkey. As it has been publicly disclosed the Turkish government has announced it’s intention to sell Telsim to the highest bidder in an auction scheduled in December. As also previously reported Nokia has reached agreement with the government of settlement of all financial claims subject to the successful completion of the sale. As of now we do not have any Telsim one time items indicated in our plans, estimates nor any form of guidance. And I do not see any currently and in year models either. Given the uncertainty of this type of auction I think this is the proper approach. A few brief comments on currency the third quarter reported year on year sales growth as 18%, on constant currency sales growth was 23%. On a sequentially basis currency impact on sales growth was negligible. Going forward our current first quarter plan is based on a EUR-US dollar range of 1.2174. Looking at the balance sheet in cash flow items inventory increase is expected sequentially in the third quarter in anticipation of the strong holiday selling season. Accounts receivables were down sequentially due to sales area mix. The relative share in Latin America was down from the second quarter. Operating cash flow was EUR 1.2 billion in the third quarter up more than double from the EUR 510 million in the second quarter. Capital expenditure EUR 166 million flat with the second quarter. For the full year we continued to estimate CapEx will be approximately EUR 600 million pretty much of offshoot level. Gain was a –82% and our cash flow limited assets which is EUR 11 billion. Down sliding from the second quarter, as a lot of sizable share buyback in this quarter. During the quarter we did repurchase 99.6 million of Nokia shares for a total of EUR 1.3 billion. Both the number of shares and the value of our buyback was more than twice that we bought back in the previous quarter. During the third quarter we employed so called 10-D 51 Safe Harbor for our buybacks. This allowed us using automated trading rhythm to buy back shares in an unincumbent manner, it’s material extend the repurchase period end of the quarter. We intended for the 10-D 51 for the fourth quarter buybacks as well. As a reminder our current buyback program authorized by the last AGM is for 10% of the stock or maximum EUR 5 billion. Today we repurchased 140 million shares for a value of EUR1.8 billion. Our intention is to execute as much as possible in the buyback program, which ends in March 2006. With that I would like to turn it over to Jorma. Jorma please. Thank you Rick. I would like to cover the fourth quarter market and as well as Nokia outlook. We have once again break that mobile device industry 2005 volume outlook and we now expect the overall mobile device market to reach approximately 780 million units. The fourth quarter industry volumes are expected to reflect the usual holiday seasonality and grow compared with the third quarter of 2005. We feel very good about our position in the fourth quarter in the fast emerging markets we are leveraging our leading position number one brand, excellent quality, well thought logistics. And a renewed entry-level officering. In the developed market we are capitalizing on the momentum of vastly improved product portfolio from the entry-level to 3G. Nokia’s mobile device volume growth is expected to exceed the overall market growth in the fourth quarter, with the market which are expected to increase both year on year and sequentially. Nokia’s device average selling price are expected to decline somewhat sequentially. In the fourth quarter the mobile device volumes from lower APS regions especially Latin and North America are expected to represent significantly higher proportion of our overall device volumes sequentially. We expect to be overall infrastructure market in 2005 to be slight to moderately up as compared with 2004 in Europe itself. Given that a significant part of operating the current investment is taking place in markets where our network business has not historically had a presence such as Africa. We expect our fourth quarter network sales to be down year on year after an exceptionally high level of Q4 sales level last year. Before we take you into the Q&A, I would like to close with a few comments about our product portfolio. Nokia is a product company and our success starts with our products. I am very proud of the in roads we have made over the last year. So far this year we have launched 44 products. The products we have launched increasing showcase our strength in leadership, in design, compact color screen camera etc. We have also increased overall specification and continue to strengthen our technology leadership. Well for instance 3G, Wifi, voice over IP etc. We are also addressing three new areas of growth. We are executing strong in the imaging and we have also launched, now dedicated imagining devices and enterprise product. In the fourth quarter we start shipping 11 new products including three of the very popular slider phones the Nokia 6111, 6270 and mass-market wideband CDMA 6280. In addition in the last few weeks alone we have launched a blue tooth compact and products for a variety of segments. Nokia 2652, the new entry level clam shell phone shipping already in this quarter, the Nokia 3250 twister music phone with dedicated music keys capacity for up to 760 songs integrate to mega pixel camera expected to ship in Q1. Last week we introduced the Nokia E series for enterprise, starting with three great new handsets Nokia v60, v61 and v70 all with excellent certification including wideband CDMA Wifi and voice over IP and worldwide availability in Q1. Yesterday we added three new phones to our highly successful custom production, the Nokia 7360, 6070, 370 and 7380 all with the great features designer material and yet again shipping in Q1. And we are not done yet, we have small new products announcement coming to. Thank you Jorma. We are now to continue with the cases, in order for us to remember I will new industry on occasion in order for us to vehicle to remember and now with the questions properly please limit yourself to one questions only, operator please go ahead. 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_233886

Good day, everyone, and welcome to the Silicon Images Fourth Quarter 2005 Financial Results Conference Call. Please note that today's call and question-and-answer session are being recorded. At this time, I would like to turn the call over to Mr. Robert Freeman for opening remarks. Mr. Freeman, please go ahead. Thank you. Good afternoon everyone, and welcome to Silicon Image's Fourth Quarter 2005 Financial Results Conference Call. Joining me today is Steve Tirado, our president and chief executive officer. Please be cautioned that during this call we will make comments regarding our future performance. These include remarks concerning our expected operating results, product introductions, new opportunities, market growth, announcements relative to standards and technology adoption rates. We may also make comments regarding events that could potentially impact the future of the company. Many factors taken individually or in combination could affect future business outcomes. Actual company results may differ materially from what I have described in these forward-looking comments. I encourage you to familiarize yourself with our most recent 10-K for the period ending December 31, 2004, and our most recent 10-Q for the period ended September 30, 2005. These reports describe relevant risk factors that could affect future financial results. Additionally, during the call this afternoon we may highlight other factors that could impact any projections or other forward-looking statements. In this conference call and the earnings press release that we issued earlier this afternoon, we will be discussing fourth quarter performance on a GAAP and a non-GAAP basis. Unless otherwise stated, all amounts, results, and projections discussed on this call that are presented on a non-GAAP basis will exclude stock compensation expense, amortization of intangible assets, and gain or loss on investment securities. A reconciliation of non-GAAP financial information to the associated financial information prepared in accordance with generally accepted accounting principles can be found in our fourth quarter 2005 financial results press release, which is available on our website at www.siliconimage.com. Thank you, Bob. Good afternoon, everyone. I'd like to start the call by reviewing five key accomplishments in 2005. Number one, revenue grew 23% from $173.2 million in 2004 to $212.4 million in 2005. Number two, profitability continued to improve throughout the year. We ended the year with operating margin for the year hitting a high of 21% of revenue. Number three, expenses were well controlled and came in at 39% of revenue versus 43% of revenue in 2004. Number four, ASP declines were offset by overall cost improvement resulting in overall gross margins of 60.2$ for all of 2005. Number five, and very importantly, we continue to strengthen our board and management team. During the quarter we added a distinguished new board member, William Raduchel, a new vice president of worldwide marketing, Dale Zimmerman, and a vice president of worldwide operations quality, Peter Rado. Overall, 2005 was a great year for the company, characterized by record revenue, profitability, and order growth, and I want to personally congratulate our employees for their hard work in driving our overall results. With respect to the market and key product announcements, I would like to point out the following highlights in 2005. Number one, HDMI market adoption was very strong throughout 2005. As of the end of the year, we had 313 adopters worldwide versus 290 at the end of last quarter. As of today, the number now stands at 357 and represents a very strong start to 2006. Number two, with the HDMI founders group, Sony, Matsushita, Hitachi, Toshiba, Thompson, and Philips, we announced a significant advancement planned for the HDMI standard that will address several advanced features. The support for higher bandwidth in anticipation of even greater than high def TV resolution for the future; the support for deep color, which will enable billions of color TVs to take visual quality to a new level; greater support for PC convergence by accommodating PC-like resolution in AC coupling to allow for ease of integration in large system-on-a-chip controller as well as full interoperability with UDI, the universal display interface; the new digital video interface for PCs; a new mini-connector to address the mobile market; listening support; and, finally, support for the HD audio standards, DTSHD and Dolby HD. Number three, the announcement of UDI, the universal display interface, with Apple, Intel, LG, National, and Samsung, represents a new digital video standard that is intended to provide advanced feature for digital video connections on PCs and maintain full interoperability with HDMI and HDCP. This new standard will open new semiconductor opportunities for silicon image in both the product and licensing area, especially as it relates to higher-speed interconnects that support new high resolution displays. Number four, Silicon Image will be enabling the entire deep color pipeline in 2006 from source devices like DVDs and set-tops to advanced digital television. The industry's first deep color silicon to enable panel migration and 10-bit support and beyond with the transmit receive pair, the Silicon Image 7170 and 7171 panel chip, are now in production. The move to deep color is significant for the TV market and represents a growth driver for 2007. Number five, the announcement of our new advanced television video processor, the Silicon Image 8200, represents an important milestone in our product offering and complements the Silicon Image 8100 offering at the lower end of the market. The Silicon Image 8200 incorporates a host of advanced features including Silicon Image's dual video processor pipeline allowing picture-in-picture and picture-over-picture functionality as well as fully programmable main and sub-picture location and size. The Silicon Image 8200 includes the ability to process JPEG pictures, MP3, WMA, and AAC audio and other multimedia content from USB-enabled devices as well as supporting an IDE hard disk drive interface for high definition digital video recorders. Number six, the announcement of the Silicon Image 1390 and 1930 HDMI chips for the PC platform enabling the industry's first solution for connected PCs to state-of-the-art TVs with HDMI will be key products driving growth for PC in 2006. Number seven, the announcement of our first key OEM design win for SteelVine with less seed and the additional release of the SteelVine 4723 and 4726, SteelVine storage processors represents an important milestone in our vision of enabling the storage of consumer content, merging markets like DDR, CDCCs, and other home digital media appliances. And, finally, the launch of SimPlay Lab and the SimPlay HD testing specification represents an important industry initiative aimed at promoting solid interoperability between HDMI, DDI, and UBI-connected devices. Retailers, like Tweeter, have recently endorsed the program along with several top-tier CE companies and Hollywood studios. They understand the importance of robust testing, they understand the importance robust testing will play creating seamless connectivity and satisfied consumers. The digital interconnect will continue to evolve to provide better audio and picture quality and eventually converge with IP networks to enable new, interactive services. SimPlay Labs is being established to ensure that the industry has a way to test and optimize interoperability across a wide range of new consumer products. I'll now make a few comments regarding 2006. Our mission as a company is to drive the architecture, semiconductor implementation for the storage, distribution, and presentation of high-definition content into consumer environments. We will continue to use our ability to drive innovation through participation and standards bodies as a competitive advantage in delivering first-to-market semiconductor solutions attractive to the top tier of the market. Our business model of driving standards that drive innovations for our semiconductor solution complemented by licensing to complementary products for mass-market adoption has supported better-than-average financial results to our peers. Our new organizational structure will allow us to focus on creating products that enable the market to move ahead in its desire to offer better storage connectivity and presentation quality across a wide range of devices. The new market estimate for HDMI devices is expected to reach almost 300 million devices by 2009, and we expect to be a major beneficiary of that growth. With that, I will turn the call over to Bob for some details on Q4 2005 and our guidance for 2006. Thank you, Steve. As Steve mentioned, the company recorded record revenues of $61.4 million for the fourth quarter, a 10% sequential increase compared to revenues of $56 million in the prior quarter and a 33% growth from revenues of $46.1 million in the year-ago fourth quarter. Product revenue, which includes revenues from both our semiconductor and our systems products, was $55.3 million, or 90% of total revenue for the fourth quarter, which was an increase of 10% from the prior quarter and an increase of 32% for the year-ago fourth quarter. Licensing, royalty, and development revenue was $6 million, or 10% of total revenue for the fourth quarter. This compares to $5.6 million last quarter and $4.1 million in the year-ago quarter. Deferred licensing revenue was $8.3 million, as reported on the balance sheet. This reflects the billings of licensing agreements in excess of the revenue recognized from these agreements. This was an increase of 76% from $4.7 million for the prior quarter and an increase of 289% from the year-ago fourth quarter. I will now discuss the breakout of our total revenue, which includes both product and IP revenue among our three lines of business. Consumer electronics product and IP revenue was $36.4 million for the fourth quarter, an increase of 7% from the $34.1 million the previous quarter, and 51% of the $24.1 million in the year-ago fourth quarter. PC products and IP revenue sequentially increased 17% to $14.3 million compared to $12.2 million in the previous quarter, and increased 31% from the $10.9 million in the year-ago fourth quarter. Storage products and IP revenue was $10.6 million in the fourth quarter, a 9% increase compared to $9.7 million last quarter and a 4% decrease from the $11.1 million in the year-ago quarter. Non-GAAP gross profit margin was 58.1% compared to 62.3% last quarter and 62.4% in the year-ago fourth quarter. The 58.1% was below the guidance we provided last quarter of approximately 59.5 to 62.5%. A decrease in gross profit margin in the fourth quarter was due to higher production costs due to supply constraints at assembly and test houses and price erosions in some of our CE and PC products. Non-GAAP operating expenses were $22.8 million compared to $21.3 million in the previous quarter and $18.8 million in the year-ago quarter. The $22.8 million was better than our operating expense guidance of $23 million to $25 million. Non-GAAP net income was $13.8 million, or $0.16 per diluted share compared to the non-GAAP net income of $8.7 million, or $0.10 per diluted share last quarter, and non-GAAP net income of $10.3 million, or $0.12 per diluted share in the year-ago fourth quarter. The company recorded a tax provision of $5.8 million and $6.4 million for the third quarter of 2005 and the nine months of 2005, respectively. A tax provision of $5.8 million and $6.4 million for the three months and the nine months ended September 30, 2005, was the result of revised estimates of 2005 taxable income and the 2005 effective tax rate. The effective tax rate was estimated at 14.5% due to the expected benefits from the utilization of net operating loss carryforwards. For the fourth quarter, the effective rate was estimated at 13.5% for 2005 resulting in a tax provision of $0.4 million for the fourth quarter. I will now discuss the results for the full year. Total product and licensing revenues were $212.4 million in 2005, an increase of $39.2 million or 23% over revenues of $173.2 million in 2004. This was driven by a 40% growth in consumer electronics, a 21% growth in personal computers, and a 6% decline in storage. Non-GAAP operating expenses for 2005 were $83.4 million, or 39.3% of revenue compared to $73.6 million, or 42.5% of revenue in 2004. Operating margin was 21.0% in 2005 compared to 19.5% in 2004. Non-GAAP net income for 2005 grew to $40.9 million compared to a net loss of $324,000 in 2004. Net income in 2005 includes a tax provision of $6.7 million. A 205 tax provision includes a noncash charge of $0.1 million in the fourth quarter of 2005, $5.3 million in the third quarter of 2005, and $5.4 million for the year ended December 31, 2005, associated with stock option exercises in 2005. The noncash portion of the tax provision for 2005, when added to non-GAAP earnings, would result in non-GAAP earnings per diluted share of $0.54. I will now review a few balance sheet and cash flow items. Cash and investments at December 31, 2005, was $151.6 million compared to $134.1 million at the end of September. Cash flow from operations for the quarter was $18.2 million compared to $15.4 million last quarter and $8.5 million for the same quarter of 2004. DSOs were 44 days, unchanged from last quarter and up from 38 days for the same period last year. Inventory turns were six times compared to 6.2 times last quarter and 5.2 times for the same quarter in 2004. In addition to the strong growth in cash, healthy DSOs, and a healthy inventory turn, we essentially have no debt. Capital spending was $1.3 million compared to $2.4 million last quarter and $900,000 in the year-ago quarter, and depreciation was $1.5 million, the same as last quarter, and $1.3 million the year-ago quarter. Our 10% customers for the quarter were Inotech Corporation, World Peace Industries, and Microtech, Inc. I will now summarize our financial guidance. Our 2006 revenues are expected to increase 15% to 25%. For the first quarter, product revenue guidance is $50 million to $52 million, reflecting traditional seasonality in the quarter. Our first quarter IP revenue guidance is $4 million to $6 million. So our total revenue guidance is $54 million to $58 million. Gross profit margin guidance for the first quarter is 60%, give or take 2%. Operating expense guidance for the first quarter is 40%, give or take 3%. Expenses for the first quarter are expected to increase as a result of CES marketing expenses occurring during the quarter, new authorized test centers being established for HDMI and SimPlay Labs, product development costs for new products, and qualifications of a new fab for a large OEM customer. For modeling purposes, interest income should increase in relation to cash flow and interest rates. The tax provision in 2006 will increase from the rate in 2005 as a result of the company using significant net operating losses in 2005. A portion of the tax provision associated with stock option exercises will be a noncash charge with a corresponding offset to capital. In summary, our fourth quarter was marked by positive news in many areas. We again reported record revenue and record cash and investment levels. Our business outlook remains poised for continued top- and bottom-line growth. We look forward to meeting with many of you over the remainder of the year at the financial conferences and other venues to talk about continuing exciting opportunities here at Silicon Image. This concludes the formal portion of our presentation, and we would now like to open up the call for your questions. Thank you. Your question-and-answer session will be conducted electronically, if you would like to ask a question, please do so by press the "*" key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allowed your signal to reach our equipment. We will pause for just a moment. And our first question comes from Tristan Gerra with Robert Baird. Good afternoon. Could you talk about the outflow from digital TV design wins for '06? I would assume that you're almost close to being done in terms of the sockets that you have, and if you have any comments in terms of market share and the pricing environment that you see for 2006? So the market share that we have this year relative to 2006 will probably go down a little bit. The market is sort of bifurcating into the higher end, which we still continue to hold pretty solidly. There's more competition at the low end, but I think that we're going to have a significant market share for 2006 based on design wins that we came into the year with out of 2005. And could you talk about, roughly, the ratio of TVs where you think you can sell your discrete chip versus the integration of your HDMI technology as part of the single chip from which you will be collecting licenses. If we are looking at the unit of digital TVs, can we assume that the majority of those TVs shipped in '06 will have a discrete HDMI chip and how do you see the progress in terms of licensing there? I said before, the estimate, I think, for '06 will be somewhere around 10 to a 12%. The only vendor who is really out in '06 models this year with an integrated solution is Trident, and we licensed them, so we get a royalty off of those sales. We didn't give you a specific rate, but it will be higher than 2005, as we work through a good percentage of our tax loss carryforwards, and the bulk of the tax loss carryforwards available to us for 2006 will go into capital rather than to the provision. So this will result in a higher tax rate. I would say probably, the range is probably going to be somewhere between 25% and 35%. Great. Thank you very much. Steve, could you just comment on what the timing is for the immediate PC ramp and whether that's going to be dominated by UDI or HDMI in 2006? For 2006, I think you're going to see it mainly dominated by HDMI. UDI, as a standard, isn't finalized yet. The spec probably won't finalized until sometime around mid-'06, and then we will participate in that market. Intel won't integrate for some time, and so we'll be providing chips both for that platform for those that are interested, although, again, I think HDMI will be the most popular choice. And then, of course, to the extent that the UDI market begins to develop on the panel side, we'll have solutions for that as well. One other question, you didn't have very much commentary on storage in your prepared comments. Could you comment on what the sequential uptick was in storage, I believe it was 9%, and what is the outlook in '06, specifically for your serial ATA products. Thanks. We did have pretty good growth on the serial ATA side. Part of it has to do with we have some customers now in the Internet space who have building out their, they're scaling their storage up and, believe it or not, some of these guys actually build their own equipment, and they're using a lot of Silicon Image technology, both controllers. We had a large surge in what we call our "port multiplier" chip, the 3726. So that basically has accounted for the growth. We're also, as we outlook into 2006, there's actually going to be quite a bit of volume, although ASPs are going to go down, and part of that is being pushed by some new CE applications. Yes, gentlemen. A couple of questions here, you know, you talked about, you talked about storage a little bit there, but about SteelVine and I know you and I, Steve, have talked about this at length on many occasions. Do we have any better visibility and we might see some of these products begin to ramp, whether it's a five-drive or a two-drive system, and where you might expect to see that first, whether it's in small-medium business or on the consumer side? I didn't give this number in the prepared remarks, but the SteelVine sales doubled this quarter from about $250,000 to a little over $500,000. So we're starting to see some scaling on the systems side. We also have several design wins now for the chip, but they're still in low volumes. But we're seeing good, interesting action around the whole SteelVine business. Okay, well, I guess I'll ask it a different way. At what point might we see that become a more meaningful piece of revenue, like, in the millions as opposed to the hundred thousands. I think it's going to take these guys getting into bigger production. I don't think we're going to see it in 2006. We'll probably see it more in 2007. Okay, thanks. And then on the PC business, I know in the release you talked about seeing some strength in the DVI and HDMI on desktops and some notebooks. Is there any particular application that's driving that? Are we seeing more media PCs picking up and will we expect to see some seasonality with that, greater than particular average in Q1? The places where we're getting a lot of traction for both DVI and HDMI is a lot of notebooks and a lot of these new desktops that are trying to be more multimedia-like machines. We're going to hit our normal seasonality. Normally, for us, PC storage and CE are all down a bit in Q1, and then they start to recover. Certainly, CE does in Q2, and then the PC and storage markets get stronger in Q3 and Q4. I think you saw that this year as well. Okay, great, and then one other question on the new products. With things like ITMBS and when might we see that start to ramp in a meaningful way, and would it be more, is it going to fall in your PC bucket or your consumer electronics bucket? That's a good question. We'll probably count that, let me not answer that question, let me just say this, we already have a lot of sampling going on for those chips and I expect, actually, to get revenue this year growing into something somewhat meaningful going into 2007. But we do have manufacturers that want to go right now, especially in the DLP space. Okay, and then one last question, I know gross margins were down a little bit here this quarter. Can you give us some sense of what was driving that on a percentage basis, you know, if it was mix or ASPs or anything else that's unusual that really pushed it down into the 58 range? We saw probably in the ASP erosion, the bulk of it coming in the CE area and some in the PC primarily related to more legacy-type products that we were shipping, and in addition we ran into some capacity constraints in trying to meet some of the delivery schedules in 2004 in our assembly and test houses, and so we had to go outside our traditional houses to get additional capacity, and that, in turn, resulted in quite a bit more in the way of costs, maybe as much as $0.50 on a unit basis for some of these chips that we were providing. Yeah, we had some surprise upside on some of our two-port chips at the end of the year; people wanting to make sure they had enough product for Christmastime, and so we had to go accelerate test and packaging outside of our normal vendors. Let me just follow up on that real quickly, and then I'll get off the phone, when we look at gross margins, and you're guiding to be about 60%, plus or minus, in the March quarter. Can we think about that, basically 200 basis points, a fair part of that coming back, bouncing back from, you know, not having that is going to be a test problem? Yes, we think this was a unique problem for the fourth quarter, and we have since, I think, dealt with that problem. This was something that came on, really, in December. Thank you. And once again to ask a question on today's conference, it is "*" "1" on your touchtone telephone. And our next question comes from Adam Benjamin with Jefferies & Company. Thanks, guys. Can you talk a little bit about where you ended '05 in terms of the TV market for HDMI ports, whether it was single ports or multiple ports and then, kind of, what you expect in '06, the market to break out in terms of single ports versus multiple ports? I think we've talked a little bit about this. The strategy in '05 was really to migrate a lot of the market to dual port, and we believe about 40% of the market will be dual port versus single in '06. Okay. As the 80211 standard comes on and got ratified, are you seeing that as a potential competitor to HDMI, going forward? Okay, then last question on the opex side, you had a little bit better opex in the quarter, and it looks like your guidance is for a little bit better as well. Can you just, Bob, maybe talk about where that's coming from, where that benefit is coming from? Are you pulling back some R&D or where is it coming from, I guess? I think, primarily, in terms of headcount, we were anticipating probably more increased headcount in the fourth quarter than what we were able to achieve. I also think we achieved some savings from our shutdown for one week in December in terms of expenses as well. So I think, generally, the major change was in the headcount. Looking into first quarter, we are increasing expenses, and R&D is going to go up quite a bit, essentially because we have new products coming out. Can I just ask one last question, just on the revenue guidance for all of '06, you guided to 15 to 25%. Can you give some better granularity? Some of these markets are growing units at a pretty significant rate. You know, for example, the TV market, how do you get to the 15 to 25% growth rate in '06? If you look at the revenue mix for this year, you know, CE to PC to storage, it was about 55, 25, 20, roughly. That's CE, PC to storage. It's going to shift a little bit more toward CE next year, but it's going to look similar to what you saw this year. Thanks. Bob, maybe a bit of clarification, towards the end of the operating expense guidance, you mentioned in terms of having to do some new test facilities relative to the HDMI that's in play. Did you also indicate in terms of trying to secure new capacity for a new OEM customer, did I hear you right? Can you elaborate, Steve or Bob, a little bit more? That sounds as if that's a fairly significant piece of business that could be coming. Could you give a little more granularity on that? You know, the only thing I can say is that we have a fairly large volume requirement that required us to go to get more capacity, and that's what we're doing. From a financial standpoint, Steve, are you guys being subsidized to do that, or is it something that you're being asked by a customer to secure for a given amount? In terms of the mix between the lower cost and, you mentioned, as far as going to the outside houses, can you give any sort of indication about how much money you either left on the table or in terms of being able to, you guys sound like one of the few who have been able to bring up a new assembly and test house intracorder to be able to handle some of those expedited orders. You certainly paid through the nose for it, but was that just a one-time shot? Most people have been talking about how they couldn't even get the capacity if they wanted to if they weren't Broadcom. Where did you get it from and was that just a one-time deal or is that a new supplier for you guys? Well, no, I think this was a reaction to a specific shortage that said that we couldn't meet the fourth quarter demand with the existing capacity within the assembly test houses. We were able to meet the demand coming out of the fabs, but where we were meeting some constraints was in the assembly and packaging and testing area. But in terms of, Charlie, your question is either did we bring up a new, actually, what we did was we were able to get the additional capacity out of a vendor that knew us, so it wasn't entirely new. But we weren't doing as much volume, and so we had to pay a lot in order to get capacity. As you're pointing out, it's tight out there for a lot of things. But that's so they were able to get that premium from us. Okay, Steve, if I take a look at the numbers right now, the new recent InStat numbers or other guidance out there right now, I guess maybe I'm having a little bit harder time as far as if we take a look at the CE business, assume it's 55 to 60%, and you take a look at even with the dual ports going up from 15 to 40%, it still looks like you've got significant growth. If the InStat numbers, or even the old ones at 37 million, not the 57 million ports, I don't want to say you guys are sandbagging, but are you looking for significant ASP shifts or a much larger shift in the low end of the growth while you guys move up to the 1.2 type of designs? Can you give a little better granularity because the math's not really working out unless you get a much higher revenue growth rate. The '06 table is set. The sockets are won, and it's just a question of how the customers go and how they go into production. I will say it's a little more back-end loaded than maybe I would like, but it's just the nature of the beast. There are some new platforms coming into the market that are going to change the dynamics a little bit. But the dual ports will go up something, you know, once 2 million, closer to 11 million to 13 million that's given here, correct? Okay. So it is back-end weighted but right now, I guess, maybe the question is what could give you the upside right now? Is it the storage side or is it the HDMI falling more in line with the InStat you guys have just basically adopted a more conservative base relative to some of the new third parties? Okay, yes, that's what it seemed to be. And then the last question, Bob, in regards to the mix on the gross margin. I certainly understand the kickback, but what sort of AP declines did you see and, Steve or Bob, how much of that was thwarted by some of the newer products like the 9000 series, that I thought was supposed to kind of counteract the ASP decline or at least prevent gross margin decline. Well, I think probably what we were seeing was ASP declines, obviously, on some of our older products rather than our newer products. The newer stuff is just going into production now. The cycles are changing a little bit. We do have some customers ramping a little bit earlier in the year, so the benefit from a margin side you won't see until we get into '06. But by legacy sometimes? Are you talking more the storage stuff, like the old 2-gig fiber channel stuff coming off, or are you also talking about some of the older DVI and initial 1.0 HDMIs? I was looking at the ASP decline across the board, because the back end doesn't seem to handle all of this unless you have some sort of ASP decline, and I'm just trying to get a clarification with that all CE-related, storage, PC, and why? The storage actually did well from an ASP standpoint. I think it even went up a little bit. There was some, probably, erosion in PC, and bigger ones on CE. The impact was bigger on CE, of course, it's the biggest percentage of our total revenue as well. Yes. I just wanted to know, with regard to the HDMI, we've been over this already twice, so far, just what does the landscape look like with regard to competition and for '06, I guess? Who do you expect to be out there? You said that Trident, you think, is going to have some sort of stake. What about the other discrete guys out there? What's going on in the landscape? For '06, there's just not going to be much difference in terms of market share. There's been a little bit of movement but not much. I think the real battle for market share relative to competitors is going to happen this year. It is happening this year, looking into '07. But the socket war was over in '05, and we got a real lion's share of the marketplace. Obviously, there was some price erosion in order to for us to maintain that, but the competitors weren't as ready in '05 as they are now. They're in much better shape, and so we're also in better shape as well. We've got new products that are coming out that we think are going to be very effective against the competitors. Not really actually coming after us at the high end as well as the 10 ADP market, we pretty much got left alone all of last year. Well, just to clarify, first of all, we're talking about, somebody was talking about the receiver side. Obviously, the transmitter side, you've seen a tremendous amount of competition even this year. How do you see the market for transmitter shaping up in '06? Yes, on the transmitter side, the competition is mainly from integrated solutions that either we've enabled or they've done on their own. So, for example, we've announced that we've done licensing deals with Mediatech and SunPlus. Zorantz announced their own integrated solution, Broadcom has its own integrated solution. We do still have wins, though, and actually our business is shifting in '06 somewhat. We were very heavy TV, and the source side devices are really coming on strong, particularly DVD recorders, and then there are some new platforms that are coming up as well, and actually this is on the camcorder and camera side. Yes, there will be significant discrete transmitter growth in '06. We thought it was going to happen in '05, but what happened in '05 was everything was TV. The TV market basically tells you that you first do it on the television, and then you go to the source side. We thought the integration rate would be faster than it's been actually. So I'm actually expecting significant growth in the TX side for Silicon Image. I think you mentioned before that you said 10 to 12% of the receiver side was discrete in '05, is that what you said? Ah, two-port, I'm sorry. And then just to give me an idea or even roughly, what do you think the discrete versus integrated transmitter market share should look like in '06, and what do you think is going to happen in '07? You know, obviously, there is going to be a lot of integration, but most of the integration will be single-port, and I guess would be HDMI 1.0. What do you see as, again, how do you see things unfolding in '07 with regard to multiple ports and upgraded iterations of HDMI? There are a few things going on, and you have to kind of segment the market. I think in the 36-inch and above market, you definitely want two or more ports, and many times you want those two ports to be active, and the reason I make that distinction is there are a lot of vendors coming in with switches that you can put in front of a single port. So you'll have three or four ports on the TV but only one is active at a time, right, and so you can get away with that. I think at the lower end of the market, you'll see some of the switch-like products coming in. This is, like, the 36-inch and below market. So that will be dominated more by single-port. This year, for 2006 for integrated, I've estimated that maybe 10 to 12% of the volume will be integrated, and the only vendor that's really out there today for 2006 production is Trident. It won't be until '07 that some of the other guys like the Genesys and the PixelWork guys will be out there in TVs for '07. I haven't done the analysis, by the way, on the impact of the integrated move on the TX side. We're being somewhat opportunistic. We're basically taking care of all the vendors who need something on the transmit side, and we're being very open and aggressive with our licensing. I mean, from the very beginning, we didn't even expect the transmit market to be very meaningful, but what's happened is because HDMI has been so successful, and there are so many TVs out there with it, a lot of vendors don't want to wait. We have three approaches to help them. We can do a full-up license, we do have an intermediate offering where we can let them integrate the digital logic, and we have a very low-cost part that's roughly $1.50, which is the DL-on-5 or they can buy a full-up discrete. Most companies in '06 actually went up and bought the full-up discrete; those that didn't already have some integrated solution. The other thing that was important, especially for these higher-end DVD players in the higher end of the market is they wanted to support up to 10 ADP, the 165-megahertz speed range, and there was just nobody out there Silicon Image. So you don't anticipate any of these guys being able to, I guess, the integrators being able to get up to 10 ADP support or 165 support or even HDMI 1.0, greater than 1.0 support for the '07 design season? No, for '07, somebody will probably be there, and I'm sure the integrated guys are going to try to get there. We'll see what happens. No, I was really referring, my comments were, '06 is over, right? But for '07, I think they're all out there trying. Certainly, the integrated vendors will try to make sure they can accommodate the higher performance. Now, bear in mind, we are also going to have a massive push on deep color this year, and so that means link speeds will go out past 225 megahertz. I'll have a whole family of products out by this summer to enable that transition. So we are continuing to move the market. Steve, real quickly, what are your expectations for China in '06? Do you think it's going to be material, or is that really an '07 phenomenon? I think that we may get surprised by China. We have now in excess of 40 adopters for HDMI in China, which is a pretty good number, relatively speaking. There is a tremendous amount of interest in HDMI in China by a variety of very important entities, and I think we, I'm not really expecting it to be, I am expecting growth there, but I think '07 might be the bigger year for China. Part of what's going on there is they really want the 2008 Olympics to be a real showcase for Beijing digital technology, so I think it's going to be very interesting to watch what goes on there, and it wouldn't surprise me at all to see some early acceleration in growth in 2006, just related to preparation for that 2008 Games. Thank you. And as a final reminder, to ask a question on today's conference, it is "*" "1" in your touchtone telephone. We will take our next question from Peter Wright with PAW Partners. I was a little confused about the guidance, and maybe you could help me. You said revenues were up 15 to 25%, and you said the tax rate would be 25 to 35%, and you said your expectation is to grow revenues and earnings this year. I was kind of trying to figure out with such an increase in tax rate, how earning per share might be able to grow this year. A good percentage of the taxes that we're going to essentially expense in 2005 and 2006, as well, are going to be for book purposes, and that we really have sufficient deferred tax assets that we can utilize both in 2005 and 2006 against taxable income. So from a cash basis, we're not looking to have to pay those taxes that we would be recording. On a non-GAAP basis excluding the noncash portion of the tax provision, that we would expect earnings to be up. Another thing that's going to affect the earnings in 2006 is going to be that we will be, like a lot of companies, converting to 123R, so we will be also expensing the fair value of the stock options, but we will break that out for you so that you can……. The non-GAAP for the year, including the tax provision that we recorded in 2005 was $0.47, but if you take the noncash portion of that of $5.4 million, that brings the, and you add that to the non-GAAP taxable income, it brings you to $0.54. We knew when the press release went out people weren't going to get this, but we had to state it that way. I just wanted to make sure I understand. So at the end of the day what you're saying is the revenues will grow 15 to 25%, is your expectation as of this moment, and that earnings per share will be in excess of $0.54 with the cash tax provision on a non-GAAP basis. I don't think we gave any earnings guidance, but in terms of your own model, looking at that, and we gave you for the first quarter what our expected margins and operating expenses are going to be. So it's just really trying to guide you, relative to the taxes as to how you might factor that into your model. Right, and not to be picky about first quarter, I guess, expectations have been for slightly higher, $58 million, and I think you said something in the $52 million to $57 million for the first quarter? We said 50 to 52 on product and 4 to 6 on licensing. So if you pick the midpoint, you get 56. Gotcha, okay, exactly. So, I guess, is there any particular reason why the first quarter is going to be down with midpoint 4 or 5……. If you look at any of the companies that sell into a consumer market PC, they are all down, even the high flyers, everybody's down, and we're down about the same as they are. I don't think there's much difference. So, and this is a seasonal pattern for us. We don't see anything unusual. We have good visibility, so we know where we are. And then, finally, what's your, do you have any thoughts about the full year in terms of gross margin and operating margin, or that's just a one-quarter-at-a-time thought? I think we only really are giving guidance to that, but I think you've seen what we use is basically a benchmark in terms of our gross margins and our operating expenses, but we'll update that on an quarterly basis. And then CE is what percent would you expect of your, what was in '05 and what percent of your business would you expect…….. In '05 it's about 55% of the total, and what I said earlier, somebody asked about this, I said 55 and about 25% in PC and 20% in storage. And I said the numbers would look pretty similar except we will see a shift toward a little bit more heavy on the CE side at the expense of storage. I know you've never given a breakdown on TV, but could you give me approximate percent of CE? Is it half, is it more, less? Well, in the past, what I've said it's been dominated by TV. What's happening is the percentage of overall CE product is shifting a little bit more now towards transmitters simply because of all these new DVD recorders. Some of the set-top boxes that were in a, really accelerating in deployments of the HD boxes. So are you trying to model this out, it's moving maybe from a, yes, concentrated TV to, it is actually going to grow quite a bit. I can give you a range, maybe it will be somewhere around 25, 30%. Hey, can I just ask two follow-ups. One is on this new customer that's ramping, that you've qualified a new fab. Is that baked into the guidance of 15 to 25% year-over-year growth? Yes, we've put that in there. It's really kind of more toward the latter half of the year, so you don't have that much visibility right now relative to that, so that's why we gave you that range. I think the other issue, too, is sometimes when you have something like this, you never know when they're going to necessarily announce or not, but, of course, we're working very tightly with them and making sure that they are going to be ready to go when they say they want to be ready to go this year. Okay. Thanks for the clarification. One last thing on, Bob, on the gross margin. There was about 300 basis points difference between your guidance and what you guys reported, and you talked about the potential impacts from the test and the package and the ASP declines. Can you quantify that 300-basis-point difference? Was it 50% due to the test and package or 50% to the ASP? Can you give us some metrics there? I think probably on the testing side, we were probably looking at $300,000 to $400,000 impact. On the ASP erosion, maybe $0.5 million to $0.75 million. A quick question, I know last quarter you guys gave out the book-to-bill metric, and I wasn't sure if you guys gave one in this quarter. Could you just give us the book-to-bill on this quarter? We did give it last quarter, didn't we? It actually was pretty good this quarter as well, slightly lower than last quarter. And then in terms of your guidance, and I think I might have asked before, but is there a way to maybe correlate, I know people are, Display Search and a couple of other people are projecting pretty good numbers for the TV side of the business to grow. Is there any way to go back and quantify as to if we see 50% growth, let's say, in flat panel TVs this year, would your business generally see that kind of revenue growth as well? Or is there any way to kind of use that as a metric for your growth? I think it's not a bad proxy. However, there are so many things going on within that. There are multiple sizes, there are different prices of the different sizes, but I think if you look at unit growth, it's not a bad proxy for how it should affect our business. Okay, and then the last question, on the gross margin side, is there a target gross margin for you guys for the full year? We typically target margins of around 60%, historically, you can see for the last year, so we've been achieving those with some fluctuation on a quarter-by-quarter basis. So that's probably not a bad target to look at, but to take it into account that that could fluctuate a couple percent either way in a given quarter. Yeah, thank you. I'm calling on behalf of Karl Motey. I have a quick question, Bob, just on the number, cash tax rate. What should that be in '06? Cash tax rate, let's see, that's a tough one to answer. If we were saying 25% to 35%, and the cash portion or the noncash portion. I would say the noncash portion is going to be probably the significant portion of that rate, and that would be going, again, to, because of the stock option exercises, all stock option exercises, which would go to capital as opposed to the provision. Sure, so a cash tax rate of 5 to 15, is that reasonable? That would yield our pro forma estimates, and I think it's a little bit of a question, at least on what's on First Call. It's a good question. It's not something that I can nail down real well at this point in time. I think we're going to have to look at it on a quarterly basis, because we looked basically at what's transpired during the quarter relative to the non-cash stock options and their related expense. But I would say more in the neighborhood of 10 to 15% would be probably better. Probably, going up mostly from internal exercises of stock option. If the price goes up, then, on a diluted basis you're going to have more shares in the money, which could affect that, but probably just on an increase of shares via plans that we've got in place, maybe a couple million in shares at the most, a couple million is probably a good number. Thank you very much, and thank you for everybody participating. Again, I want to comment on the fact that 2005 has been an extremely good year for the company in terms of performance, especially on the bottom line, and we look forward to being able to continue that execution in 2006. Thank you. This does conclude today's conference. We would like to thank everyone for your participation, and have a wonderful day.

EarningCall_233887

Here’s the entire text of the prepared remarks from Altera’s (ticker: ALTR) 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. At this time, I'd like to turn the conference over to Mr. Scott Wylie, VP of Investor Relations for Altera Corporation. Mr. Wylie, please go ahead. Good afternoon. Thank you for joining this conference call, which will be available for replay telephonically and on Altera's website shortly after we conclude this afternoon. To listen to the webcast replay, please visit Altera's investor relations web page where you will find complete instructions. The telephone replay will be available at 719-457-0820. Use code 258712. Before we begin this afternoon's call, I want to remind you that as we indicated in our earnings release, we will offer our fourth quarter update on December 5th, after the market closes. This update will be issued via press release and will be available shortly after the market closes. During today's call we will be making some forward-looking statements and, in light of the Private Securities Litigation Reform Act, I would like to remind you that these statements must be considered in conjunction with the cautionary warnings which appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that future events may differ from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website or available from the company without charge. Nate Sarkisian, SVP and CFO, will begin today's call and John Daane, Altera's CEO, will then offer some brief remarks before we open up the call to your questions. Prior to the Q&A session, the operator will be giving instructions on how you can access the conference call with your questions. Thank you, Scott. Third quarter revenues of $291.5 million increased 2% sequentially and were consistent with our expectation and guidance. Strong 23% growth in new products offset an 18% decline in mainstream products. CPLDs declined 5%, FPGAs increased 4% and other was up 3%. FPGAs were 70% of revenue and are up 48% versus the third quarter of 2003. Our major accounts were generally down in the quarter, as would be expected given the decline in our communications business. Our guidance called for communications, both wired and wireless, to be down on the seasonal softness in Europe, as well as a pause in some programs which contributed to strong growth in Q2. We anticipated industrial to be about flat and that consumer and broadcast would grow modestly with relative strength in consumer and softness in broadcast. Finally, we expected computer and storage would grow on the strength of new program ramps. That's about how the quarter turned out, though industrial was a bit stronger than we had anticipated, with strength in military, especially. As is typical in Q3, August was soft and September was strong. Now for some specifics on our operating results. Gross margins were a major disappointment. The result, 66.5% was spot on with our mid-quarter update, but down significantly from our original guidance of 68% to 69% and down from last quarter's results of 68.3%. I need to discuss several issues, which admittedly, have not been adequately explained to this point. First, why the decline? Secondly, why didn't we see it coming sooner? Thirdly, what are the implications for future margins? And finally, why couldn't we answer these questions when we revised our guidance? Last question first. The answer is essentially timing. Historically our margins have been very stable and we have usually been able to identify the causes for fluctuations in pretty short order. This, as you will see, was a difficult nut to crack and we did not give ourselves enough time to get the job done. We concluded our internal mid-quarter forecast in the middle of the week before our previously scheduled update. We were able to hone in on the numbers pretty accurately, but we had insufficient time to identify the root cause for the decline in gross margins. So now, why the decline? There are two primary causes. The primary reason for the margin decline and the miss from forecast was a broad-based shortfall in terms of orders on high-margin business. Nowhere is this more evident than our mainstream products, which declined 18% or $80 million. On average, this $80 million of business was running at 80% gross margin and this decrease accounts for about one half of the sequential decline in overall gross margins. We focused on more than 60 high-margin customers which registered a sequential decline of more than $100,000 in mainstream products. Some of these 60 accounts were pretty small, but some were sizable, two, in fact, were multi-million dollar programs running excellent margins. These are older programs which have stepped down in volume, but should be stable from here. I acknowledge we should have comprehended these two accounts in our margin forecast and guidance. For the aggregate of the 60-plus accounts that we analyzed, based on field inputs and discussions with those customers, approximately 40% of the decline is the result of program ends where Altera secured the new socket and about 10% was lost competitively or to an ASIC conversion. The remaining one half was buying-pattern related. We should see some resumption of historical revenue levels on those accounts in Q4. Our margin forecast for the fourth quarter incorporates those assumptions. As I just mentioned, some of the lost mainstream business transitioned to our newer products, helping to drive the strong 23% sequential growth in that category and that growth occurred even though our newer products have a much lower price on a per function basis. So the overall growth of the company speaks, we believe, to greater Altera content on End Systems. We are, of course, very pleased with the new product ramp, but the gross margins on our new product business declined, accounting for the balance of the margin decline. This occurred for two primary reasons. First, some of the growth in new products was driven by the ramp of some more aggressively priced programs that are incremental opportunities and second, in the normal course of business, as customers ramp into volume production they get an ASP production that corresponds with their consumption shifting from prototype quantities to production quantities. In summary, we lost some high-margin business in our mainstream and mature products. Some of the decline was related to normal summer slowness and inventory adjustments and a small portion, as I said 10%, was lost to an ASIC conversion or a competitor. Some of this business was replaced by newer products at lower prices and, in some cases, lower margins and our margins on newer products were further pressured by the ramp of some aggressively priced programs. Other facts, including the decline of benefits and the sale of written-off inventory, other mix shifts and cost reductions were, essentially, a wash. So you now know why there was a decline and, hopefully, have a good sense as to why we were not capable of fully explaining it mid-quarter. As I mentioned above, some of this we should have seen coming, particularly the larger two programs whose volume fell significantly in the quarter. As to why we didn't see more of it, many of the programs that caused the decline are not specifically forecasted but are included in the large portion of smaller accounts that we trend. We were surprised by the business decline in mainstream and, unfortunately, that business carried very high margins. Similarly, we were surprised by some of the new product business that did book in the quarter. I mentioned that new product margins declined in the quarter and I want to point out that, at present, our new product margins are lower than our long-term target of 65%. As you know, our position is that this phenomenon is not systemic. We try to capture prototyping business as prototyping prices early on in the introductory phase of our products. Then we drive down costs as customers ramp into volume and get lower prices, with the model of holding about average corporate margins throughout a product family's life. New products do not necessarily hold lower margins and our history shows no correlation between revenue mix by product maturity and gross margin. Indeed, Stratix II, which just completed rollout earlier this year is today, running above corporate average margins. But as you know, we are driving into higher-volume applications and some of that business is below overall corporate margins. Also, we have been quite explicit in saying that our model for corporate margins is 65% and that we would be aggressive in pricing to secure incremental opportunities as long as we were above 65%. The impact of both volume market penetration and aggressive pursuit of market-expanding opportunities is exclusively impacting our new product margins. Those are the products we are quoting for new business. Our intent is, and has been, to engage in a portfolio of business with varying margins that, in aggregate, average 65%. In infrastructure applications like storage and communications infrastructure and in small volume applications such as medical, military and test, we will enjoy high margins and in volume-oriented applications such as displays, games, set-top boxes and customer-premise communications equipment, we will run at lower margins. Our non-qualified deferred compensation plan experienced a net investment gain, unfavorably impacting R&D by $0.7 million and SG&A by $1.4 million and benefiting other income by $2.1 million. SG&A was $57.3 million and R&D was $49.4 million. After normalizing for the impact of the deferred comp plan, SG&A was about $2 million below our prior guidance, with half of that being a real reduction and the other half pushing into Q4. Again normalizing for the deferred comp plan, R&D was substantially below our prior guidance but $700,000 above the guidance provided in our September update. Other income was $11 million or, after normalizing for the impact of the deferred comp plan, was $9 million, higher than our $8 million guidance due to the short duration of our portfolio and higher interest rates. The Q3 tax provision includes several discrete adjustments, including a charge related to the planned repatriation of $100 million of foreign earnings pursuant to the American Jobs Creation Act of 2004. The total net impact of the tax adjustments was $1 million. The company's core tax rate remains at 20%. Now some comments on the balance sheet. We ended Q3 with $1.3 billion in cash and investments, up slightly, even after repurchasing 4.7 million shares of common stock during the quarter at a cost of $94 million. Cash flow from operations was $123 million for the quarter and $249 million year to date. Altera net inventories increased by $7.1 million to 2.2 months and distribution inventories declined by 1.2 months. The total inventory pipeline stayed constant at 3.4 months. Accounts receivable declined and our DSO was 39 at quarter end. Now for guidance. We have some programs in Q4 that we know are going to be slowing down for a variety of reasons, including transition to newer products, customer build cycles, program end of life and, in a few cases, ASIC conversions and competitive losses. This, then, is going to be a challenging quarter at the top line. Our guidance for Q4 is for a 2% decline to a 2% sequential increase. Orders-to-Resales were just below parity in Q3. Turns required to achieve our Q4 guidance is in the low 70s. We expect that communication and industrial segments will grow and that consumer and computing and storage segments will decline. Gross margins will be in the range of 66%. Guidance on spending is given assuming that the non-qualified deferred compensation plan will have neither a gain, nor loss, that is, no impact. R&D will be approximately $53 million. SG&A will be approximately $58 million. We are guiding to $9 million of interest income, a tax rate of 20% and diluted share count of 371 million shares. Total months of inventory, including both distribution and Altera, are expected to be in the range of 3.3 months, plus or minus 0.2. For 2006 we are guiding gross margins to be in the range of 64% to 66% for the year. We have looked at our current engagements that are significantly above or below our corporate margin average and forecasted volumes for those programs, identified the new opportunities that might affect margins, anticipating routine ASP declines, and projected costs through the year to arrive at that result. There will be virtually no uplift from the sale of previously written-down inventory. We will be completing our financial plan for 2006 this month and will be providing spending guidance at our analysts meetings, which will be held in Boston and New York on December 5th and 6th. These meetings will be webcast. Thank you, Nate. I am pleased with the continued strong growth in our new products in Q3, while also disappointed in the gross margin decline. Overall, we expect to outgrow the semiconductor industry, as well as our competitors this year on the strength of our new products. New products grew 23% sequentially, 66% year-over-year and, for the second straight quarter, drove 100% of the growth. Each of our new product families grew sequentially with Cyclone 4%, Stratix 40%, Stratix GX 45%, MAX II 56%, HardCopy 8%, Stratix II 25% and Cyclone II over 400%. Many of you have developed product revenue models and then to enable you to trim them up, rounded, Stratix and Stratix GX together were $66 million in the quarter, Cyclone $32 million, Stratix II $13 million, MAX II $2 million, Cyclone II $2 million and HardCopy $12 million. 130-nanometer products are now over 35% of Altera's revenue and 90-nanometer products are over 5%. There are several highlights in the quarter I would like to expand on. First, we continued to take market share in FPGAs, particularly at the high end, which, in turn, is driving our overall market share gains. FPGAs grew 4% sequentially and 12% year-over-year. Second, we have revenue leadership in the new product category. New products, including 130- and 90-nanometer, where Altera has competitive strength, will continue to ramp for the PLD industry. Correspondingly, mainstream, where a majority of our products had limited commercial success, along with mature products, are in decline. Third, we completed the production rollout of the Cyclone II 90-nanometer high-volume FPGA family. And fourth, we announced the Stratix II GX family, our third generation of high performance FPGAs with high-speed transceivers. Of course, there are always lowlights and areas for Altera to improve. CPLDs declined 5% sequentially and 4% year-over-year and while I do not believe we lost much market share in the, we are still a year away from MAX II having an impact in this category. Also, with our focus on growing our new products, we did not foresee the ramp-down of two major mainstream customer programs that affected gross margin. We are in the process of refocusing on the customer forecast process. And finally, the fourth quarter is one of customer program transitions that will result in a growth path for the company. For the fourth quarter, we are projecting flat revenues, plus or minus 2%. By market, computer and storage will decline due to 2 storage programs that are pausing in their production ramp that began in Q3. We expect storage to resume strong growth in Q1. Consumer will decrease as a result of seasonality where builds for the holiday season are ending. We also had one consumer customer reduce their forecast for this quarter due to excess inventory and we have assumed that there might be others. Communications will grow, led by enterprise, with the continuing ramp of new programs. Wireless will also grow in 2G and 3G. We would now like to take questions. Please limit your questions to one at a time so that we give as many callers as possible the opportunity to ask questions during the call. Operator, would you please provide instructions and poll for 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.

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Here’s the entire text of the Q&A from Dell’s (ticker: DELL) Q3 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. Hi, guys, two questions if I might. The first one is on the, if you look at the two basic concerns that investors have had with Dell, the first one has been about our near-term expectations too high and the second one really is about the business model and is the business model broken. Obviously the near-term expectations have been reset here and the performance in the Enterprise suggests the business model's alive and well but obviously the consumer business was a very big disappointment. How long is it going to take to get you guys, get this fixed so that it isn't the drag on business overall? Well, Harry, this is Kevin. As you know, our focus as a company has always been on the corporate and the enterprise market. And so if you look at those businesses, they're doing very well and they're doing very well globally with growth in international markets continuing at a very nice pace. For our consumer business, predominantly in the U.S., we went through a correction from Q2 to Q3 and our overall focus and making sure we had a good balance of low-end, mid-range, and high-end and with the launch of our XPS product line are now a little bit better balanced set up coming out of Q3. We are actually still very hopeful and very confident that we can take share, make money at all price points and on all products and make that a very successful business as has been traditionally for Dell. The second question relates to the earnings growth. As the guidance you have given, the midpoint of the range suggests 10 to 11% earnings growth which is basically in line with the total expected return of the S&P and I don't think, from an investor perspective, that's really what investors are expecting relative to the S&P. Is this a low point in terms of earnings growth? Do you think you can get it up? What is your long-term sustainable growth rate on earnings? Well, we think that in this particular time that this is the appropriate level of growth on the revenue, appropriate level of growth on the earnings side, Harry. And for this, we're giving that guidance out to the Street right now. What will be the long-term growth, we'll have to wait and see but we think at this point in time this is a very healthy growth rate. Leaves the industry in overall profitability and I think that's where we are today. Good afternoon, thank you. A couple of questions. First of all, the Q4 guidance implies about a 5 to 8% sequential increase in revenue, I know that you said that the extra week has not historically affected your business, but it seems like it would add at least several hundred million dollars, maybe a couple percentage points to the growth sequentially. I guess the question is, number one, why has that not been the case historically and number two, if it does add to the revenue, are you just taking a fairly conservative tack with Q4 guidance? And then the second question for Jim is when you say that margins will contract modestly in Q4 versus Q3, are you talking gross or operating or both? Thank you. Let me try to answer both of them. I'll do the last one first. Yes, I think it's more on the op income. We're not talking about gross margins or OpEx, but we think because of the consumer influence. I mean with the consumer business, down year-over-year in this third quarter, we're still going to have a lot of sequential growth in consumer and the op income characteristics are lower as you can see from the numbers and the rest of the business. So can't have a slight drag on op income percent. So it's 8.6 this quarter. We expect it could be slightly lower in Q4. Addressing the question on the extra week, it is kind of a tough one. It's interesting because it's the third 14th week quarter we've had since I've been at Dell and we've never actually talked about it with you guys very much in the past because it's never really been much of a factor. It seems to have gotten a little more press this time. But I'll tell you, the way the thing really works is that if you look at the way corporations buy, you know they're going to buy annually or then it's going to be broken down into quarters. And the fact that we have about three extra selling days this quarter in the first week of February, which is the lowest month of the year, I think it has like zero impact really on our overall relationship business. Now, transactionally, you would think day to day we might get a little bit extra volume but if I think about the growth in the transactional business in the fourth quarter, we get the bulk of that more front-end loaded in the quarter at least up through the holiday season. So the fact that I've got three extra days in February doesn't have much impact on the holiday buying season. So, yes, it's kind of a mix. I actually hope that we can get enough extra revenue to cover the extra OpEx that we have associated with having an extra week because you've got fixed salaries and things like that, so it's kind of a push for us and that's the way it's looked for us historically. Sure. Two things if I could. One, there's been a lot of talk about your strategy on processors. Could you sort of take us through the thinking regarding, have you given any more thought to expanding beyond Intel and the reasons for staying with Intel? And I guess the second question, just in terms of, as you look at where you are from a cost standpoint, given the slower level of growth, are you interested or planning on taking other steps to address your cost structure? Yes, Andy, this is Michael. On the processor question, you probably have seen in the last five or six months we have broad dual core processors to our desktop, workstation, and server platforms across basically the entire line. When you look at server volumes, there basically are three categories, and I'll sort of take them in order of volume. The first and by far and away the largest volume category are the two socket servers like the PowerEdge 2850. And of course those have dual core processors and stack up extremely well to competing products with other dual core processors. The second category is basically entry servers where it's really more of a cost play. And we participate in those products with our PowerEdge 1425, yet it sort of is commonly known that there's not a lot of profit to be earned in that sector of the market and so it's really more of a cost play than a performance play. And then there's the highest end of the market, which is the four socket server, and you've probably seen that just recently we have started delivering our PowerEdge 6850 and PowerEdge 6800 which is a four socket server now with the dual core XEON part. So we think we've closed a lot of the gap and as was mentioned earlier with the 9G generation of servers that we have coming in the first part of next year, we have a number of advancements in those in terms of Intel's next generation of microprocessors in addition to a new memory architecture, new storage architecture, systems management improvements, and so I think also when you look at our enterprise business in the third quarter, we're seeing healthy trends in that business and so we're encouraged that we're doing well there. Having said all that, we have many products in development and we feel we'll continue to be competitive in terms of the products we can offer to the enterprise market. And Andy on your cost front, I think that with the growth that we're going to experience this coming quarter, the actions that we've already taken, we think are going to be very helpful in driving efficiency. If you are looking at the P&L, you can see that our margins actually were enhanced, gross margins, so we're in very good shape with the efficiencies of our overall business model, supply chain and manufacturing model, our OpEx was creeping up faster than we wanted and so we've taken some actions and I think you'll see us continue to hold pretty tightly to control those costs in the future and with the growth that we anticipate, even with the guidance we've given, we think that we can manage those costs back into shape. Thank you, I also have two questions. Kevin you alluded to having rejigged the model to drive a better balance that optimizes and I'm quoting here, optimizes profit while providing sustainable top-line growth. Should we be therefore assuming that the revenue guidance you provided this quarter is the sustainable top-line growth that you believe Dell can do going forward? Moreover, do you still feel confident in your $80 billion target which I think even if we pushed out to the later year of your three-to four-year projected range, would imply 13% revenue growth through the end of this fiscal year. Well, Tony, on that front we still believe the $80 billion target is achievable. It's strategic goal for us. We think that with our market share in the 18% range on PC units, with less than single digit areas within kind of overall printers worldwide, the storage business, the services business, software and peripherals business, that there's no logical reason why we can't continue to extend our model and grow into that level. However, when you talk about the growth rates, we believe that for this time and for this quarter, the best guidance that we can give you is in the 10 to 11% growth rate and we think that's appropriate for now. Just to clarify, the 80 billion that you think is still achievable, is it still achievable in your original time frame? And if you have moved to a model that does have more sustainable top-line growth, which is what you alluded to, when are we going to reach that level of sustainable top-line growth? Well, like I said, 80 billion is the goal that we're going to try to achieve and target our team strategically to go over. No timeline on that for you Tony and right now the guidance that we're giving for the quarter is 10 to 11 and we think we'll have to leave it at that. Okay. And then just on cost initiatives, I would just like to try and get a better understanding on timing. Firstly I'm not sure if you're at liberty to comment about the amount of the work force reductions. I think some simple math would say it was a thousand plus people associated with your one-time charge. But can you comment on when you should start to see the benefit of some of your cost initiatives? Again, I think in your closing remarks you said you are already seeing results in consolidation of consumer and SMB. If we are seeing some of those results, why wouldn't they offset some of the potential OpEx or gross margin weakness that you're expecting in Q4? Well, Tony, we've taken action, as we alluded to in terms of a reorganization, in terms of performance management of all of our workforce globally. But your number's not too far off. But I think right now the focus is on executional excellence across all of our systems. We're going to speed up a number of the cost reduction efforts we have going. We're focused on scaling out our overall OpEx structure, which is I think really the place we're focusing on cost improvements and we're doing that through a number of areas and initiatives that I alluded to. And so we're going to have to see how that goes through this quarter but we're pretty confident we've made the right moves. Good afternoon. Thank you. A couple of questions. Just first off on printers. Historically, you've provided unit growth and profitability metrics, will you comment on those? And I have a followup. Yes. In terms of printers, our total imaging revenues were up 31%. We had tremendous growth really in laser printers, a lot of growth in color lasers. We have now a number two position in total lasers in the United States. And again, we're seeing very strong growth in that product line. Revenues for consumables were up strongly. So the unit growth in the printer business has moderated some. But I think what you're seeing is a real shift to the laser business. So laser business is up in a very big way and we're focusing more on color lasers, which is really not a unit game when you compare it to the inkjet business. Rebecca, I'd say that the way we're managing this business has really been to continue to take share rather than focus on profitability right now but I'll tell you in this quarter the consumables revenue growth was so strong that we made a few million dollars this quarter and I think even with more unit growth in the fourth quarter, we'll probably make money; so I think we could very well be at the point where this starts to make more money sort of from the fourth quarter onwards into next year. Great. And then just a quickly two things. One, some of my contacts are suggesting that you weren't able to fulfill all of the desktop demand because of chipset, the shortages. Is, how much did that impact the quarter? And your guidance for the fourth quarter? And then can you just comment about what types of services initiatives you're making, are they focused on corporate and enterprise or are they across the board in the consumer as well and just provide some more context? Well, there has been a tight chipset market but all I would say is we were able to get what we needed for the quarter and for what we're going to need for Q4, so I'm not sure where the information you're--. And on the cost side, really is not a cost side, on the service and the support, I think it's a matter for us of building the correct capacity to handle customers' needs, accelerating technologies and technical support arenas, and just refocusing our overall execution within the service and support area. We pride ourselves on having great support, believe that that will be true in the future as well. I think one of the signs of early success is if you look at the most recent CIO survey we commented on in our original talking points, that we were named amongst largest corporations kind of in the world as number one when responding to the question of who offers impeccable customer service. That's pretty telling information and so we believe that one of the prides of the Company of providing great technical support is something we have and we will continue to improve on. Yes, one of the services that Kevin mentioned and we've actually been piloting this in, in a sort of a beta mode now for a couple of months is the service called Tech Connect. And it's part of a Dell on-call service that we're offering to consumers. And essentially when a user has issues with their machine, a lot of soft errors, spyware, those kinds of things, they can, on the internet, go to Dell.com/remote and they download a small piece of software. When they call us or they're on-line with us they're given a special code that they enter in and it allows with the customer's permission our technical teams to go on that customer's computer and basically fix the problems every step of the way asking the customer for their permission. And we found enormous satisfaction with this tool. Much faster speed to resolution and we think it has great applicability for a number of the, let's say, challenged users out there who we can help solve these problems more quickly. Yes, a few questions, please. Just three quarters ago, estimates for your growth were quite a bit higher, 18% plus and now you virtually have your growth targets and given that you've always been known for setting aspirational revenue and earnings targets, can we assume that you're changing your approach in order to give yourself more room and therefore have more of an opportunity to exceed targets? In addition, what actually changed so radically to cause this large a difference, that is, virtually having the numbers? Is it all consumer? Because the numbers don't really come out. And then, finally, you, the target numbers you gave for next quarter are for 8.5 to 11.5% top-line growth, and yet Kevin, you referred a couple of times to growth being in the 10, 11% growth range can you possibly explain, how the two mesh? Well, Laura, a couple of things. On the overall growth we talked about this quarter the impact being in consumer and also in the UK, we have a very strong position and predominantly that was a public sector shortfall within the UK, which is again one of our largest countries and one of our largest sectors. So that's kind of driven it. I believe that we are correcting overall kind of growth trajectories. We believe that 10, 11% of revenue growth rate is a very healthy growth rate for a company our size and for the time being and for the quarter that's the guidance that I think we're going to give. That's about the best I can do. On the earnings front, yes, the growth rate and the range is a little different from 8 to 13%, which is a little better than the revenue growth rate, which is what we always strive to achieve, better growth rate and profit line. So in other words, the 10 to 11% applies to the current quarter and not just to the longer term because it's a little bit different than what you have actually in the slide? Excuse me, 9 to 11 is the revenue growth rate my team is telling me here I misspoke and said 10 to 11, 9 to 11 is the revenue growth rate. I think for now Laura that's the guidance we're going to be able to give you for the quarter. Thank you, good afternoon. I wanted to know if you have any timeline on the turnaround in consumer and can talk a little bit more about the initiatives that will particularly allow us to track that better? When does the headwind become a tailwind? And then with regard to operating margins, Jim, if you could just clarify, I think we're going to maybe the mid to lower 8s next quarter. When do we go higher and how do we get there? Is, do you still have a goal of getting close to 9? Or do, should we look for that to expand slightly as we go throughout the next year to hit some kind of a goal? Thanks. Well, Ben, I'll answer your first section there. The consumer business for Dell, even in what we consider to be a kind of a slower period still is the, somewhere in the three to four times the profitability of any of our nearest competitors. So that's still a very good business for us. And my question is do we want to, how fast we want to grow it as an overall part of our portfolio. What we went about doing and correcting from Q2 into Q3 is getting the mix balanced between low, medium, and high-end products such that we had a healthy balance that we could grow off of into the future. So what we did in Q3 is launch and accelerate the growth of our XPS high-end product line forming computers both through launching XPS products as well as two high-performance notebook XPS products, the 140 and the 170. Those products have been very well accepted into the marketplace. I think we alluded to the fact that quarter on quarter they grew at double the rate of our lower end systems. And so we're very happy with market acceptance. It reminded us the fact that customers actually do want great technology at a great value and so we'll continue to push that strategy forward. We think, therefore, if you look at low, medium, and high and which we'll offer products at all price points, we'll have a good consumer order. Ben, we also have in our development pipeline for next year a continuing strengthening of the high end of the product line where Dell has historically led and we intend to continue to lead. We're also going to participate of course in the mid-range and in the entry space as well. Michael, just, the Street kind of is thinking that with easier comps in the second half of next year that's when we should see a turn. I'm just trying to get a direction. It seems like you're doing a lot of things to fix the business, but I mean, are we thinking about it the right way? Well, I think in response to all these questions we have been giving you the fourth-quarter guidance and I'm not going to give you anything other than the fourth-quarter guidance. Yes, Ben, you know when we talked about getting the op income up to 9 or better. If you kind of go back to late last year, we peaked at this time at about 8.8. And I think at that time the trending looked like we could go up above. And I think what's kind of changed during this year and I've been talking to all of you all year about this is that we've had a lot more growth outside the U.S., which just has lower op income percentages. It's something we're still working on but we're focused on continuing to grow our share, build our infrastructure out there and I think over time, that's still our target. I think we're pressured a little bit this year by the combination of that higher growth outside the U.S., and then with consumer having a little lower profitability, if we, if we had to sustain the same profitability even what we had last year in consumer op income would have been up another 10 basis points or more. So I think it's partly a mix issue in this quarter and I think kind of going into next year that's still our target, to get back from where we were, but I think we will just have a little bit of that natural pressure this quarter because the strongest revenue growth we're going to have sequentially from Q3 to Q4 here will be outside the U.S. and it will be in consumer. Hi. A couple things if I could, please. Guys, I'm still not sure on the consumer business. I think the plan is to try to improve the profits as the focus is more on the high end. But clearly that would be a position that's coveted by many. So how does the consumer business, which has 4.5% op income or 4.2% op income if there are other folks coveting that same space how do you really drive improved profitability there? That's the first question. Keith, I think we drive improved profitability there the same way we do it in every other customer segment. If you look at our overall competitive front and we've, obviously as you have, assessed our top three competitors, their operating income in the entire business is somewhere between 2 and 3%. So our consumer business, which is one of our least intensive businesses, makes more money as a percent than any of the others across all their businesses. So it's pretty clear to us if that's the case that we have a sizeable advantage in the consumer space and so the model's very healthy, and the only issue is how fast do we grow it and where do we grow it? And we spent Q3 in the process of getting the mix and balance between high, medium, and low set. We think that's done. We also have spent the quarter in worrying how we would manage overall operating expenses to have more sustainability in the growth. And I think you'll see if you watch our product moves this quarter that we will continue to drive growth in the consumer at all points and we'll have a very healthy Q4 for consumer. So just if I could clarify that for a second. Is, would you expect improved profitability in the U.S. consumer then as a result of that mix. Okay. The follow-on on Jim, your comment was on the extra week which you indicated was in effect only three days, did I hear that correctly. Yes, three, we take this in terms of selling days, you take the holidays and look at what you really have. To us it ends up being really about three selling days. I think four years ago and then another four years or so before that. So it's, I've been here nine years and this is my third one, so--. Well, we've gone back and looked at this thing historically and it's really a bit hard to tell. I think intuitively you guys look at it and you say, well, it has to have some uplift and I'd say the same but when we actually look at relationship type selling, which is still the bigger part of our business, the way business works and customers buy or public institutions, you, it hasn't translated into like a lot of extra revenue because it's not the way the selling cycles work. So I think you'd have to more look at the transactional side of the business and say, yes, the day-to-day run rate business surely must have a little bit extra revenue from that. But then again, like I said, a lot of the transactional business this quarter is more front-end loaded, before the holidays are even then post-holidays where people take their money and buy things after Christmas but I tell you February's our worst month of the year. So having a few extra days there, I agree it should have some uplift a bit because it needs to to cover the OpEx. I don't anticipate it. I've only done this one other time again in my nine years, so I'd rather go like another nine years or so. But--. Thank you. Two questions, please. In the printing business, do you think that the consumables revenue is turning out to be lower over time for the printers that you're bundling in for free with PCs versus the printers that you're selling stand-alone not bundled with PCs? We don't think, we know, yes, we don't think about those things, we know because we sell them directly to the user and we know exactly how many cartridges they buy, so we know, we know the answer to that question and the answer is yes. Bundled printers have lower consumables than non-bundled printers. Yes. Well, I think it implies that we would do less than we have in the past but I think we'll still use that as part of the portfolio of things that we offer value to customers. It has been a successful promotion in the consumer business and there might have been times when we over used it but I think we'll still have it in some moderation. I think the other thing that we are doing is finding that bundling higher-performing printers, so now the new all in one or color related photo related printers have also an accretive impact. So not only is it just, do you bundle it or not, that's clearly one question. But secondly what do you bundle? And those higher value products actually when they bundle are still used a bit. Okay. Thank you. And then the second question if I may. On the flat panel TV business, I wonder if you might just elaborate on your results there. How that performed relative to your expectations and whether or not that can explain any of the consumer shortfall or is that still just too small to be a factor? Yes, I'd say that the TV product line is really too small to have much of a factor. We did launch several new products in Q3, they are very nice products. We'd be happy to take your order right now if you'd like to buy one, there's a 50-inch, 37, a 50-inch plasma, 37, 32 inch LCDs, and so those product lines will, I think, continue to be reasonably successful for us, it's a fairly nice product category. Pricing has been quite aggressive there, as you know. But I don't think it had much to do with the shortfall. Okay, great. Thanks. Last quarter you noted that component prices weren't necessarily coming down on an optimal rate or at least not coming down as fast as they had historically. And clearly if we look at the past when you've had some of these operational hiccups, particularly when your relative growth rate came down for several quarters, the component price environment, at least the firming component price environment, has been highly correlated with those events. So did this, did the firming of component prices persist for you guys in the October quarter? And if so, how should we think about a potential improvement in your unit growth rate as component prices begin to come down at a more rapid pace going forward? I think the component costs declines in the last quarter here were fairly moderate. We talked about that coming into the last quarter and pretty much played out that way. And we actually, with the unit growth being relatively strong in the industry, I think we're expecting to have a component cost environment again. That's very similar in Q4 to Q3. Unless demand softens in some way, I think it's pretty much more of the same. And of course if costs come down faster, it's better for us, but we'll just have to manage with what we have. But I expect it to be very similar. Okay. And then just an expansion of the question previously on bundling printers. You had done that quite aggressively in the early part of the year and clearly you've moved somewhat away from that strategy for various reasons. But I would imagine if you stopped bundling free printers or excessively discounted printers with the consumer PC that makes the overall price less attractive for the consumer and my question is does that have any impact, any elastic impacts on demand potentially explaining some of the weakness in consumer? And if so, how do you make up for that? You have to obviously pull from other component sides or price more aggressively on the list price and how do you make up for the fact that you can't, or you're not going to bundle printers as aggressively going forward. Well, I'll let you in on a little secret. The promo of bundling of printers is not our best promo to drive volume. So having that maybe out or using a different type of bundling strategy with the printers is not necessarily going to change the overall trajectory in the units, so it really had nothing to do with the overall consumer business per se. What we have concluded, though, is that there are better ways to make more money and get those printing products out into the customer basis and that is through doing some bundling through both bundling of low-end but also of the new photo all in one inkjets and that drives better customer value and it does drive a better consumable take rate. So we're learning a lit bit more about how we do that and I don't think you'll see bundling stopped but I don't think you'll see us utilize that as the only tool. Just actually four short questions. First one is, Jim, on the component side and in relation to the last question you said about the same in Q4 as Q3, can you quantify what you think the bill of materials declined in Q3, is it 30 or 40 basis points per week? Historical is 50. Second question is, if we do assume that operating margins over the course of fiscal '07 do migrate back up to the high 8s, seems likely that we're going to get higher gross margins because of obviously more focus on the balance of products as well as higher margin emerging growth areas but probably higher operating costs so in other words I would assume you'd see higher GMs but then higher OpEx and that would be the way you'd get to higher operating margins using that kind of methodology. And maybe you could confirm or deny that. And the third thing would be on, I get a lot of questions from in the business about the fact they believe that your economic advantage on the mobile side with notebooks, vis-a-vis HP, is not nearly as strong as it is on the desktop side. Maybe you could clarify that while everybody here is listening. And then lastly, and I promise this is the last one, you're probably not going to answer it. But I am assuming we are looking at a growth haircut this quarter in your guidance because of the ongoing restructuring which will likely last a few quarters. How much of a growth haircut do we think we're incurring here as you guys try to get the ship righted. Let me get started on those, Steven. If I missed something, just tell me. But, yes, the cost reductions last quarter were probably in the 30 kind of basis point a week. So if you're looking at I don't know 4% or so for the quarter, that was probably about it, the way we do it. Kind of like for like for the quarter. And that's what it looks to me like it's shaping up for Q4. Now, again we've had quarters like this, but it's probably the lowest reductions, maybe in the last couple of years, both Q3 and in Q4. So we do have that to deal with. The op income thing. It's a little harder to talk about it because part of this depends on what revenue growth rates we have but we're pushing pretty hard. I mean it was part of the cost reductions and even in the charge with some of the workforce alignment. I think we believe that you have OpEx this quarter at 10 points, we know it has to be lower than that. So I think there things that we can do, with revenue growth we still have some OpEx growth to work with and still take it down as a percent of revenue so I think it's really a balance between really margin and OpEx. I wouldn't look to any one and say this is where we're going to be able to improve our income, but I will tell you that our goal is to get OpEx down below 10 points or revenue though. So that's an improvement area and then it really depends on pricing pressures and what we can do with margins. I mean on notebooks, Steve, you asked about that. Notebook units were up 38%. This was a 13th consecutive quarter where notebooks grew more than 25%. We think we have a very strong product line here and a strong advantage. And we just introduced new 14-inch XPS product, the XPS M170 continues to win pretty much every time it goes into a competition it comes out with an award. So we have got a very, very strong product line. We're gearing up for a whole new generation of latitudes starting early next year. So this is obviously where we're investing heavily on the client side because we see a lot of growth here and the margins, operating margins, here are very healthy. Michael from an economic advantage standpoint in terms of the cost of goods, bill of materials, advantage you guys have as well as obviously the channel. There's no difference there between desktop and notebook you're still touching the box you're still buying materials on an order basis versus a build to forecast. So there is no difference between economics between a Dell notebook vis-a-vis a Hewlett notebook and a Dell desktop vis-a-vis a Hewlett desktop, is that correct? Well, that would not really equate to what we know of their profitability. So I think you'd be missing something there because those products are quite nicely profitable for us. They're certainly more profitable than desktops. So you'd be missing something in the P&L there somewhere. Steve, the other thing you've got with that is you can certainly weigh cost position in terms of just bill of materials and the kind of bare bones you've got a number of other cost elements that go into that equation, but then you've also got product mix. And so when you combine all of those, we're very happy that we've got an excellent cost position. It may be slightly different than the desktop business, may be slightly less. In terms of just a bare bones cost effort. But there's a lot more that goes into the profitability of a product line than just the bill of material costs. Yes, I think there are number of things that go on in notebooks. For one, you have a whole array of things that gets sold along with the notebook, which are unique and often, are really always sold by the channel. In our case, of course, we're the channel, so we have an opportunity to sell all of those and those carry fairly attractive margins. So when you add all these things up plus the warranties and everything, what you have is a very attractive business that continues to grow. Again, 38% unit growth. So we're continuing to invest heavily in notebooks. And I think you'll see leadership from Dell in terms of the next generation of performance in mobile computing. And then lastly, is there some haircuts that we're getting. I know you are not going to quantify it, that's fine. But I'm assuming that the guidance of 9 to 11 incorporates some haircut resulting from ongoing restructuring at the Company. No, I think Steve what we've done has given you what we think is a good growth rate for the Company at our size 50 to 60 billion growing at that 9 to 11% growth rate we think's appropriate and that's what we can give you for now. Just want to take one more stab at the revenue growth for the fourth quarter. Historically, your international business has been seasonally strong, it's been the fourth quarter. It's growing more than 2X the rate of your Americas business. So with that increasing as a percentage of the total and with faster growth there, and with your public sector declining as a percentage of total and that's been a drag on growth I'm just trying to understand, why are you guiding to decelerating top-line growth on a year-over-year basis in the fourth quarter? Well, you do, as you correctly stated you've got a number of kind of puts and takes of parts of the business that kind of trail off and some that maybe even trail off in terms of TRU, some that peaked up and so w look at that in terms of the balance of our over all-business. We looked at what we thought was a healthy growth rate for our company to set our targets and our guidance for and really, Brian, all I can tell you is that this kind of 9 to 11% growth rate we think is acceptable for a Company of our size, for the market that we're in, and for the direction we can give you today. Just a quick followup on the UK. Can you just talk a little bit about how much that contributed to the shortfall versus your original guidance by my math it seems like maybe the UK was up mid-single digits year-over-year, is that correct? And could you just talk about whether you think the weakness you saw there was market driven or more company specific. Thank you. Yes, it's actually a mix there, Brian, because the UK business was still up, more of a stronger single digit but it's a mix of the home and small business markets are actually quite good. The public market, which is strong for us in this quarter, was quite a bit short. And in fact that's even when you see, no one's asked so far but when you look at some of the profitability even, and we've talked about this a lot with you in the past. We're very big in the UK, it has a market share similar to the U.S. And with that part of the business being very profitable and kind of dropping off, our UK profitability was much lower than normal so that really had the impact on EMEA. But some parts of the market actually are quite good, the small business and the consumer part in the UK was good. So it really is more one part of the market. I was going to just to add to that though, Brian, one other thing just because so many questions about Q4 is there are so many moving pieces now. Even though we talked about federal business in the past, not being as strong, the federal business in Q3 was actually quite good and made all our targets and we're also really big in the education business, so we've not talked about that being off. But the whole public business, the combination of the federal business and all the educational business declines a lot in Q4. So when you look at it sequentially you have several hundred million dollars of revenue declines there. Consumer goes up several hundred million. Europe goes up a few hundred million, you balance all those out, and we're guiding to actually quite a bit of revenue growth. So it's like if any one of those moving pieces changes a bit, that's kind of your difference in growth rates. Yes. Good afternoon. Let me try perhaps another variation of a question that's been asked. Versus 6 to 12 months ago, do you see competition having an incrementally better value proposition taken as a whole, or, are the changes that you're grappling with due to the internal execution issues or top-line execution issues? Internal execution issues on the cost side or top-line upfill issues? And on the upfill question, is there any way that you can give us a sense of metrics on progress on, on driving improved commercial ops? And I have just a quick follow-on to that. Well, Richard, I think as we look at the business and we look at our model and comparative advantages, we make improvements in that model at all points and all time and all the geographies and if you look at this quarter we had excellent growth outside the U.S. We had very good growth in very unique markets that we're targeting, enterprise particularly, server storage, notebooks. So we're having great success in a number of areas. We didn't do as well in a couple of spots and we've shared those with you. But I don't think it's fundamentally due to a big shift in the overall competitive frame. We didn't do as well as we talked in Q2 as we think we could have. Made some adjustments in Q3 and we're further making those adjustments and we think that as they come to play, that the benefits of the model for customers and for cost will play out like it has the last 10 years. Kevin, just to clarify what you said. You don't think it is a big shift at competition, but do you see even a marginal shift in the ability of competition to offer a marginally better value proposition. Well, I think you have to ask yourself what the marginally better competition really, we were talking a little earlier today about someone asking about kind of the low end price points and somebody mentioned a competitor that would be selling a notebook this holiday season for $399 and so we talked about that. Well, we offer 399 notebooks today and in fact the notion of a $199 desktop we're looking at our files was available to customers back in 2002. So the notion of low price points is something we lived with all along. That's not a new phenomenon and we have been able to compete very aggressively to sell a good balance of low end, medium, and high that's going to be true in the future. But we probably didn't do that as well as we could over the last several years and I think we're just getting back into that sweet spot of our overall model and as we do we're very comfortable that the model's fundamental strategic advantages will remain intact. I'm not exactly sure what you mean by upsell. What I can tell you is that our TRUs, our total revenues per unit quarter on quarter increased 3% Richard. That's a bit abnormal in terms of the quarter on quarter growth rate of that particular metric. That tells us that we're making headway into the product categories and the product mix that we really want to. And so we're quite comfortable that that's a good trajectory for us. As Jim talked, it will probably trail off a bit in Q4 as we accelerate into markets that have fundamentally lower TRUs. But that also has enhanced services and software and peripheral elements that are growing very, very nicely. And so, yes, the upsell I think's working well. 36% growth in services, 25% growth in software and peripherals. That's pretty good. And finally with respect to the growth rates. 9 to 11%, you have said numerous times that is your best appropriate number for this quarter. Do you think that that is a transient kind of a phase that you're going through? I guess the question in my mind is I assume you are not suggesting that 9 to 11% is the appropriate sustainable multiyear growth rate with Dell or, or is it? Richard, about all I can do is give you the same answer as everybody else. For this particular time this quarter and the guidance we're giving you, we think that is an appropriate growth rate, healthy for a company our size. That's where we are. Thank you very much. Operator, thank you. And we thank you all for joining us on the call. We look forward to talking with you throughout the quarter and have a great weekend. 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 InterActiveCorp’s (ticker: IACI) Q3 2005 conference call. The prepared remarks are in a separate article. 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] Our first question is from Michael Savner from Banc of America Securities. Please go ahead. Hi, good morning. Thanks. If I could ask two questions. Barry, it looks like you were quite aggressive in your share repurchases during the quarter since the spin-off, with only 7 million remaining under the current program. Would you consider expanding that authorization so you have the flexibility to buy more shares should the opportunity arise? That's my first question. And second, on Ask Jeeves, the market share increase in search queries looks to be 25% from the beginning of the year. Been trying to figure out how much of the market share might be attributable to the lower rates and the rebranding effort. And what we're getting is there risk that marketshare corrode once you try to exercise some pricing power? Or are you already seeing some pricing power with certain advertisers? Thank you. The answer to your first question is yes. What we have really seen is that when we're just -- as Thomas McInerney said a short while ago, the amount we expect it to get, in terms of decreasing the ads, which increases the queries -- the plot we have been on now for some 10 months, but increasingly actually in the last four or five months, when we really adopted it. Two months is it, Tom? It's shorter than I thought. We have been experimenting for some time to prove it though. The early indications are that it's exactly, plus a nickel, what we thought it would be. I think that's going to increase. And certainly, indications are that that when you reduce the number of ads above the fold, queries come. And from queries, without any question, we get revenue. So I think it's all on track. As far as rebranding is concerned, we haven't begun. I would say that you would look for the -- if you can call it rebranding. I would just call it telling people the wonderful differentiating points of Ask as against other global search engines really will begin in the first and second quarter of next year. And that's when we would expect, we have been gaining a little share, but that's when we would expect to make a real run for share. Won't happen overnight, but it will happen, we hope, over a year or so. Two quick questions. Tom, could you give us a little bit of your outlook for free cash flow in the fourth quarter and maybe into 2006? And also, if the Cap Ex on the building starts to come down? And then secondly, can you give us a little help with the Ask Jeeves margin outlook? I think the margins for that group were 11% this quarter. Does that improve into next year? Sure, Justin. In terms of free cash flow, just a couple of comments. One is, we don't want to give a specific guidance on Q4, but I'll point a couple of things out. One is that last year the number was -- for IAC as currently configured, $133 million, so it represented about 40% of the year's total. And with the travel businesses now gone, every year will be a new story, but I say in general, with Retailing being a bigger percentage than our discounts business, Q4 is more important from a free cash flow perspective than before. As you said or implied, it was exacerbated this year by our corporate headquarters building. And on a year-over-year basis, '05 to '06, the spin will be approximately flat, perhaps up slightly on that project. It will continue but it will not hurt year-over-year comparisons as it has this year relative to the prior year. On an overall basis, you look at our trailing 12 months on a free cash flow basis, we were at $355 million -- that factor in kind of the Q4 seasonality gives you a better indication of the current free cash flow generation of the businesses. With respect to Ask Jeeves -- I think, look, we're -- as Barry said, we're very early in this process. I think last quarter we said our first priority was growing share. The nature of this business -- the physics of this business is such that if you grow share, particularly in a rising market environment, even if you only hold share -- our intent is to grow share -- then you get very high incremental margins which will flow through to the bottom line. We're not running Ask either for near-term percentage margins this quarter or even next year. At the same time, we're not going in and completely transforming the economic model. Our intent is to take profits as we can, but the first focus is making the investments necessary to compete. And I think we'll -- we'll keep you posted as it goes. The only thing I will point out is on Q3, that is a seasonally very low quarter for Ask, given the natural seasonality of the business in the summer and things like that. Thank you, I wanted to delve in a little bit more just on the HSN part of the business. Last quarter, you'd express some concerns about that business and some talk about some changes you wanted to implement. It looks like the results from this quarter seem to have supported all of those changes. How sustainable are those changes? Is that kind of growth rate that you did in the quarter organically year-over-year, is that sustainable going forward? Thank you very much. Yes, I do think it's -- what I hope is more than sustainable. I hope it accelerates. We have put in -- we always do, but I mean increasingly, several initiatives. And that, plus what Tom spoke about in terms of Cornerstone, where we're going to get very aggressive now that we laid all of the -- actually the track of figuring out how to put the products on air in the best way, but that really goes into '07. So -- I'm sorry, '06. So I would -- I would hope, yes. What happens when you have -- in this business, we have it, QVC has it -- when you have a difficult quarter, you fall into a bit of a draw. It takes -- it takes a while to climb out of it. And it wasn't that deep for us, but it wasn't anything like we had planned. And that depresses things in the next quarter because you built up merchandise that you got, to not take particularly large gains with, in terms of margin. So I do think that there is no question that you just look at it every day -- which this is a business run every minute -- but every day, you see the definite solidifying and improvement. Tom, you want to add anything to that? I think only that the macro conditions, longer-term, which favor, we think, a cross channel retailing -- people that can combine, in our case, the compelling power of television with the compelling convenience of the internet in increasingly value-added ways for the consumer. The wind is at the back in that context. The short-term execution issues are as Barry suggested. And our challenge and objective is to execute well so we can take advantage of those longer-term favorable conditions. Thank you very much. Barry and Tom, as I look at the QF growth -- for the Lending business it's been extremely strong, accelerating for the third consecutive quarter, from 26% growth year-over-year in March to 39% in June and 52% this quarter. I wondered if you could give us insight into what is driving that acceleration on the QF's and do you think it will continue? And then Barry, on Ask Jeeves, obviously reducing the amount of ads on the page will improve the search experience and drive more queries. As I think about the second, third, fourth steps beyond this -- being able to put the right ad in front of the right consumer will drive higher click-through rates and ultimately drive better conversion rates in the back-end and better ROI's for the advertisers which, would really be the additional leverage in the business, which it really requires owing both the algorithmic technology and the monetization technology. Could you talk a little bit about where you are on the second piece of that technology? And what talent you may need to bring into the Company to be able to have that second, third and fourth step down the road? Thanks. On the -- Anthony, I'll take the first of your questions, in terms of Lending. If you say the 52% is very strong QF growth for the quarter, and I think -- it's a number of initiatives. The ones I would call out first, is getting the site to work as efficiently as possible. The QF process and the LendingTree's value to its lenders and to its participating lenders, is it delivers highly qualified leads to those lenders. That means consumers go through a QF process where they fill out the form. The key is to make that as efficient as possible for the consumers and the lenders. The consumers are doing it quickly and the lenders, on the other hand, are getting the information they need. And we continue to get better and better at that, which increases throughput and conversion. If we can tweak up conversion of someone we bring to the site to complete the QF process, that allows us to be more aggressive on the marketing side. And so we have had a number of initiatives there. Working with our lenders -- I highlighted this in my remarks, but lenders want the right leads at the right time in predictable volumes. And that's simple to say but complicated to execute. And we're getting better and better at that. Which, again, allows us to convert a higher percentage of those QF's to close loans, which allows us to make more money, which allows to go back and market more aggressively. And lastly piece is just being more aggressive in marketing. LendingTree's hallmark strength was creating this great brand -- as Barry said, 80% awareness -- that the challenge for them has been -- and the success, thus far with more to come, has been broadening that marketing outreach to be much more, number of varieties to include direct response, targeted specific lending products, much more extensive online -- to just cast a wider net for what is essentially, a better way of borrowing money and getting that to the right lender. So it's all of those things. And they kind of work in tandem and the more successful you are, make more money, allows you, again, go be more aggressive to cast that net and things are clicking. On Ask Jeeves. Yes, there is no question, the queries go up, the satisfaction goes up when you get the ads down to the three -- basically three or four above the bar -- above the algorithmic free search results. As far as the ad works system, as I think you all know, we're with Google for another two years at least. And you certainly know that Google is an efficient server of ads. So, what we're doing internally is, we're beginning to build the system where we will -- and we are doing it in small amounts now -- where we will increasingly -- which we have the right to do under our agreement with Google -- but we will -- we will increase this to the extent that we think is sensible. We both use our own tools in-house, we have extremely good technology. We don't necessarily have every smart person in the universe at levels above 187, which is what Google seems to claim. But we've got really, really good people in technology. In both internal and external things that we're using -- methods that we're using to build our own ad works. But, in a couple of years, I think we're going to be in this great position. We will have gotten it built. We will use it to the extent it makes sense. We think it will be a much more important factor in in Google's ad search, which would put us in a very good situation with at least three other ad search engines, plus our own, to plot the next course. Thank you. On the LendingTree and in particular, can you talk about the share that is going to Lending -- of these QFs that are going to LendingTree loans? And also, maybe talk about how Lending Tree loans makes its money. Is it secureitizing loans, is it whole loans, sales or something in between -- basically how it records profits and reserves? Sure. The percentage bounces around from quarter-to-quarter, month-to-month, et cetera -- but I'd say right now, we're trending less than 20% of the front-door leads that come through LendingTree getting closed by LendingTree loans in our own name. In terms of how it makes money -- it's essentially -- it's closing loans, what is technically called in the industry a correspondent. It closes loans in its own name, so it does all of the underwriting and paperwork -- so it collects the documentation and does the hard manual labor of A; selling the consumer the mortgage and enrolling the consumer, if you will, putting all of the paperwork together, putting the loan files together, closing the loan in its name while simultaneously selling that to one of different investment vehicles or investors. And it's done in different ways -- the secondary market activities, what we call secondary market activities, depending on the nature of the loan. It's essentially -- by doing that work, that kind of hard work of converting the consumer to a closed loan, closing the loan and then selling it off, it makes margin on that particular transaction. There is a mixture that I would say generally parallels the market. And they are selling the entire loan, including the servicing rights and everything that goes with it. Yes, hi guys. A couple of questions. Can you give us an update on Ask Jeeves International plans. It seems like a big growth in search coming from international markets. What is your plan to roll out the product -- search product beyond UK and the Spain market? Secondly, a follow-up to Ask Jeeves, in terms of integration process, it seems that you have Ask search box in most of IAC sites. I was trying to get a sense -- what's the next step, in terms of -- are you focusing on tool bar? Or maybe integration with the shopping channel part by HSN? Can you comment on that? Thanks. I'll take the latter part first. All over the place, Ask is beginning to integrate itself with IAC and to push these initiatives, which go from certainly tool bar, where we have a very, very good business and all of the IAC properties. Yes, you will see on everything -- and you will see a search -- an Ask search bar. You will see -- it on Expedia, beginning, probably, right after the first of the year. And it's -- again, these are -- these are new things that we're doing. Which is to line up the symbiosis, which is natural between a search engine and these fantastic -- forgive my word fantastic, I shouldn't say it. But I think it is, actually. We have the best vertical services. So, whether it's the search and traveller, the search for loans or it's the search for -- I mean I can rifle through them all -- but they're true content value-added services. And as you -- as you integrate them into this global search engine, you really do give the consumer just a much better -- really value-add than they would get anyplace else. That's part of the differentiation of what Ask is and will be in the future. And I think it's in the differentiation that we will gain share. Just one quick add-on to that. The people that want a quick visual, just a -- literally a tiny example. But if you search today on anniversary gifts on Ask, we have a very small, just started business called Gifts.com -- which I would encourage you to check out -- we have done a quick integration, just to get it up for Q4 and the gift-giving season. And it just gives you an example, if you look at that return on Ask -- of the type of integration. And this from a Gifts.com business, that has been in business for about six months -- not to the level of our other leading verticals. So, plenty of promise. On the international question, we just came out of Beta in Spain, as you alluded to. And we are very -- in the very near-term, going to launch Beta sites in Germany, France, Italy, and the Netherlands. And so we're very much focused on the European and ultimately global opportunity but it's early days. Thank you very much. A couple of questions. You guys saw a QF growth of 52% and obviously shifting the model from agency to principle. Can you give us the sense of -- should we expect the Lending growth to be comparable to that 50% growth as we look out over the next year? Especially given the shift from agency to principle on that side of the business. Second, not to beat a dead horse, but everyone's excited about Ask Jeeves still. And I think the key question I have around the business is, are you see anything sort of lift -- any way to characterize what kind of lift you're seeing as you have integrated the Jeeves search box across the different brands out there? Which seems to be a major source of leverage for you as you go forward? On the first one. Again, we're not going to give specific guidance, in terms of going forward. All I will say is the 52% QF growth is a good indication of unit volume growth in this particular quarter. In fact, if you go back in proforma LendingTree loans, it was not included in the Q3 a year-ago period, if you proforma that in and look at apples-to-apples, we grew topline 87% and OIDA growth 142%. There is plenty of organic growth in our Lending business. And where that goes in Q4 and '06 remains to be seen. But when you think about the -- as Barry would say, the pitiful share of the market we currently have and that this is simply a better way, and we're the leader, it adds up to a nice equation. I don't think that we want to predict exactly where it goes. I think it'll -- we have got this enormous demand at the front door. And we have a very good network -- lending network. And we have a very good emerging network -- not network, but emerging loan closing operation of our own. So, I don't think that -- what I do think is important here is that we are very much -- there is so much runway in front of this business, because LendingTree continues to get its proposition across and imbedded with people that it's a better way to access loans. And to the extent that we keep doing that and to the extent we keep fulfilling as efficiently as we have, I think it's -- and given our tiny percentage of the market currently, I think that's all you need to know at the present. I don't think you can percentagize it, so to speak, to the future. On Ask, it is very much -- the integration of our search boxes, we're not seeing any particular lift -- now that they've been up for two months, three months -- some taken down and re-put up. You really have to tinker with it to get it right. That's going to take us months to do and not years, but it will take us months to get this symbiosis right. To get the relationship between our vertical search and Ask's Global Search in the right balance. As I said before, I don't think there is any question that over time, all of these things converge into a search box -- Global Search will be the entrance. It's the gateway to all information, goods and services. And the more information that you have got, the more good content that you got is, I think, going to be a very good differentiator. And there is no question, we have a lot of very good content that we have been building for years. Next question, please. Great. Thanks. There has obviously been a lot of talk about the holiday season -- the holiday shopping season starting later this year on the back of general consumer spending concerns. Can you talk a little bit about what you're seeing in the HSN business relative to last year? And how you view the online component of that HSN.com having an impact on the business's growth and, of course, profitability? Sure. I think we have always said -- and I have always said, that the macroenvironment for retailing affects HSN but it doesn't drive HSN. And that remains our best sense of it. When the consumer is focusing on gas prices or anything else, it can't help, but at the end of the day, it's not the driver. And the same is true when it's positive trends. It's much more about our own execution, our own merchandising and our own service, et cetera. The macroenvironment is something we're looking at, for sure. I would say in terms of --the only specifics I would say at this point, the general trends we have seen in Q3 continue. Not marketably better or not markedly worse. And we're guardedly, cautiously, insert your word, optimistic for Q4. In terms of HSN.com, every single day -- and I don't think this is an exaggeration. Every single day, we find important and interesting ways to relate our on-air and our online businesses. Very simple things like having people come to HSN.com and tell us that they want to be notified via e-mail when their particular favorite vendor or guest or brand is coming up on air. We call those 'when to watch e-mails'. It's a simple concept, but it's very much taken up steam and it's a very important tool for consumers. We have launched customer ratings on HSN.com, which allows consumers to rate products, nothing novel in that. What is novel, when you have the television network, is, you can then use that to build programming shows. So we have had programming on air, where we only feature products that customers on .com have rated four or five stars. Very successful. Those are two examples and it continues. These two services continue to be highly complimentary and we think -- it goes back to what I said earlier. The reason we think longer-term -- over the long-term, multichannel retailing, particularly with this configuration of assets -- the wind is on our back, because of examples like -- examples like that. Thank you. Barry, you mentioned earlier in the call, if you would be making more investments in the business in '06, which we would all expect, especially given the early nature of many of them, Can you elaborate on some of those investments? If there is anything in particular, to comment on, it's incremental. In terms of the Ticketing business, I think in the release you said there is increased cross-selling on behalf of the other IAC businesses. Can you talk about that a bit? And were there any new relationships? Any specific drivers here that increased things in 3Q? Thank you. As far as investments for next year, what I really wanted to signal is that there is no one of our businesses that we are not investing some in -- something in. Because there is no sector that we have got that we don't think has growth worth chasing. So, I wouldn't want to break anything out, Not at this stage. But I think, again -- without being redundant about it -- that businesses that obviously have higher growth, actually don't take that much additional investment. It's opening up new areas, new initiatives where in fact, we're going to go and start this travel club in interval. We're starting two new -- one new service in Match.com and we have some other announcements that we'll be making about Match.com soon that take additional investment. We think it's -- we -- contrary to everybody else, we think the Personals catagory is anything but saturated. We think it has got enormous growth ahead of it and very worthy of investment. You can just pack down almost -- at HSN and at Cornerstone, because we think we're going to sell much more Cornerstone product -- there is some infrastructure you have to add. You actually have to have a deal with warehouses and the inventorying of goods -- and where you're going for a much bigger reach sales goal, which we are. So I think that's what it is. Again, we'll balance investments with return -- we balance investments with our current operating profit. We don't want to trash anything, but we certainly don't want to not make an investment on a timely basis or make an investment -- not make an investment because of some expectation here or there. If we're doing our jobs correctly -- we're making the correct investments for the long-term without sacrificing a single thing short-term that is sensible of -- to keep as it is. Well, we do some cross-selling with several other of our IAC's businesses. There is some natural -- some kind of obvious natural things. We do some with our discount programs, we do some with Expedia -- it's good for Expedia and good for Ticketmaster. And Ticketmaster is such a good service unto itself. And we're a bit cherry about using the Ticketmaster audience to cross-sell. Not that we won't do some, hopefully, natural and good -- good efforts there. But we don't want to overburden the consumer. Hi, guys. Just a couple of quick questions. One, Barry, I think that Clear Channel accounts for somewhere around 20% of Ticketmaster's revenues. Can you talk about your current relationship with Clear Channel? And how it may evolve going forward? Number two, I wanted to get your general thoughts on what you thought about AOL. There has been speculation about AOL paring up with some of the search engines. I wanted to get your thoughts there. And lastly, I wanted your opinion on the shortage for the Vacations division and whether you see that sort of clearing up anywhere in the near-term? Clear Channel is less than 20% -- it's between 15% and 20%. Our relationship is very good with Clear Channel. They made a management change. We're supportive of that. We think their new management is excellent. We're always in conversation with ---we're probably at the -- at our smoothest point. Any time between distributer -- supplier or these kinds of relationships -- they often have friction in them. Just as kind of a general understanding of their relationship, but we're doing many things with Clear Channel. They're very supportive of some of the really great initiatives inside Ticketmaster that deal with TicketExchange and getting into the secondary ticketing business, et cetera. So I would say it's very solid now. At the same time, I think that Clear Channel is probably going to say, all options are open, as they move into -- as they do end up moving into independent status as it relates to ticketing and other matters. But, again, we just exercised our option for another three years. So we're together, we're going to be together and we hope we'll be together for a long time. As far as AOL is concerned -- I don't have anything to say about that, except I think that -- I hope that Time-Warner also takes care of the long-term. And I think they have a great business in AOL and I hope it doesn't get clogged up. On Vacation -- let me jump in on that one. There has been a number of factors which have affected top-line growth. As you have seen throughout the year, profit growth has been very strong. Part of this is -- in a tighter-supply environment -- travel supply, hotel occupancy, supply environment, there is less available inventory in the system. And it's kind of a complicated equation how inventory -- condo inventory ends up in the system available for exchange, but developers can put it in on their own. And in a tighter environment, they're selling some of that separately. We're actually in a tighter environment, as in essence a distributor, in this sense. We're seeing lower exchanges and lower -- what we call 'getaways,' which is when someone books ancillary travel in connection with the timeshare exchange. We think an element of that is industry cycle. The movement to the web has been a positive -- you see the metrics on this and the release -- it's been a positive from a profit perspective. It's simply a more efficient way of doing business. It hurt us a bit on the revenue side, because without that phone operator -- call center, operator interaction with the customer, you are not getting as much travel upsale and ancillary services provided. We think that's solvable over time. We've solved it in other businesses. And that's a work in process. And the last piece is international growth. Interval has a reasonable international business and for a variety of country-by-country reasons, the international environment has been tough. There are pockets of the world we're now optimistic about. And I think the same things that have fueled the growth in the domestic industry ultimately will prevail in international markets and we should be well-positioned to take advantage of that. But it's kind of macro factors that will play out over some time. Finally, Barry mentioned in his remarks, the launch of Live It Up, which is our travel club. We think it's an exciting new initiative which will, for the first time, make Interval's tremendous supply of unused condo inventory available to the general public. And encourage people to check out the site as it moves from Alpha to Beta to full production over the coming period. And we think there is tremendous deals for families taking vacations. The next question is from the line of Paul Keung from CIBC World Markets. Please go ahead. Paul Keung, your line is open. Thanks. Most of my questions are answered. One that you kind-of touched up on, that's on the Retailing side. We're seeing mixed results right now from retails and catalog orders out there. I am curious what relative strength or weakness are you seeing, either by segment in Retail or by demographic? And I guess specific to you in Cornerstone, between home decor and the apparel categories? It's interesting. When we think about the Cornerstone brands, and as you know, there are now seven principle brands plus some derivative-developed titles, we have strength and weakness in each of both, home and apparel. We have multiple brands in each of those areas. And in the home area, I think we called out in the release or in my remarks, we have had a strong year and continue to. At Ballard -- Front Gate, which is the other large home business in the portfolio, has had a much tougher and softer environment and that continues. So, very mixed. Just a function of the merchandise and a variety of merchandising initiatives. On the apparel side, TravelSmith has been very strong. Not all travel, but partly. Whereas other apparel businesses within the portfolio has not been as strong. I'd say the same is true for HSN. In retail, it usually doesn't get down to broad generalizations, it gets down to very specific product classification and execution issues. And the nice thing about Cornerstone is they do have a portfolio of brands, all of which are significant and material to our Retailing business, and so usually we're able to offset weakness with strength in other parts. We have a very, very good retail portfolio now. Between catalog, on-air and online. And we -- we now are on so many multiple burners that you're going to have both good news and bad news. Overall -- the overall pull of our business is -- is just completely positive. Looking at the tax payouts, the secures -- you've increased those secures of what benefit you have had from paying out the more and trying to [trade more] partners there. What trends are you seeing in your payment of your tax? Are you increasing them or decreasing them? And what benefits have you had, either way, in terms of where you're spending the tax? Let me try -- let me take a shot at it, if I understand the question. I think Ask has a number of different methods to apply to our customer -- distribution methods that range from customized portal deals to search integration deals to other forms of -- obviously in the tool bar business, a variety of downloadable online marketing tactics. And I would say in general, all of -- the market for all of those customers are competitive. We have seen some pressure in spot areas. I don't think any of it's game changing. But obviously with a highly competitive search market that continues to grow very rapidly, our arbitraged opportunities and opportunities to make margin are going to get arbitraged away by competitors. But then you go find other opportunities. It's constantly a competitive game. I don't think anything is sea changing there. It's something we focus on every day. Hi, thanks very much. Two questions, if I may. First, can you explain why the Ask Jeeves percentage of revenue from proprietary sources declined in the quarter on a sequential basis? Does this reflect at all the new sponsor links offering? And how is that going at this point? The second question is a bigger question -- I wanted to know if you could talk a little about your vision for becoming more of a player in interactive media. Things have been referenced over the past several quarters. You guys are doing some things in that area. Where do you think there could be opportunities in that particular area, given your current base of assets? Thanks a lot. On the -- on your first question, you really have to -- given the seasonality in the business, you really have to look year-over-year. We think that's the right comparison in this particular one. Because the source of revenue does move around seasonally, and so Q3 is a lower seasonal quarter for some of the proprietary as opposed to the network. Flat year-over-year, we think, is indicative in the current trend in the business. As far as the future, which I am -- look to be much of a predictor about. But what I would say -- actually now, I will go and do it -- which is, and I don't think it's very much a prediction to tell you the truth. It's hardly looking around the corner. But clearly, video -- digital video is going to be increasingly, increasingly a part of the interactive internet world. As bandwidth increases and you do get the ability for rich media, for video, that is a whole world. Now, we are already in the closest thing to it. Because at HSN we have video, now all digitized. And we have, as we talked during this call, enormous amount of efforts that relate between HSN and the symbiosis with HSN.COM and their interrelationship, which will more and more merge. Each will be always separate but they'll be very much true sisters of each other. There are all sorts of other things that are going to happen through digital video. And this Company does intend to begin to make investments -- small investments at this stage, because I think it's really probably -- it's certainly off, meaning off by some digit of years. I don't think all that many or we wouldn't --or we would just wait. So I think it is sensible for us to begin in various forms of content creation, of digital delivery, et cetera, those forms where we're going to start to make small investments in the next year or two. And if I could just follow-up, do you think right now your company has the assets that you'd like to kind of pursue what is going on in interactive media? Specifically, are you thinking about proprietary elements of this type of area? Or are you thinking about what you have done historically, which is essentially connecting buyers and sellers in a variety of different areas? Well, I don't know yet, to tell you the truth. I don't think -- actually, I don't think we should know yet. It's too -- it's too much early days. This Company is very much concentrated on -- on being of service to consumers. We -- in being of service to consumers about goods and information. The next forms, which will be probably more -- if you could say it, I mean they're all content-based. But maybe in the narrative area, may not. Don't really know yet. Certainly will be in the area of news through Ask, which is very much now in it and thinking about how to aggregate services for the future. So I don't yet know where it's going to go. I do know that the areas that we think about deal with gaming, they deal with gaming of all kinds. We have some little embryonic efforts of that right now. One in the UK -- two in the UK, actually. So whether it's gaming or whether it's entertainment, narrative, et cetera, I don't know yet. But, again, as I say, it's not an area of capital deployment at this stage. I don't believe it will be one for awhile. And I think you got to look probably towards the end of next year, the following year, for anything really significant to develop there. It's our pleasure. On behalf of Tom and my colleagues and I at IAC, thanks for listening. And we'll be back with you, I think, sometime in February. So, an early wish for a nice holiday. Thank you and good day.

EarningCall_233890

Here’s the entire text of the prepared remarks from eDiets’ (ticker: DIET) 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. David Humble, Founder and Chief Executive Officer Robert Hamilton, Chief Financial Officer Allison Tanner, Chief Strategist Ciaran McCourt, President and Chief Operating officer Scott Van Winkle, Adams Harkness Courtney Coles, Adams Harkness Bill Vlahos, Odyssey Value Partners Ken Farsalas, Oberweis Asset Management. Chris Sassoon, Eagle Asset Management John LaRosa, Market Data Brian Freckmann, Crown John Lewis, Osnium (ph). Paul Johnson, private investor Presentation [Operator] Good day, ladies and gentlemen, and welcome to the Third Quarter eDiets.com Earnings Conference Call. My name is Jen, and I will 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 anytime during the call you require assistance please press “*” followed by “0” and our coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference, Ms. Allison Tanner, Chief Strategist. Please proceed ma’am. [Allison Tanner, Chief Strategist] Thank you Jen and good morning, everyone. And thank you for joining us for our conference call. Before we begin, I just have a couple of housekeeping items. First, just to go over our Safe Harbor limitations, the statements that we make this morning that are not historical in nature are considered forward-looking statements, and those may involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to be materially different from those which we might express or imply today. The risks and uncertainties include, among others, that we would not be able to obtain sufficient and/or accessible outside financing when and if we required it; changes in general economic and business conditions; changes in product acceptance by consumers; a decline in the effectiveness of our sales and marketing efforts; loss of market share and pressure on prices resulting from competition; volatility in the ad markets that we utilize; the termination of contractual relationships with our brand partners that license certain brand components and other proprietary information for our subscription program; regulatory actions affecting our marketing activities; and the outcome of any litigation that may be pending against us. For additional information regarding these and other risks and uncertainties, you can refer to our annual report on Form 10K for the year ended December 31, 2004, and to other reports that we file from time to time with the SEC. All forward-looking statements are current only as of date on which we make them, and we do not undertake any obligation publicly to update any forward-looking statements. I would also like to let you know that all of the speakers today, Rob, Ciaran and Dave, are not in the same location, so the question and answer session that may just cause a slight delay. And to tell you that while we are happily back in our headquarters this morning, with most of our utilities working, we are having some intermittent issues accepting inbound calls. So a better way to reach us if you need to after this call would be through using email or through our investor relations firm, Integrated Corporate Relations; and their contact information is on the top of your press release. Thanks Allison. And I thank everyone for attending. Last week, Wilma knocked out all services across South Florida. While we were inconvenienced, our virtual business continued to run automatically, generating revenue in diet plans as usual. Even with the lights out, we met last week’s sales goal. As of today, we’re mostly back to normal. Today, I am pleased to report a 14% increase in revenue to $13.5 million, and record net income of $2.1 million or $.09 a share for Q3. This is versus a loss in the comparable quarter last year. This is the fourth straight quarter where we have acquired subscribers on a profitable basis and a key indicator that we have successfully adapted to the significantly higher online advertising costs we have faced for over a year. Online advertising is still a major means of acquiring subscribers, but our plans are to further diversify to other media. Today, our focus is continued profitability, but in addition to that, we are repositioning our site as the online authority in the diet category, introducing new diet plans to attract more subscribers, increasing revenue for subscribers, and exploring new channels of distribution. In Q3, we built a new eDiets site from the ground up to accomplish three objectives. First, to attract more viewers to the site, we added more original content, health and diet news, and tips from Harvard Health, Psychology Today, and the Federal Trade Commission who publishes alerts in their diet category. Second, to bring viewers back, we designed the site to be the authority in the diet category, the place where consumers seeking diet advice, information, products and services can find the latest information regarding diet solutions. And finally, the new site is more advertiser friendly, with larger ad sizes. As traffic builds, the new site will generate more ad impressions and more revenue. It’s early. The consumer response has been positive; and we are seeing increases in both site traffic and returning visitors. To attract more subscribers, we continue to build out our diet depot, a concept that clearly sets eDiets apart from the competition. Where our competitors offer mostly a single plan, we offer a wide array of plans that give consumers a choice. Our strategy here is moving beyond just weight management into health-related plans that increase our market reach and better position us for the corporate market, a potential new channel of distribution. As an example, two plans that we have in development are health specific, adding to our Type II diabetes, healthy heart and low-cholesterol plans. To increase subscriber revenue, the challenge is convincing the consumer that online diet solutions are a viable alternative to the 40-year old drive to model. We have three things going for us in this respect. First, the increased awareness of overweight in America; our belief, consumers are willing to pay more for online solutions; and finally, internet technology will let us do today what just last year was not cost effective. We now have the ability to really connect with our subscribers in ways that will add value to our service, strengthen retention, and bring us closer to the price point of the offline drive-to-model. While we have been successful marketing online and on television, there are other channels of distribution to explore. One of several opportunities we see is doing in the U.S. What has been a success for us with Tesco in the U.K., Tesco’s well respected reputation will help us make the right connections in the U.S. supermarket industry. To summarize, we continue to acquire subscribers profitably. We are well positioned in the growing market where consumers are becoming aware of the risks of overweight, and we have substantial upside potential on product pricing, eCommerce and new channels of distribution. We have been the innovators in the market, and we will continue to lead rather than follow. I am very excited about what we have in the development pipeline and the potential of these initiatives to grow our business. Thank you again for attending, and I will now turn the call over to Rob Hamilton, our CFO. Thanks, Dave, and good morning everyone. As Dave mentioned in his opening remarks, we are very pleased with our current business trends and our third quarter results. Third quarter revenue increased 14% to $13.5 million in 2005, compared to $11.8 million in the comparable period last year. That income for the third quarter of 2005 was $2.1 million or $.09 per diluted share, compared to a net loss of $1.4 million or $.07 per share for the same period last year. The company’s revenue for the nine months ending September 30, 2005, increased 21% to $41.6 million from $34.3 million during the same period in 2004. Net income for the first nine months of 2005 was a loss of $.1 million or $.01 per share, compared to a loss of $9.8 million or $.50 per share for the first nine months of last year. Our revenue growth was mainly from a 15% in increase in revenue per member due to a combination of price increases implemented in late 2004 and our expanding portfolio service of service information and product offers. We are showing growth and earnings as a result of continued efficiency and leverage in our business, including more efficient advertising spending. Our new subscriber acquisition costs fell to 46% of estimated subscription revenue per member. And that is about an estimated 800 basis point improvement, compared to the same period last year. Other revenue which includes the sale of advertising on our website and in our newsletters, for all these from our Tesco relationship in the U.K., and eCommerce and commissions activities was up 14% over the prior year. As Dave mentioned, we are working to improve our ad sales and are in the process of reorganizing this area of our business; and that includes the roll out of a new online magazine format. Initial reception of the new format has been positive, and we expect that over the next several quarters, that as impressions increase, ad revenues will follow. Our gross margin remained constant at 86%. As a reminder, cost of revenue is mainly credit card fees and royalty payments due under our licensing relationships. Third quarter sales and marketing expense, which includes our online and television advertising, marketing personnel and production costs totaled $7.7 million, down from $9.5 million the year ago period. A decrease was expected as advertising accounts for about 80% of our sales and marketing costs, and we continue to be more efficient with our ad dollars spent. Offline spending new accounts for over a quarter of our ad spending, and we see that number growing in the future. As a reminder, the second half of our year tends to be seasonally softer, and our expenditures scale down accordingly. Based on the seasonality and our ability to become more efficient with advertising spending, we expect our sales and marketing expenses will be down in the fourth quarter of this year, compared to last year, as we continue to eliminate unproductive ad volume. General and administrative expense total $1.3 million for the third quarter of 2005, compared to $1.4 million in the comparable period last year. At the percent of revenue, our GNA was 10% for the third quarter, as compared to 12% in the third quarter last year. Our income from operations was $2 million, compared to a loss of $1.4 million in the prior year quarter. Cash from operations during the third quarter of 2005, totaled approximately $.4 million, versus cash used of $.8 million in the year ago quarter. I would like to note that in the prior year, most members pre-paid for services three months in advance, while currently, most members now pay one month in advance resulting in less up front cash for us. Turning to our balance sheet, cash and cash equivalents at the end of September 30, 2005, grew to $7.7 million, and we do expect our cash balance to grow in the fourth quarter. In addition, we have to make future cash flows from our current paying members as of September 30, 2005, to exceed $10 million. Though this is not for accounting purposes, we do look at these future cash flow streams as an asset. With regards to guidance for 2005, the company now expects to earn between $.04 and $.06 per diluted share in fiscal 2005, compared to a loss of $.49 per share in 2004. Revenues of 53 to $54 million are expected for the full year. Please note, we are in the midst of our budgeting process for 2006, and although not complete, we are targeting the 2006 revenue growth rate at least comparable to 2005, and with GAAP profitability for the full year. That concludes my comments. Now, we’ll turn the call over to Ciaran McCourt. [Ciaran McCourt, President and Chief Operating officer] Thank you, Rob. The results that Rob reviewed are the best indications of our overall progress as we drive growth and invest in the future. Over the past nine months, we have made a number of improvements in our business model that have resulted in strong revenue growth and improved earnings. Factors including price increases, more effective CPA management and modest overhead reductions all helped our improving numbers. Probably, our most important factor was the improvement in our cost to acquire a new customer, otherwise known as our CPA. This can be attributed to flexible ad buys both on and offline, and continued success with our commission driven sales, rather than straight ad buys, such as search and direct response to you. Our TV media had a particularly strong quarter, as we recorded our most efficient CPA. In addition, our ability to manage our media optimally so that we deliver the most cost effective ad placements with the most targeted message has helped drive down the CPA. Finally, the release of programs, as Dave mentioned, like the new Mediterranean Diet, helped diversify our marketing message and offering, which has increased our conversion. In addition to our product innovations, I would like to give you an update on several of our strategic operational initiatives. In the third quarter, as Dave said, we began testing a new authoritative approach to our homepage. The early results are promising in that the conversion from our homepage has improved. If any of you have not visited our site recently, I invite you so to do. You can see how we intend becoming the authority for consumers interested in a healthier lifestyle. We are encouraged about the direction that the ad revenue and eCommerce side to our business is taking. Though ad revenue growth this quarter trailed our subscription revenue growth, there were some noteworthy achievements. Firstly, our CPM rate increased 67% year-over-year, as evidenced by the quality of our recent advertisers. For the first time, we are seeing major pharmacists, finance companies, and CPG’s advertise on our site. We also had our first significant homepage base in this quarter. We believe our diet depot strategy will help grow this part of the business. We can publish and digitize a great variety of diets, offering vendors a unique audience for their products and service. In addition, we are setting a target to increase our ad impressions by a minimum of 50% in ‘06. That’s combined with the higher quality advertisers means that this should be a lucrative market for us going forward. Though traditionally as a company we were focused on subscription revenue, it appears that we have a lot of potential in this area. In addition, our eCommerce revenue, including sales of vitamins and products, increased 22% year over year from our store. We will indeed expand and re-design the store in ‘06. In addition, we see a meal delivery service as an additional opportunity here. We are currently testing this service in our sales process. Going forward, we see ad revenue and eCommerce becoming a more significant piece of our business models. These two areas are particularly significant, as we can match our expenditure and revenue more closely than we can our subscription revenue. This can help change the dynamics of our business model. Other notable successes this quarter include a bookazine (ph) deal with Time, Inc, which will launch in January ‘06, and will be available in checkout stands across the nation; our international revenue continues to expand with our U.K., royalty stream from Tesco, beating our expectation; and Germany and Spain revenue growing, albeit off a very modest base. In addition, we are in early stages in exploring some new international licensing deals. Overall, we believe the strength of our innovation in new products and services, combined with our improving operating efficiencies will continue to increase profits and increase our revenue for the long term. Even though we have made strong improvements through the first nine months of this year, we believe we are in the very early stages of an exciting marketing opportunity. In ‘06, we want to be ready to embrace new platforms to engage with our customers. As we look to the fourth quarter of ‘06, we will continue to drive growth and invest in the future in order to produce long-term shareholder value. 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_233891

Here’s the entire text of the prepared remarks from Cisco’s (ticker: CSCO) 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. Hello and welcome to Cisco Systems' First Quarter Fiscal Year 2006 Financial Results Conference Call. At the request of Cisco Systems, today's conference is being recorded. If you have any objections, you may disconnect. Good afternoon, everyone, and welcome to our 63rd quarterly conference call. This is Dennis Powell with John Chambers, our President and CEO; Rick Justice, Senior Vice President of Worldwide Field Operations; and Charlie Giancarlo, Chief Development Officer. The first quarter of fiscal year 2006 press release is on First Call, Old National Business Wire, the European Business and Technical Wire and on the Cisco website at www.cisco.com. If you would like a fax of the press release, please call 408-526-8890 and follow the instructions. Information regarding Cisco's financials and corresponding web-cast with visuals designed to guide participants through the call are available on the Cisco website at www.cisco.com in the Investor Relations section. Additionally, a replay of this call will be available via telephone at 866-357-4205 or 203-369-0122 for international callers. Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results. Throughout the call, we will refer to our non-GAAP results as pro forma. Please note we have provided complete GAAP reconciliation information on our website in the Investor Relations section. Additionally, we have provided information relating to both our GAAP financial results and our pro forma financial results, along with a reconciliation table between our GAAP and pro forma financial statements in our press release. The financial results in the press releases are unaudited. The matters we will be discussing today include forward-looking statements and as such are subjected to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent Reports on Forms 10-K and 10-Q and any applicable amendments which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. Unauthorized recording of this conference call is not permitted. Consistent with previous quarters, we will conclude our call promptly at 3:00 PM. Dennis, thank you very much. I would summarize the quarter as a solid quarter. Our balanced approach to the market in terms of our four customer segments, core and advanced technologies and five key geographic theaters continues to work very well, with solid results in the majority of categories. For example, our very good results in the U.S., Asia-Pacific, emerging market theaters, core routing and switching and advanced technologies balanced the slower orders we experienced in Europe. Going into fiscal 2006, we focused additional resources and management time on five key areas in addition to our normal strategy, those five key areas being the commercial marketplace, additional sales coverage, advanced and emerging technologies, our evolving support model and the emerging market theater. As we will discuss later in this call, each of these investments appear to be producing solid results. Now, moving on to the discussion of Q1, reminding everyone that Q1 is by definition the start of our new fiscal year and as such experiences normal seasonality, especially in the U.S. federal business and European market as well as being the beginning of the direct sales force new year following a super Q4. Q1 normally will be the lowest quarter in terms of orders and revenues, with momentum building throughout the year during normal economic times. Revenue growth was approximately 10% in terms of year-over-year, and flat relative to an extremely good Q4. Product orders grew year-over-year, faster than revenues. Product orders year-over-year grew in the 12 to 13% range in Q1. Product book-to-bill was slightly below 1. And in anticipation of questions we usually get about the linearity of orders during the quarters, the orders gained momentum in each of the three months in terms of year-over-year growth rates throughout the quarter. GAAP net income was 1.3 billion and earnings per share were $0.20 on a GAAP basis, which includes a charge from stock options of $0.04 per share. Pro forma net income was 1.6 billion, and earnings per share were $0.25. Total pro forma gross margins were 68.1 versus last quarter's 67.9. Pro forma product gross margins were 68.5 versus last quarter's 68.4. Staying with the same theme from the last quarter's conference call, there were a number of key takeaways from the quarter, all relating directly or indirectly to our advantages from a balanced opportunity perspective, and additional resources and management focus committed to the five key areas for fiscal 2006 discussed briefly above. First, from a balanced theater perspective, the advantage of having four large theaters is that when there is a challenge in one theater, it is often balanced or offset by the strength in the other three large theaters. And that is what occurred this quarter with the U.S., Asia-Pacific and emerging market theaters offsetting the slowing of growth in Europe. The U.S. continued to perform at the higher end of our expectations, with orders growth slightly above 15% year-over-year. This is better in terms of year-over-year growth than we experienced in any quarter during the last fiscal year. Our Asia-Pacific operation returned to high order growth. We were very pleased with the Asia-Pacific's Q1 growth of approximately 30% year-over-year in terms of orders, something we did not see in any quarter during fiscal year 2005. And our emerging market continued with order growth of approximately 30% year-over-year. Japan, which represents about 5% of our business, as was probably expected by many, continued to be challenging. And Europe was slower than we expected, with orders year-over-year being flat. In the spring of this calendar year, our senior leadership team determined that where the key incremental resources and management attention areas for fiscal 2006. We decided upon the five critical areas for additional growth and differentiation within our overall corporate strategy first, the commercial market segment of our business; second, expanded sales coverage; third, emerging markets; fourth, expanded focus on existing and new advanced technologies, including the focus on new emerging technologies that Charlie will discuss later; and fifth, an evolution of our support model focused on customer satisfaction, loyalty, which contributes to our ability to maintain solid gross margins for our products and services. I'd like to briefly cover each of these five areas of focus so as to put them in perspective on our progress in Q1 and areas of possible opportunity for the remainder of the fiscal year. The first area I would like to address is the commercial markets, which should be the fastest-growing of our market segments in the world, in terms of both new jobs and company creation. Starting last fiscal year and increasing this year, we made major investments and resource realignment in all of the major functions of our business. Those included sales, channels, marketing, product development, finance, solutions, services, etc., in order to better address this commercial opportunity. These investments appear to be paying solid dividends, with the commercial market segment having its strongest year-over-year growth, in the mid-20s, which is better than in any quarter in the last several years in terms of year-over-year order growth. This was the only market segment where we saw solid balance across all five of our theaters, with each of the theaters' growth ranging from the high teens to approximately 50% in each of the five theaters. And, as we said in the last quarter's call, the commercial marketplace, while representing approximately 25% of our total product business, is delivering on our vision of being the fastest-growing large market segments over the next five years. Second, as we shared with you in the last call, we made a decision to expand sales coverage, especially in the commercial and the low-end of the enterprise and the emerging market areas. And this appears, as you can see from the results, to be paying off as we had hoped. In Q1, for example, over 80% of our total Company’s incremental headcount increases of approximately 850 people were in sales. Third, with the expanded organizational structure focusing on our emerging markets around the world, this theater grew by approximately 30% year-over-year in terms of orders. Fourth, the advanced technologies continued a solid growth in revenues in what is often a seasonally slower quarter at approximately 25% growth in revenues year-over-year. We intend to announce two new advanced technologies before the end of this calendar year. And finally, our revolving support model, designed to help our customers integrate both technology and business architecture at a faster speed with lower risk, is paying off. And it's off to a very good, solid start, with very positive customer feedback. This is another one of those major reasons that we continue to be able to maintain very high gross margins, as experienced during this quarter. Cash flow from operations was a solid $1.4 billion. During the quarter, we repurchased approximately 3.5 billion of the common stock. We exited the quarter with approximately 13.5 billion in cash, cash equivalents and investments. This represents our 14th consecutive quarter of having pro forma net income exceed $1 billion and our pro forma profits exceed 20% of the revenue. We continue to believe, we have uniquely positioned Cisco as network IT continues to gain momentum. As anticipated, Q1's pro forma operating expenses were 37% of revenue versus Q4's 36%. Our total headcount increased by approximately 850, with over 700 of those going into the sales coverage that I discussed earlier. In summary, we view Q1 as a solid quarter for us in most of our operational measurements. Dennis will cover some of these items in more detail later in the discussion. In the remainder of today's call, we will use the following format: First, our standard financial and quarterly overview; Second, a discussion on our advanced and emerging technology strategy; Third, our usual summary of what went well, including a discussion of potential market share gains and strategies versus our competitors, as well as our usual areas where we can improve. The discussion will also include an expanded view of the five areas of additional focus in the fiscal year '06. And finally, our industry guidance moving forward. Now, I will turn it over to Dennis for a more detailed report on our financial results for the quarter. Dennis, back to you. Thanks, John. Now for some comments on our P&L. Total revenue for the first quarter was $6.5 billion, an increase of approximately 10% year-over-year. Of total revenue, 5.5 billion related to product revenue and 1.06 billion related to service revenue. This was the second quarter that service revenue has exceeded $1 billion. Service revenue includes technical support services, advanced services and other revenue. Of the total revenue in Q1, routing was $1.42 billion, up 13% year-over-year. Switching was $2.68 billion, up 3% year-over-year. Advanced technologies were $1.21 billion, up 25% year-over-year. And other was 183 million, down 15% year-over-year, and services were $1.06 billion, up 12.9% year-over-year. Other revenues were down 35 million year-over-year due to a Q1 change in classification of mobile wireless revenue into the routing category. As I begin the overview of our income statement, I would like to remind you that Q1 is the first quarter that we include the impact of FAS 123R, or employee stock option expensing, in our GAAP financial statements. The stock option expense for Q1 was $228 million net of tax, or $0.04 per share. This amount is allocated in our GAAP income statement as follows: 53 million included in the cost of sales and 264 million included in operating expenses. The resulting total expense of $317 million is reduced by an $89 million tax benefit to a net impact of $228 million. Please note that our GAAP income statement included in the press release includes further detail of these amounts. We will provide further disclosures regarding the adoption of FAS 123R in our upcoming Form 10-Q filing. Our financial statements for prior periods have not been restated for the effect of FAS 123, and as a result, we're not providing comparisons of Q1 GAAP results to GAAP results for the prior periods. However, we have provided a table in our press release and on our website for your reference in comparing net income for Q1 FY '06 with prior periods. This table illustrates the impact that stock option expensing would have had on our previously reported GAAP net income, along with the Q1 FY '06 GAAP net income that includes these charges. In addition, we have provided a full reconciliation of the difference between GAAP and pro forma measures in our press release and in the slides that accompany this web-cast. In Q1 FY '06, the total pro forma gross margin was 68.1%, up from 67.2% in the same period last fiscal year and up from 67.9% last quarter. On a GAAP basis, total gross margin was 67.3%. For product only, pro forma gross margin for the first quarter was 68.5%, up from 67.3% in Q1 '05 and up slightly from 68.4% last quarter. The increase from Q1 FY '05 was driven primarily by cost savings and volume, partially offset by discounts in mix. The improvement from last quarter was primarily a result of continued cost savings and slightly lower discounts, partially offset by mix. GAAP product gross margin for the first quarter was 68.1%. Our service margins on a pro forma basis for the first quarter were 66.5%, down from 67.0% in Q1 FY '05 and up from 65.2% last quarter. On a GAAP basis, service margins were 63.3%. Service margins will typically experience some variability over time due to various factors such as the change in mix between technical support services and advanced services, as well as the timings for support contract initiations and renewals. Our total pro forma operating expenses were $2.4 billion, compared with $2.1 billion in the same quarter of the previous fiscal year and compared to $2.4 billion for last quarter. Pro forma operating expenses as a percentage of revenue were 37% in Q1 FY '06, compared to 35.4% in Q1 FY '05 and 35.9% for last quarter. On a GAAP basis, with the effect of FAS 123R, operating expenses for Q1 were $2.8 billion. Our tax provision rate for the pro forma results were 28% for Q1 FY '06 and Q1 FY '05. Pro forma net income for the first quarter was $1.6 billion, compared to $1.5 billion in the first quarter of fiscal 2005. Pro forma earnings per share on a fully diluted basis for Q1 were $0.25, up from $0.21 in the same quarter of fiscal 2005, representing a 19% increase year-over-year. GAAP net income for the first quarter was $1.3 billion. If we had included the FAS 123 expense previously disclosed in our footnotes, Q1 FY '05 net income would have been $1.1 billion. GAAP earnings per share on a fully diluted basis for the first quarter were $0.20. If we had included the FAS 123 expense previously disclosed in our footnotes, Q1 '05 earnings per share would have been $0.17, representing an 18% increase year-over-year. You will note, whether we include or exclude stock option expense, our comparative to net income trends are positive. Now, moving on to the balance sheet. You will notice that we have reclassified our cash and investments into two categories on the balance sheet: cash and cash equivalents, and investments. This is a preferred method and is based upon the nature of our investments' liquidity versus their stated maturity date. The total of cash and cash equivalents and investments was $13.5 billion, down from $16.1 billion last quarter. During Q1, we generated approximately 1.4 billion in cash flow from operations, compared with 2.4 billion last quarter and 1.5 billion in Q1 FY '05. This seasonal decrease in cash flow was due to our annual bonus payout, a slightly higher tax payment and the timing of payment for service contracts last quarter. These are normal seasonal factors when compared to previous Q1s. During Q1 FY '06, we repurchased $3.5 billion or 194 million shares of our stock at an average price of $18.03. Our cumulative purchases since the inception of the repurchase program in September 2001 are $30.7 billion or 1.7 billion shares at an average price of $18.14. The remaining approved amount for stock repurchase under this program is approximately $4.3 billion. Since the inception of our repurchase program, the weighted average diluted shares outstanding, including stock option activities and shares issued in acquisitions, have decreased 15.3%. Moving on to the accounts receivable, we ended the quarter at $2.3 billion, up from $2.2 billion in the previous quarter. At the end of Q1 FY '06, the DSO, or days sales outstanding, was 33 days, compared to 31 days at the end of Q4. Total inventory was $1.3 billion, with pro forma inventory turns at 6.4, compared with $1.3 billion and turns of 6.6 last quarter. Inventory was comprised of raw materials, 98 million, up 16 million from last quarter; work in process, 426 million, down by 1 million; finished goods, 582 million, up 13 million; spares (ph), 172 million, down 8 million; and demo systems, 40 million, up 5 million from last quarter. We believe this amount of inventory is appropriate for our current revenue levels. Our inventory purchase commitments for Q1 were 922 million, as compared to 954 million for Q4 and 825 million for Q1 of the previous fiscal year. Total deferred revenue for Q1 FY '06 was approximately $4.8 billion, down from approximately $5 billion in Q4. Of the total, deferred product revenue was 1.3 billion and deferred service revenue was $3.5 billion. Product deferred revenue decreased 101 million, primarily due to previously deferred revenue having met revenue recognition criteria during this quarter. Service deferred revenue decreased 147 million due to the normal seasonality in our contract renewals. Our total Q1 FY '06 reported headcount ended at 39,262, an increase of 849 from Q4 and an increase of 4176 year-over-year. In conclusion, as we continue to focus on profitable growth, in Q1, we have been able to achieve approximately 10% revenue growth year-over-year and pro forma profit of 24% of revenue, marking the eighth consecutive quarter of pro forma profit at or above 24% of revenue. In addition, we are pleased with the continuing strength in our product gross margin. And I would like to thank the manufacturing and engineering teams for just an outstanding job. Secondly, on a year-over-year basis, while our revenue increased approximately 10%, our pro forma EPS increased 19%, reflecting primarily the impact of our share repurchase program. And third, I am pleased that returns on invested capital, or ROIC, remains at above 50%. We will continue to make strategic investments in certain customer segments, technologies and theaters, while maintaining a healthy and conservative balance sheet. Dennis, thank you. Nice job. Now moving on to our quarterly overview, in this section we will highlight information from our geographies and customer markets. Starting with the geographies, this is the data on which I primarily rely to run our business and watch very closely on a day-to-day basis. The following is the theater breakout for Q1 in terms of total product orders. As we said in the last quarter's call, this quarter we will present the data in our new theater organizational structure. In this call, we will also present the four preceding quarters, so you have a base with the new theater structure to judge seasonality and other factors. The U.S. and Canada in Q1 of this fiscal year accounted for 53% of our business. In Q4 of last fiscal year, it was 50; in Q3 of last fiscal year, 49; in Q2, 47% of the total; and in Q1 of last fiscal year, 51%. Emerging markets: Q1 of this fiscal year, 10%; Q4 of last year, 8%; Q3, 8%; Q2, 9%; Q1 of last fiscal year, 9%. A number of you have asked for continued geographic discussion regarding the theater and industry segments because of the rapidly changing global economic environment. All of the theater, market segment and product discussions will relate to product order growth unless otherwise indicated. The key takeaway for the quarter as it has been in prior quarters was the continued balance that we've been able to achieve in our geographies, market segments, architectural evolutions and product families. This quarter, the commercial market segment produced the best results, which grew year-over-year in the mid-20s. There was also a good balance in terms of our product families. This quarter, our core switching product orders grew in the low double digits year-over-year, while our core routing business grew approximately 10% year-over-year from an order perspective, and our advanced technologies in the mid-teens, led by storage, with growth of approximately 70%; security and the network home in the low 20s; wireless in the mid-teens; optical with a decrease of approximately 40% year-over-year; and enterprise IP communications growth increasing in the mid-30s. As we said earlier, revenues for advanced technologies in total grew approximately 25% year-over-year. From a year-over-year perspective, the commercial market segment grew in the mid-20s and the enterprise market segment grew in low double digits. Service provider growth varied dramatically by theater. Service provider growth grew in the 20s year-over-year in the U.S., Canada, Asia-Pacific and the emerging markets. It was down year-over-year 40% in Japan from what had been a very strong growth, looking back one to two years, and Europe from a service provider perspective was down in the low double digits year-over-year. As a reminder, our business is approximately 46% from the enterprise market segment, approximately 25% each from our commercial and service provider market segments, with approximately 4% coming from the consumer market segment. As we've done in prior quarters, the geographic discussions have been in orders, and at the recommendation of several of our shareholders, we will discuss much of the quarters today in terms of order growth, and that is in many people's opinion an accurate indicator of key trends, momentum and future market share gains and losses. This is especially true given book-to-bill variations quarter to quarter as lead times will reduce. As a reminder, over the last nine quarters, our year-over-year product order growth rate has been very predictable, usually in the teens are better. As we said earlier, this quarter we saw a year-over-year product order growth rate in the 12 to 13% range for Q1, down slightly from other quarters due primarily to the slowness of our European business, while our year-over-year product revenue growth has fluctuated from mid-single digits to approximately 30% over the last nine quarters. In five of those nine quarters, revenue growth has been below the teens, including this quarter. Moving onto the U.S. and Canadian theater, which represented 53% of our business, first, from a commercial market segment perspective, balance was good among the four U.S. commercial areas. Year-over-year growth was approximately 20%, with a year-over-year growth rate better than we had experienced in any of the quarters in fiscal 2005. Second, from an enterprise perspective, relative to the five U.S. enterprise areas, excluding the federal, the average year-over-year growth in the high single digits. Third, from a U.S. federal business perspective, in what is traditionally a strong quarter, it was a very solid quarter for us, with year-over-year growth rates of approximately 30%, which is the best we've seen in several years. Fourth, from a U.S. service provider perspective, Q1 year-over-year growth rate was in the mid-20s. And fifth, from a Canadian perspective, year-over-year growth for the entire country was approximately 30%. Asia-Pacific: Moving on to the Asia-Pacific, which represents 12% of our total orders. As we said earlier, year-over-year growth rates were up approximately 30% for the entire theater. We saw a solid growth from a year-over-year perspective in almost all of our large countries. India was particularly strong, achieving growth of approximately 70% year-over-year. We had the best quarter in China we've had in two years in terms of total orders and growth year-over-year, with Q1 growing in the high 20s year-over-year. Our Australian and New Zealand teams continue to have a solid momentum year-over-year, as did our Korean team. Moving on to our European theater, which represents 20% of our business in Q1 versus 23% in Q1 of last year, orders in total were approximately flat year-over-year. We experienced good growth in several of the countries in Europe, including Switzerland, Denmark, Norway, Finland and in Greece. However, the large countries, such as Germany and France, remained challenging, with year-over-year growth rates down slightly in low single digits. Another challenging area in Europe was the UK, where we have an extremely strong and seasoned Cisco team and a great market position. During fiscal year '05, we experienced a very solid year-over-year growth, averaging in the mid-20s. However, in Q1 of this year, following a trend we've heard from several of our large industry peers, we saw year-over-year growth in the low single digits. Moving on to Japan, which represents 5% of our business, as you probably expected and have heard from some of our industry peers, the weakness that we shared with you in prior quarters is continuing. Given the economic and other challenges, this market continues to be a little bit more challenging from an economic and capital spending perspective. Year-over-year growth was down in the mid-20s and down sequentially in the mid-teens. Emerging markets: Moving onto our emerging markets, which represents about 10% of our business, there are four major geographies in our emerging markets theater. Those are Eastern Europe, Latin America, Middle East and Africa, and finally, Russia and the Commonwealth of Independent States. Q1 continued our stream of five consecutive quarters in a row with growth in the low 30s year-over-year. We are off to a good start with the emerging market concept and commonality of opportunities and issues. Eastern Europe, Latin America, Middle East and Africa grew year-over-year in the 30 to 45% range. Russia was up year-over-year in the mid single digits. In summary, while there was not a good balance across all five theaters, there was exactly this broad balance across the theaters, customer segments, core products and advanced technologies, which allowed us to have the good results, despite the challenges in Europe. Now, I would like to turn it over to Charlie for a discussion of our advanced and emerging technology strategies. Charlie? Thanks, John. John has asked me to address Cisco's strategy for describing new technologies and provide more visibility into how we will do business in this area. Cisco's first six advanced technologies represent examples of exploiting market transitions ahead of competitors and executing against the opportunity to drive growth. As John has said many times, the best time to capture a market transition, whether it's for technology or for business model or a new market, is well before the transition is apparent to the mainstream of the market. As a reminder, we've defined an advanced technology as an opportunity which is adjacent to our other businesses that can generate Cisco revenue of $1 billion or more, where Cisco can secure the number one or number two market share position, although, John, I've never seen you let us just go for number two -- -- with clear and sustainable differentiation over time, and that fits into our long-term architectural technology vision. We expect, as you've heard, to announce a new advanced technology every three to four months throughout this fiscal year. And we expect to announce two by the end of this calendar year. Now, in addition to the new advanced technologies, we will from time to time introduce new, what we're calling emerging technologies in the early phases of a new market, when it's too early to predict the eventual size of the overall market or the eventual size of Cisco's business. Emerging technologies are new areas which Cisco believes are promising and could mature into formal advanced technologies, but still have a degree of market risk that does not allow us to target a full billion dollars or greater run rate for Cisco at this time. As many of you are aware, in the last six months, Cisco publicly announced its first two emerging technologies, Application-Oriented Networking, or AON, enabling application interoperability, and our IP Interoperability and Collaboration System, or IPICS, which enables radio interoperability. We've received positive initial customer interest in both these technologies, which are both in early field trials. Emerging technologies are a mechanism to incubate new ideas, products, business models and new markets based on customer interest and our estimation of early potential market opportunity with limited resources, primarily from engineering and small overlay sales. In addition to the new advanced technologies that we have indicated we will announce over the year, we also hope to announce a number of new emerging technologies as well. Thank you, Charlie. Nice job. Moving on to our usual summary of what went well and our normal healthy concerns, starting with what went well, again discussing this in terms of orders and the balance of geography, product and customer segments discussed earlier. From a geographic point of view, there were two major highlights. First is the continued strength and balance in the U.S. across all three major market segments. The growth in orders was about 15% year-over-year, was better than we saw in any quarter in the fiscal year of '05, and momentum combined with the additional sales rep coverage looks pretty good. The second major highlight was the growth and balance from our Asia-Pacific operations, where our new theater lead, Owen Chan, is off to a great start. I just visited China and India last month, and I believe that both countries are well-positioned for growth. As you may remember, we made our key investments in China approximately 10 years ago, and those investments have served us well over the last decade and we expect will serve us well in the future. Four years ago, we made our first major commitment to India, and on my most recent trip, we made additional major commitments of over $1 billion from a sales, R&D, product development, venture capital and support perspective. On that trip, we visited the majority of our large service provider customers, key conglomerates, financial institutions and government leadership. We have had growth in India of excess of 50% in each of the last two years, and I feel that the momentum looks very solid for this year, with a very good chance of growing above 40% year-over-year in the future, with the appropriate caveats. In summary, we think we are well-positioned in both China and India, and while we are cautiously optimistic about our growth in China, it would not surprise me to see India actually challenge China from a Cisco perspective in terms of our business revenue per year, looking out three to four years. We also continue to do very well throughout the rest of Asia. Australia and New Zealand continue their very solid momentum, with Australia growing approximately 40% year-over-year in this quarter and New Zealand approximately 70%. From a product perspective, more and more of our large customers, especially in the enterprise, are committing to an architectural approach where routing, switching, security, wireless, IP telephony, the home and datacenter products are at first loosely and then we believe tightly coupled over time. There are very large advantages in terms of total cost of ownership, flexibility and time to market for customers under this approach. To put this in perspective in terms of cost of ownership, many of our customers articulate their costs at 25% being product costs, 50% supporting those products and 25% physical space and the associated expenses. The advantages of being the market leader in terms of innovation across, let's say 10-plus major product areas, combined with the dramatically lower costs to support and physical requirements from a tightly coupled approach, are becoming more obvious. We continue to demonstrate market leadership in most of our product areas. When you look at our competitors in each product area, none of them go across more than two of our product areas of focus, with even close to a leadership position. Having just attended our annual CIO Summit with 130 CIOs and having just met with a large number of other global CIOs in the last month as we traveled around the world, Cisco's architectural approach is continuing to gain momentum and acceptance. Many of you have asked for revenue growth numbers in terms of your ability to understand market share evolution. This quarter in terms of year-over-year growth, our revenue in the advanced technologies were in the mid-20s, as we had said earlier, with storage growing approximately 100% year-over-year from a revenue perspective, optical flat, enterprise IP communications in the low 40s, wireless in the upper teens, network home in the high single digits and security in the high 20s. Again, I'd like to recap our position versus our competition. While we face a very large number of bigger and very effective small companies, we believe that the industry will consolidate and that the consolidation will be along both technology and business architectural lines. We believe the technology architecture will be one where layers 1 through 7 of the OSI stack are first loosely and then tightly coupled. And that is exactly where you see us taking our core and advanced technology products, and Charlie, the emerging technology products that you and your team are working on as well. Innovation will continue to be through internal development, through acquisitions and partnerships. In our opinion, for companies to lead, they must be able to do all three. Perhaps most importantly, companies also have to gain the confidence of their customers from a vision and strategy perspective, a product architectural leadership perspective, and a service and support perspective. We think we are very uniquely positioned to continue to win the hearts, minds and capital investments of our customers. In summary, while there's always a room for improvement, we are pleased with our results. In our opinion, our results continue to show the effectiveness of our strategy and our ability to capitalize on major market transitions. Now, moving on to concerns, reminding those of you who have had limited exposure to our prior conference calls, we try to give equal balance to both what went well and our concerns. Given our normal sense of healthy paranoia, we have a number of general concerns. First, we continue to see some swings in global economic activity and capital spending. The trends that we have discussed last quarter in Japan, especially those in the service provider space, continued, and the concerns that we shared about our peers seeing some slowing in their European operations did develop in terms of our own business. Germany and France continue to be relatively slow, with growth in orders year-over-year down slightly. We have had a very solid success in the UK in recent years. UK is now our second-largest country in terms of total business and approximately, to put it in proportionate understanding, the size of Germany and France combined in terms of business for Cisco. Therefore, when we experience a dramatic slowing of growth in the UK in Q1, we have to have the appropriate amount of concern. This becomes even more important in Q2 in what has traditionally been a strong quarter for Europe versus a seasonally slow Q1. Second area of concern, we have always had a healthy respect for our competitors, and as I've said many times before, we expect an expanding wave of low-priced competitors from Asia. Third, we continue to see the opportunity to move into new advanced technology markets with additional resources. We also continue to see shorter-term payback by hiring additional salespeople. This second point speaks to some of the market elasticity and coverage issues. Therefore, we will continue to hire additional salespeople as long as we anticipate a reasonable ramp over one to two years approaching current productivity levels. If this develops the way we anticipate, it obviously presents key opportunities in terms of revenue growth and market share gains over the next several years. As you would expect, there is a natural lag between when you add these resources before you get payback for several quarters. This will obviously put a bit, a little bit of expense pressure on the percentage of operating expenses in the short run, but if executed right and the elasticity continues to be reasonably broad, it will have substantial benefits in the longer term. Having said that, our experience in Q1 indicates that these new incremental sales reps are rapidly coming up to speed in terms of orders after just several quarters of learning about their customers and Cisco. Fourth, we were very pleased with our year-over-year growth in the low 30s in the federal business, and we are cautiously optimistic about Q2 of the federal business. That is, we've often heard, and from prior experience, these funds can be quickly redirected to other issues. And finally in terms of concerns, at the risk of repeating the obvious, as you said in each of the conference calls for over a decade, whenever there is a GDP increase or slowdown in countries around the world, this is usually followed by a corresponding reaction in capital expenditures and therefore orders for Cisco and our peers. It is argued that GDP will continue to be a good indicator of what you should expect over the long run from our traditional business. However, this should also be combined with additional opportunities from advanced technologies, the service provider market segment and our commercial market segment, as well as potential market share gains. Our success is obviously dependent upon how well we execute and how well our strategy has or has not anticipated major market transitions now and in the future. Now, moving onto guidance. In very simple terms, we continue to focus on our strategy for architectural differentiation to uniquely position Cisco as our customers' networks, and therefore our industry, continues to evolve toward the benefits and value of systems approaching networking. As we discussed in the last quarter's conference call, we will continue to provide detailed quarterly guidance one quarter at a time, and we will also be providing fiscal year guidance, which as you would expect by definition, will have more uncertainty, accuracy risk and a wider range. This continues to be requested by many of our shareholders. And while we clearly understand the risk and uncertainty, we believe the benefits to our shareholders outweigh the risks. However, we do want to remind you with this yearly guidance, there will be more variability both up and down in our best estimates, and we will always try to make the best decision for our customers and shareholders in the long run, not tying decisions to a short-term quarterly mentality. As we've said on many occasions, we believe that the markets in which we participate, and according to the view of a number of industry resources, will support revenue growth in the coming years in the 10 to 15% annual growth range. And in fiscal 2006, we are continuing to stay with our prior revenue guidance, 10 to 12%. We were very pleased with the balance in U.S. operations, Asia-Pacific and emerging markets in Q1. And, with the appropriate risk consideration, the odds are good that solid momentum will continue in these three theaters in Q2. We believe Japan will continue to be challenging. Europe is the most difficult theater to predict at this time, given our Q1 results and similar experiences from some of our large industry peers. Q2 normally sees a seasonal slowing of U.S. federal orders, more than offset by seasonally strong stronger Q2 orders from Europe. This is what we would expect to happen in this quarter, and with appropriate concerns given a slow Q1 in Europe and some of the challenges that our peers have seen. We also believe that the additional focus on the commercial marketplace, sales coverage and emerging markets will continue to gain traction and associated business results. Therefore, we think there are opportunities for growth as well as market share gains, and many of our products have focused on the commercial market. As we have discussed in a number of financial sessions, we are getting more aggressive in expanding our sales coverage, resources committed to current advanced technologies and resources focused on a second wave of new advanced technologies, including emerging technologies that Charlie discussed. Therefore, you should expect our headcount and related expenses to increase slightly in Q2 versus Q1, just as it did in Q1 versus Q4. With these factors in mind, our guidance for fiscal 2006 is for product orders to grow year-over-year in the 10 to 15% range, with all the appropriate caveats regarding micro issues, execution risk and a marketplace that can change rapidly in either direction. As we said in the Q4 conference call, we would expect when comparing Q1 and Q2 fiscal year '06 year-over-year to Q1 and Q2 of fiscal year '05, in which we had a book-to-bill below 1, orders should most likely grow faster than revenues year-over-year. This is clearly how Q1 evolved, as expected, and we would expect Q2 to follow a similar pattern. In anticipation of a question in last quarter's conference call, let me use a theoretical example of how order growth and revenue growth can be different in terms of book-to-bill in Q1 and Q2. So, theoretically, let's assume that Q1 fiscal year '05 book-to-bill as announced was below 1. Let's say the same number actually theoretically being 0.95. And let's assume that our Q1 of this year being slightly below 1 was theoretically 0.98. Therefore, if revenues grew at 10%, it would be very logical that orders would grow approximately 13%. Each of you can decide whether your focus on revenues or growth projections on orders as being the most accurate indicator of growth. And I realize that among our shareholders, there are people in both camps or a combination. Having said that, my view has not changed. I focus on the order momentum and providing guidance and judging the degree of success of our strategies and what's going on from a global perspective. Also, as we said in the last conference call, with the appropriate risk considerations, we expect Q3 and Q4 of fiscal year '06 for revenue to grow faster than orders in year-over-year comparisons, given that Q3 and Q4 of FY '05 had a product book-to-bill of greater than 1. In Q2 FY '06, we would anticipate product order growth rate in terms of year-over-year to be in the 10 to 14% range. Our overall revenue guidance in Q2 FY '06 in comparison to Q2 FY '05 will be up year-over-year approximately 8 to 9%. From an overall sequential revenue perspective, Q2 FY '06 will be flat to up slightly versus Q1 FY '06. Dennis will discuss this in more detail in his section. In anticipation of some of your possible questions regarding our level of confidence and optimism, I would summarize our position in the following terms. We are continuing to be aggressive and optimistic on what we can control and influence. Key examples of this optimism and confidence would be the following, first, we continue to add resources. Second, we are beginning to develop what we believe will be a second wave of advanced technologies and have set an aggressive goal of announcing a new advanced technology every three to four months during the fiscal year '06. Third, we are getting even more aggressive on the opportunities in the commercial marketplace, as illustrated in our results and commitments in the most recent quarter. Fourth, our operational focus and results from the emerging markets developing at are better than we expected. And fifth, our market share and industry leadership gains. As always, I want to thank our shareholders, customers, employees and partners for their support and continued confidence in our ability to execute during rapid industry consolidation, market transitions, and challenging economic times. Thank you, John. Let me remind you again that our comments include forward-looking statements, and you should review our recent SEC filings that identify important risk factors, and actual results could differ from those contained in the forward-looking statements. As a reminder, we are providing guidance on a pro forma basis with a reconciliation to GAAP. Moving on to our detailed guidance. We continue to believe that for the next few years, Cisco's long-term revenue growth rate should be between 10 and 15% on an annual basis. We realize that many factors, including our own execution, will impact whether we are at the high end or at the low end of this range. Additionally, we could possibly be above or below this range. As we said last quarter, our revenue guidance for the full fiscal year '06 is 10 to 12%. We encourage you to model conservatively with the understanding that we will continue to provide updates and further guidance each quarter. Regarding gross margin, forecasting gross margin has always been challenging due to various factors, such as shipping, volume, product mix, variable component costs, customer and channel mix, and competitive pricing pressures. We expect the total gross margin to be between 66 to 67% over the course of this fiscal year. As we have mentioned, we continue to see investment opportunities in this first half of FY '06. Consequently, we expect that operating expenses will trend up slightly in Q2. However, we continue to expect that operating expenses for the full year will be around 36% of revenue. Now, some guidance specifically on Q2. We expect revenue in the second quarter of fiscal year 2006 to be up approximately 8 to 9% year-over-year. We expect the Q2 FY '06 gross margin will be approximately 67%, meaning it could be slightly above or slightly below this level. Operating income should be in the range of 30% of revenue. We would expect interest and other incomes to be approximately 150 million in the second quarter. We expect to continue our share buyback program, but it is difficult to predict the exact weighted average share count for EPS purposes. We continue to model a net reduction of 50 million shares per quarter. Regarding our Q2 FY '06 GAAP earnings, before the impact of FAS 123R on stock-based compensation, we anticipate that Q2 GAAP EPS will be $0.01 to $0.02 lower than pro forma EPS due to ongoing amortization of purchased intangible assets and stock-based compensation costs arising from various purchase acquisitions and investments. These charges will be reported as GAAP operating expenses. With the adoption of FAS 123R, we continue to anticipate that Q2 GAAP EPS will be a further approximately $0.03 to $0.04 per share lower, giving a total potential reduction of $0.04 to $0.06 to our Q2 GAAP EPS. For the FY fiscal year '06, we expect the impact of stock option expensing will be a reduction of between $0.12 to $0.14 to our GAAP EPS, giving a total FY '06 impact of $0.16 to $0.22. We anticipate the FAS 123R stock option expenses for the remainder of FY '06 will be allocated to the various line items of the GAAP income statement in similar proportions as Q1 FY '06. These expenses will continue to be reported in the individual line items on the face of the income statement and will be included in the GAAP financial statements only. Other than those items noted above, there are no other significant differences between GAAP and our pro forma guidance. This guidance assumes no additional acquisitions, asset impairments, restructuring or other unanticipated events which may or may not be significant. Regarding cash flow from operations, we would expect no change to our prior guidance of 300 to 600 million per month at these revenue levels. Our tax provision rate is expected to remain at 28% for Q2. Again, I would like to remind you that in light of Regulation FD, Cisco plans to retain its long-standing policy to not comment on its financial guidance during the quarter unless it is done through a public disclosure. Our next quarterly conference call, which will reflect our second-quarter fiscal 2006 results, will be on Tuesday, February 7, 2006, at 1:30 PM Pacific Time, 4:30 PM Eastern Time. We still request that sell-side analysts please ask only one question. And as a reminder, we will end the call at 3:00 PM Pacific Time. Operator, please open the floor to 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_233892

Good afternoon ladies and gentlemen and welcome to the PlanetOut First Quarter 2006 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please “*” followed by “0.” As a reminder, this conference is being recorded today, Wednesday, May 3, 2006. With us today we have Mr. Lowell Selvin, Chairman and Chief Executive Officer; Mr. Jeff Soukup, Executive Vice President and Chief Operating Office; Mr. Daniel Miller, Senior Vice President and Chief Financial Officer; and Mr. Kevin Noland, Vice President of Corporate Communications and Investor Relations. I would now like to the conference over to Mr. Kevin Noland. Please go ahead sir. Good afternoon and welcome to PlanetOut’s First Quarter Financial Results Conference Call for the period ended March 31, 2006. I’m Kevin Noland, Vice President, Corporate Communications and Investor Relations at PlanetOut. Joining us today on the call today are Lowell Selvin, Chairman and Chief Executive Officer; Jeff Sourkup, Executive Vice President and Chief Operating Officer; and Dan Miller, Senior Vice President and Chief Financial Officer. By now you should have a received a copy of today’s earnings release, which is also posted on the IR section of PlanetOut’s corporate website at www.planetout.inc.com. The IR section of the website will include a transcript of the conference call tomorrow, while the slide presentation and management they reference in today’s call is available now. Keep in mind that today’s presentation is being webcast on PlanetOut’s IR website. Lowell, Jeff, and Dan will begin our call by providing an overview of the business and our financial results, after which we will open the line for a question and answer session. As a reminder, during the course of the call, we may make forward-looking statements regarding future events or performance. We caution you that actual events or results may differ materially from those forward-looking statements and we refer you to those documents we have filed with the SEC including the annual report on Form 10-K for the year ended December 31, 2005, and other public filings. These documents identify factors and risks that could cause results to differ from the forward-looking statements. During this call, we may also discuss several non-GAAP financial measures including adjusted EBITDA, adjusted net income, and adjusted earnings per share, basic and diluted. You should not consider these non-GAAP financial measures in isolation or as a substitute for net income, earnings per share, operating cash flows or other cash flow statement data determined in accordance with GAAP. Because these non-GAAP financial measures are not measures of financial performance under GAAP in United States and are susceptible to varying calculations, they may differ from and not be comparable to similarly titled measures of other companies. Numbers that we discuss today are unaudited and may be subject to change. We do not undertake an obligation to update any forward-looking information we provide today, and I would like to turn the call over to Lowell. Thank you Kevin, and thank you all for joining us today. I’m very pleased to discuss with you PlanetOut’s successful performance for the first quarter of 2006. I will also revisit our strategic plan and overall objectives as we move forward in 2006 and beyond. Then, Jeff Sourkup will follow with an overview of our key operating activities during the quarter and discuss how we’re investing for continued success in 2006 and 2007. Finally, Dan Miller will provide both a detailed financial review of the quarter as well as our business outlook for the second quarter and the balance of the year. We reported very strong financial performance for the quarter with revenues of $17.6 million, representing an increase of 164% compared to the first quarter last year. Our results reflect the strength of our diversified revenue base and the impact of PlanetOut’s newest brands, including the leading gay and lesbian print magazines out in the advocate and related websites, growing e-commerce businesses including bigay.com and RSVP, a top marketer of gay and lesbian travelling events. These moves have further solidified PlanetOut’s meeting position at the world’s largest LGBT focused media and entertainment company. Our core competency is marketing to the global LGBT community. This target audience while expected to have an estimated $641 billion in buying power in the United States alone in 2006, an estimated of over 260 million people in developed countries worldwide remains largely underserved. At PlanetOut, as a primary market maker with the first move advantage, we intend to serve this market across a variety of platforms into multiple channels increasing our distribution in consumer touch points as we continue to transform the LGBT marketplace. We are executing successfully against our strategic plan, both by growing our heritage business as well as by deploying what are truly transformational changes through the acquisitions of LPI and RSVP as a result of the execution of our long range plans. Since our October 2004 IPO, we have grown our revenue significantly with expected 2006 revenue roughly triple the revenue of 2004. In addition, our revenue base is more diversified and balanced. We are growing traffic and activity internationally and we now offer advertisers marketing opportunities across multiple platforms. We believe our quarter performance shows that the initiatives we undertook during the last six months are already taking hold. Our acquisitions of LPI in November 2005 and RSVP in March 2006 are already proving to be excellent sources for additional growth and strategic value. These acquisitions offer the cumulative benefits of cross-platform advertising, bundled subscriber growth, and broader and more lucrative consumer purchasing opportunities that we could present to our audience through a number of channels. When we talk about making a market in the broader gay demographic and generating ROI from our major investments, this is where the rubber meets the road. Through these acquisitions, we are validating the scalability of our business model and unlocking revenue and expense synergies based on PlanetOut’s model of high incremental growth and low cost customer acquisition. As a combined entity, we expect to use PlanetOut’s ability to drive magazine circulating growth, deploying both our complementary marketing and editorial assets to create cross-platform programs and engage our audience and provide unique sponsorship opportunities for advertising customers. In addition, we believe RSVP enables us to leverage our consolidated user base and multiple marketing vehicles into the estimated $65 billion a year gay and lesbian travel market. Overall, we remain attentive to our core objectives: first, year-over-year top line and bottom line growth; second, continued marketshare growth; and third, revenue diversification and balance. All of these objectives are designed to increase shareholder value as well as billed value for the lesbian, gay, bisexual, and transgender community we serve. We are pleased with our progress to date and we intend to continue our success by focussing on three key opportunities. First, PlanetOut will focus on building deeper engagement with its audience and users of its products and services. We aspire to be even more relevant and essential in lives of LGBT people everywhere. To achieve that, we know we must deliver what consumers in the broader gay market desire. We increasingly provide the vibrant online community and resources on local events where gay people can find, create, and share the information and content they want and locate and interact with people with whom they want to connect. In our print and travel brands, we are aggressively expanding our consumer reach and touch points and enhancing the value of those products for LGBT people through new leadership or through bold marketing changing initiatives like chartering the Queen Mary II for the second quarter of next year. Online, we are creating a more relevant and personalized experience that delivers greater value to our users as a marketing engine for all of the PlanetOut properties. Second, as we stay true to our admission to connect, enrich, and illuminate the lives of gay and lesbian people everywhere, we plan to continue to innovate and invest in our brands and to grow our audience over time. We intend to continue our growth in the women’s market and internationally, executing on a strategy to capture a larger share of the LGBT market in the U.S. as well as globally with international emphasis on Europe and Latin America and pushing forward in Asia as the market opportunities present themselves. Third, we will also remain focussed on prudently integrating LPI and RSVP into the PlanetOut family. Consolidating activities were appropriate between and among all the heritage businesses, and working to leverage our extensive online user base to grow activity and revenues across all of our business lines. Executing on our strategic plans, staying focussed on core growth, old yet prudent investments, and the integration and consolidation of our lines of business continue to motivate and drive our operating plans and activities on a daily basis. With that, I’ll turn the call over to Jeff for discussion of some of our key successes during the quarter and the investments we are making to continue to build economic value for the future. Thank you Lowell and thanks to all of you for joining us today. The first quarter was the beginning of what we believe will be a strong year for PlanetOut as we grow our organic business, integrate LPI and RSVP, and invest in our overall growth and profitability. As a result of our recent activities and investments, we’re a much larger company with diversified revenue streams, deeper and broader market penetration, and expanded opportunities for additional growth throughout our entire business. We generate revenue from advertising, subscription, and transaction services for online and offline business and consumer customers. Having multiple revenue streams with targeted, customized offerings for different market segments, it allows us to take better advantage of cross-selling opportunities and more effectively monetize the large user base that we have built through our multiple media properties. At the same time, our growing free page services provide valuable upfront working capital and improve our near-term revenue forecasting. In positioning PlaneOut for further growth, market penetration, and revenue diversification, we executed on several key initiatives during the first quarter. First, during 2005, we grew our advertising service revenue rapidly and we continue this momentum during the first quarter of 2006. By offering more than just a single media channel, we are able to serve as a one-stop shop for advertisers who want to effectively and efficiency market to the LGBT community. Our full complement of online, offline event advertising delivered across multiple platforms allows advertisers to connect with many of their most valuable customers in a cost-effective manner. Both new and existing advertisers find our editorial content and cross-platform strategy increasingly attractive for reaching the LGBT audience. During the first quarter, many of our existing advertising clients chose to increase their spending with us. Among these was GlaxoSmithKline for whom we are now running ad programs and multiple online properties and at the 2006 Gay Games. Additionally, we’re able to add a strong line of the first-time advertisers including BMW, Just for Men, Kohler, Omega, Ralph Lauren, and SKYY Vodka. As with a number of our repeat clients, many of these first-time campaigns utilize more than one of our media properties. Through these properties we offer advertisers the ability to target customers with particular demographics such as age, education, and income, as well as interests such as news, entertainment, travel, fashion, auto, and health. For both our worldwide advertising services as well as our own internal promotions, we also earned revenue in generating marketing capacity based on available online ad impressions. During the first quarter of 2006, across our wholly owned online ad network, we averaged approximately 550 million advertising impressions per month. This metric underscores our leadership position in making a market for advertisers to reach the LGBT audience of providing targeted, high-value impressions across our online network in addition to the reach of all our other properties. We believe strongly that PlanetOut offers an unmatched ability for advertisers to reach the underserved gay and lesbian market. Like BET and Univision before us, we believe we hold the frontrunner position in a unique marketing niche capable of reaching millions of potential receptive customers. Second, we continue to grow our subscription service business including with new and unique bundles. As we saw, we increased our total page subscribers across our multiple media properties to over 515,000 at the end of the first quarter of 2006, approximately 475,000 at the end of the fourth quarter and 137,500 at the end of the first quarter of 2005. In addition to continued growth in our datacom subscribers, another element of growth came from an increase in the page subscriber base throughout in the advocate of over 12,700 during the first quarter by bundling these magazines with Gay.com’s online premium subscription offering. Ninety four percent of these new incremental subscribers to, either Out or The Advocate represented approximately 5% growth in their combined subscriber base in just three months. Note that this success is in stark contrast to the recent demise of magazines like Cargo, Lgirl, and Celebrity Living that did not have successful growth drivers as we do with our multiplatform marketing strategy. We’re also executing on our strategy to capture a larger share of the global LGBT market through our international gratis campaign, which we began in October of last year and continues to gain momentum. During the first quarter, we increased finance for the gratis campaign by 50% from the fourth quarter of 2005 with approximately 300,000 international signups since we launched the campaign. Third, we grew our transactions with revenue significantly during the first quarter with new products such as the Brokeback Mountain DVD, the additional of LPI’s e-commerce business, and the consolidation of our list management services. During the first quarter, we also benefited from our acquisition of RSVP, a versatile and trusted marketer of gay and lesbian travel products. With a strong multiplatform marketing campaign, RSVP exceeded our revenue expectations and we look forward to carrying this success forward into the fourth quarter when we launch our next large ship itinerary. And also sponsored the Dyna, a powerful combination of events, entertainment, and sport, which drew an estimated 15,000 gay women and their friends who gathered in Palm Springs for fun and camaraderie. Events like this are an important part of the PlanetOut women’s brand and serves as an additional platform for advertising sales growth. As we move towards the second half of the year, we will continue integrating our new properties and executing on the transformational opportunities we have created for PlanetOut. We are managing or actively planning a number of initiatives to continue growing each of our revenue strings. We believe these initiatives, which we plan to roll out later in 2006 and throughout 2007, will exploit the synergies among our online and offline properties using our proven multi-platform marketing approach to the worldwide LGBT community with advertising services, while we continue to expand our online inventory, grow our circulation base, and increase sales across multiple platforms. We’re also upgrading our local directory to drive advertising opportunities for local businesses that want to reach the LGBT market. By investing in our local services offering, we expect to increase the value of our online content, grow our page views, and expand this new and diversified advertising client base. In subscription services, we are continuing our bundling efforts to increase the value of our online subscriptions and grow our print and advertising circulation base. Throughout this quarter we affirmed the success of this model by growing The Advocate announced circulation bases with low-cost incremental subscribers. Through bundling not only have we expanded our total subscriber base and continue to shift our online subscribers to longer term, higher value plans, we’ve also established a base for what we expect will be even faster advertising revenue growth in 2007. We will continue to explore opportunities to expand this low cost customer acquisition model to drive additional economic value. In our transaction business, we see numerous cross-selling and cross-promotional opportunities. Throughout the rest of 2006, we expect to deploy several events with an integrated mix of consumer marketing, advertising sponsorship, and transaction revenue potential. We’re sponsoring the Gay Games in Chicago in July 2006 to promote and merchandise our consumer brands for both gay men and women, plus we are selling event sponsorships on behalf of the Gay Games, which enhances our suite of advertising services. We expect that our live reporting and daily coverage of the gay games and athletes will be among the most comprehensive coverage worldwide. Also, we’re thrilled about the success that we’ve already had with RSVP and the growth opportunities that it offers. We’re very excited about the impressive itinerary RSVP has lined up for the rest of 2006 and throughout 2007. Upcoming trips include our Mexican Riviera Cruise in the fourth quarter and four large ship charters in 2007, as well as several small ship cruisers, riverboat trips, and land packages for gay and lesbian travelers. Recently, we announced a first ever gay and lesbian charter of the Queen Mary 2 for a transatlantic crossing from New York to Southampton, England over Memorial Day Week of 2007. Along with the other steps we’ve already taken to expand our travel offerings, we believe that this charter helps position us as the leader in the LGBT travel market. We also believe that our expanded itinerary for 2007 demonstrates our willingness to invest strategically and actively in this lucrative market based on our ability to drive new customers at low incremental cost. In addition to growing revenue, we’re also focussed on both eliminating unnecessary expenses and improving operating efficiencies. As one part of this effort, we have made significant strides in integrating LPI and RSVP into the PlanetOut family. These included reducing management redundancies, cross-selling and marketing, and beginning to consolidate our facilities in each of Los Angeles and New York. Finally, for those of you who may not have the pleasure of meeting him, I’m glad to report that Dan Miller has joined our leadership team as Senior Vice President and Chief Financial Officer. Dan is a seasoned financial leader who brings with him over 17 years of valuable experience. We are extremely pleased to have him onboard. Dan has already met with many of our investors and analysts. We expect that he’ll be meeting with many more of you in the months ahead. We’re proud of our accomplishments during the first quarter and believe we’ve only just begun to leverage the full potential of our business. With that, I’d like to turn the call over to Dan for a discussion of our financial results and our business outlook for the balance of the year. Thanks Jeff. The first quarter of 2006 was a solid indicator that we are on the right track in executing on a sound business model. Again, net revenue for the first quarter was $17.6 million, up 164% from a year ago reflecting growth in all lines of business. Excluding the impact of the RSVP acquisition, which closed in March, revenue for the quarter would have increased 102% year over year. Adjusted EBITDA for the quarter was $1.2 million, up 45% from $0.8 million for the same quarter during the prior year, and net loss was $0.1 million compared to net income of $0.2 million last year. In quarters where our transaction business has a cruise or other event, our revenue mix and EBITDA margins will change. As Jeff mentioned, we delivered one cruise during the first quarter. Travel events revenue is recorded when cruises or events are delivered. During the quarter we had capital expenditures of $0.5 million. We expect an increase in the rate of CAPEX sending along with an associated increase in depreciating expenses over the remainder of 2006 as we continue to invest in our technology and infrastructure. We ended the quarter with $11.3 million in cash on hand, down from $18.5 million in cash last quarter, which reflects the impact of the RSVP acquisition. During the first quarter, our advertising service revenue was $5.3 million, an increase of 284% from last year. This strong growth was primarily due to deeper penetration into key advertising categories and our success in attracting larger advertisers’ commitments as we are now reaching the LGBT community in multiple ways. Advertising service revenue accounted for 30% of revenue during the first quarter, up from 21% for the same three months during 2005, due to the acquisition of LPI, and organically we’ve seen an increase in the average amounts spent by our advertisers and a total number of advertising campaigns last quarter versus a year ago. The increases are also a result of our strong TPMs and the growth in our overall subscriber base. I’d now like to talk about local service or what we call local theme revenues. Though this program is still in its early stages, we are seeing significant growth in the number of local listings on gay.com. For the quarter ended March 31st, we provided over $4.8 million listing views on average per month and had over 16,000 total basic listings. We’ve recently added new leadership to drive this initiative and are very excited about this growth opportunity. Our subscription service revenue was $6.3 million for the first quarter of 2006 versus $4.9 million for the same quarter last year, an increase of 29%. This increase was due to the addition of our LPI brand driving overall subscription growth, offset primarily by the impact of our international gratis campaign. Our transaction services revenue totaled $6.0 million for the first quarter of 2006 versus $0.4 million in the first quarter of last year. Transaction services revenue accounted for 34% of total revenue for the quarter, up from 6% for the same period last year. This increase is primarily due to the incremental effect of the acquisition of RSVP and the acquisition of LPI. The increase also reflects e-commerce revenue from the first quarter shipment of Brokeback Mountain DVDs that were expected to ship in the second quarter as well as greater-than-expected onboard carryover sales from our Panama and Barbados Cruises. Overall, we believe the increase in transaction revenue as a percentage of total revenue demonstrates our commitment to diversifying our revenue streams. We continue to make additional marketing investments during the first quarter to accelerate our growth and deepen our market penetration including the launch of the areugay.com advertising campaign. Sales and marketing expenses were $3.9 million, an increase of 61% from last year. Sales and marketing expenses as a percentage of revenue were 22% for the quarter. Turning to the integration of LPI and RSVP, during the first quarter, we had overall cost associated with integration of approximately $0.4 million. These consisted primarily of severance, travel, and other corporate services cost. We are pleased with our first quarter results, but want to point out that these results include, as we discussed, a number of items that impacted our profitability during the quarter. Among these factors are the inclusion of partial quarter results of RSVP, the timing of the shipment of Brokeback Mountain DVDs, and our integration cost. I would now like to discuss our business outlook. First, we are reaffirming our guidance for the full year 2006. For the second quarter of 2006, we expect revenue to be between $15.5 million and $16.5 million, adjusted EBITDA to be between $1.75 million and 2.25 million, and GAAP net income to be between $0.25 million and $0.5 million. As a reminder we do not currently have any travel event scheduled in the second quarter. This outlook reflects our expectations with respect to several factors including revenue growth in all of our lines of business, including advertising, subscription, and transaction services. As we discussed, 2006 profitability can vary depending on integration cost and our continued significant investments in growth areas for PlanetOut such as in our advertising business, the ramping up of our local listings business that are not planned to have a significant revenue impact until 2007. For our subscription business, both the gratis campaign and the bundling of Out and The Advocate for our premium online subscribers are not expected to provide significant topline benefit until next year. As we discussed, later this year, we may begin converting a portion of our international gratis members into page subscribers. While we’ll see some nominal increases in ad rates for our print publications in 2006, we do not expect to see the full revenue impact from our print ad rate increases until 2007. For our transaction business, we have a 2007 travel events itinerary which includes four large ship cruises that we are marketing now versus two large ship cruises scheduled for all of 2006. The travel marketing business has long leap times and we are already incurring marketing expenses for our 2007 itineraries. Remaining revenue capacity for 2006 travel and events was committed to an early 2005, which we will be delivering and recognizing primarily during the fourth quarter of 2006. Looking ahead, we expect to deliver strong revenue in EBITDA growth during the second quarter. Other costs such as the amortization of intangible assets acquired as part of the LPI and RSVP transactions and interest expenses incurred as a result of seller financing or the LPI acquisition are expected to increase. In summary, we had a strong first quarter with solid revenue and EBITDA growth. We executed on our strategy to create a business with growing and diversified revenue streams and high margins. Throughout the rest of 2006, with the acquisitions of LPI and RSVP in place, we hope to build on this foundation and deliver strong returns to our investors. Thank you for joining us today. We look forward to updating you on our progress when we report the second quarter fiscal 2006 results. Operator, we’d now like to open up the call for questions. Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press “*” followed by “1” on our push button phone. If you would like to decline from the calling process, please press “*” followed by the “2.” We have a three-tone prompting acknowledging your selection and your questions will be polled in the order they are received. And if you’re using speaker equipment, you may want to lift the handset before pressing the numbers. One moment please for the first question. Our first question comes from Mr. Jim Freidland. Please state your company name followed by your question. Hi, with Cowen and Company. First question relating to RSVP, it seems roughly like it’s for a big cruise about $2 million revenue or maybe $1.7 million to be exact. So, as we look to 2007 and start to think about what that business can be, should we just take four times $1.7 million and are there some incremental things that you might be doing there? That’s first question, and I do have a followup. Hi Jim, this is Jeff. Thanks for the question. The $1.7 million is probably a little low for the cruises that we’re going to have for the balance of 2006 and the four cruises we’ve scheduled in 2007. Much of that is due to passenger capacity. I believe the ship that you saw at $1.7 million was roughly about 1700 passengers. The cruise, for example we’re going to have later this year, is about 2700 passengers, Caribbean at next year is 3100 passengers. So, we do believe that we’ll be able to increase revenue over time. So, yes, we do think that there’s a fairly simple direct model for managing and modeling up the RSVP transactions. So, in addition to those four cruises that you…but basically as we modeled the company, we should really focus on how many big cruises you’re doing, anything else from RSVP is just incremental? Okay, and I just wanted to get a sense on the local scenes, I guess you call it the startup business there; how big can that become, is that just an add on to the advertising business or is that something that you see as being…I don’t know, let’s call it 10% of revenues or how you want to talk about it a couple of years down the road? Hey Jim, this is Lowell. That business we believe can be a really nice and wonderful business for us, not just in the U.S. but on a global basis, and we think this is driven by an underlying need especially in the gay and lesbian community to bring people into your home to do business with and to have questions answered by professionals who understand and appreciate and accept gays and lesbians, so lawyers and doctors and plumbers and electricians and so forth, and of course you have your bed and breakfast and others. So, Community Yellow Pages that are in print are very non-aggregated and fragmented all around the U.S. and in Europe and elsewhere. We believe there’s a sizable online model and you can see with a pretty early start with 16,000 basic listings already and the kinds of listing views that we’re getting we think there’s a bear there. What I can’t do is give you numbers and model it other than to say that we believe it’s a nice sizable business for us. Okay, then instead of numbers, when do you think it becomes that critical math, is it something we should look out in 2008, is it 2007 or is it really longer term? Yeah, I think you’re going to see some lifts in 2007 and as we get away in 2009 we expect and we hope that there is quite a bit more left in this business, but we’re building it now. We recently hired a leader; her name is Cary Fischer. She was formerly with Window Media, which is somewhat of a competitor of ours on the East Coast in the U.S. with a large gay and lesbian directly classifieds business primarily in print. Cary is very experienced building a heck of a team, local sales people making outbound calls, receiving inbound calls and so forth. So, we have a lot of faith and belief not only in the business but also in the leadership that’s just joined us. Thanks. This is Richard Fetyko from Merriman Curhan Ford and Company. Just on the followup on the local scene discussion, can you explain to us how you charge for that? And then on the advertising side, it sounds like you’re making a lot of progress there, could you talk about the overlap that’s between the advertiser base of the online and the offline businesses, if there is any, or how much, and the success of your sort of cross-selling and ability there to cross-sell the online advertising inventory to the offline advertisers that you’ve had in the magazines and vice versa? Okay Richard this is Dan, I’ll address the first question about our local scene business. What we do is we provide a basic listening service that a customer can upgrade to our subscription model — there are actually various levels — that then we would include in our advertising revenue line, but that’s how the model works, and again, it’s sort of getting traction now in terms of getting close to upgrades, but we think we have a real growth opportunity there. Richard, this is Lowell, let me take the second question. In terms of the overlap between our print business lines and our print products and our online products, I would point you to Slide 18 that’s on our website. Last time we had an image that showed the digital advertisers and the print advertisers in an addition, and you’ll see a lot of differences between the logo mix and also by the way the opportunity for cross-selling on events and sponsorships now. So, we are only interested in cross-selling between online and print, online, print, and events, and we think we’re doing something very few companies are able to do and we’re just getting started at this. And I would offer that when we first look at LPI we were very surprised at the fact that our list did not coincide that much, the tough side, largest account, I think we shared one account in common. Of the 300 accounts we looked at, it was in the range of 15% in name and 20% in revenues or net range. So, we feel like there’s a lot of opportunity, and then in terms of event and sponsorship revenue, for example the Gay Games coming up in July, a very big opportunity for us to bring advertisers to gay and lesbian people where they are, in a place that they enjoy. And the spirit industry has done this fairly well, the Millers and Budweisers, and the Absolutes for many years. We’re bringing GlaxoSmithKline and others to these events. So, you’re going to see more of that from us, not only in 2006 but as we get to 2007, and already seeing good initial pickup from major advertisers and we expect more and more as we get better at this and as the market…we’re making a market not just online and not just in print but we’re making truly the holistic market that also now includes events and activities. Okay, for my followup, it sounds there’s been a little overlap right now between the advertiser sets. The impact of the growing circulation as you in the first quarter have successfully driven, circulation up by 12,700, and the increase in the ad rates that you’ve instituted and expect to institute throughout 2006 on the magazine side, shouldn’t that be pretty material in the back half of this year, in terms of your impact on ad revenues from the magazine? Richard this is Jeff. The primary source of ad rates really comes based on the audited circulation, which is why we’re spending so much of the first half of 2006 to grow the auditable circulation base of these various magazines. So, while we have instituted a rate card increase effective for July 1st, we believe that the real lift in this is going to come primarily in 2007, based on the December 2006 rate card increase. So, in our model, we have built nominal increases in revenue based on the July rate card increase, but we do think we’re really going to see the lift in 2007 versus 2006. Got it. Finally, Lowell, you mentioned sort of the sponsorship opportunities with the events business, when will you set that for the first time, because I know that’s a sort of a novel idea? We already have, so the GlaxoSmithKline for the Gay Games, for example, is a significant relationship that is not only going to be something that’s online but also at the Gay Games, and by the way not only is PlanetOut enjoying the benefit of that relationship but we’re able to share some revenues with the Gay Games, like the local community organizers. We’ve also done this with Dyna, we believe there are opportunities there, Out Hundred at the end of the year which is a big, kind of sexy event, the top Out Hundred people and their allies and friends in New York and the people Out did a terrific job at that event. We believe we might see sponsorship there, and then other RSVP things we might do -- cruises and the riverboat tours and other things where there might be opportunity for advertisers to partner with us. So, we’re seeing in the Gay Games, a little bit in the Dyna, and opportunities later in the year, we’re looking to get better and better at this as we move into 2007. It’s WR Hambrecht. I’m wondering if you could give us a little bit more color kind of on the sponsorship events that you guys are going to have in second quarter, namely the Gay Games, and could you remind us to what extent you guys are going to be involved with Gay Pride, I know you were kind of focused on some of that in San Francisco last year, is that going to be the case again this year? And then I have another followup? Karen this is Jeff. Yes, we have been involved traditionally in Pride. We will continue to be involved in Pride across a number of properties. For example, not only do we attend a number of Pride events but we’re able to market our various products. We’re also able to take advantage of that from an advertising perspective. June tends to be a good month for us from an advertising perspective, and now with the addition of the LPI properties, we also traditionally had a larger June Pride addition of the various properties, particularly out in Advocate. So we do see Pride as part of a regular benefit for us in terms of the advertising and sponsorship opportunities. The Gay Games actually occurs in July in Chicago this year, so that will be in the third quarter. So, we think that’s an added benefit for us from the sponsorship perspective, and then as Lowell said, we’re also looking at the fourth quarter to events such as the Out Hundred. Then, just a question about the local business, is that going to be a primary direct sales, do you guys kind of see it build up for the remainder of 2006 or how should we be thinking about what kind of investments you’re going to be making? It is going to be head count or are there some other investments that need to be made? Karen, this is Dan. It’s primarily head count, it is direct sales. We’ve got from the U.S. and…that are selling to direct local listening providers. So, it will be a direct touch type of sales model. Hi it’s Bill Morrison from JMP Securities. Several questions, in fact at least a few. One, it looks like the net point of your guidance and then if you look at your pro-forma revenue growth for last year, you’re looking for pro-forma growth on the topline this year of around 6%. It sounds like you’re indicating that there are several opportunities that accelerate growth next year. I was wondering if you could give us some kind of a range of what type of growth rate you’d like to see next year on the topline, and then if you could talk specifically and breakdown the drivers for that growth by your different business units. Secondly, I was wondering, Dan, if you could give us some guidance on the gross margin progress for the three quarters remaining in the year. And then lastly, on RSVP, I was wondering if you could give us the contribution from RSVP in the quarter and also maybe talk about whether or not there’s any limit to the number or what you think the limit to the number of cruises you could offer in a year. You clearly added a big one recently, I’m just wondering if there’s room even more ships next year. And then, you talked about the revenue side of RSVP, I was wondering if you could talk about what kind of operating or contribution margin you could expect from those through this next year? Thanks. This is Lowell, I’ll take the looking into 2007 question in a general form as I can and then I’ll ask Dan and Jeff to pick up what growth we expect for this year and position and so forth. Just looking at 2007, we expect that we should be able to deliver as 2007 and 2008 unfolds the kinds of EBITDA margins that you would expect from a nicely profitable media and entertainment business, plus or minus a few percent for each year and a range of 20% EBITDA margins, and growing the topline, again plus or minus a few percent in the range of 20% topline. This year there’s a lot of sort of puckering down with LPI and RSVP and we’re really seeing now what the RSVP this year, we built the itinerary and a lot of that was built in, although we can help them market and make sure those ships get built, as we did unexpectedly nicely in March. At LPI Bob Cohen and the team there are doing a lot of rinsing of cost and getting behind that business and we’re growing circulation, which really won’t have an impact until we exit 2006. So, there is a lot of sort of focusing on the core business right now, but as you look at 2007 and 2008 I just wanted to give you a general feel for how we see the business unfolding in EBITDA and growth, and I’ll turn it over to Dan for the other questions. Bill, as I understand the second part of the question, you said gross margin. We typically have talked about EBITDA margins, so I’ll talk about it in that length. Yes, you said the first quarter integration costs and other items, more of that in the second quarter and we would expect that EBITDA margins would grow as we go throughout the year and breakout integration costs and be able to in a situation to grow the business overall. In terms of RSVP, the revenue contribution during the first quarter was $4.1 million on the revenue line. In terms of the number of shifts and how can we grow that, we feel we can grow it significantly. We talked about going from two to four large ships from 2006 to 2007. We think we can grow it more than that obviously but we are being prudent and just trying to grow this business in a reasonable manner, but we still think it’s actually obviously still a very significant growth. Okay, just a couple of followups. I know, I can see your EBITDA margin progression based on your guidance, what I was curious about is there was a big 1500 basis point decline in gross margin, I was wondering if you could give us any kind of guidance on where the gross margin goes from here throughout the rest of the year? Okay, got it. I can comment on that sort of broadly. I talked a bit about how during quarters where we have accrues there’s going to be a mixture that goes on, and in particular this quarter is because it was a partial quarter, we had a bit of a mixture. So, any quarter where we have a travel event, you’re going to see some change in margins. So, in this year, fourth quarter, you’ll see margins impacted a bit down from there because of the RSVP business. Dan, I had one other question. In the margins on RSVP, I know you said historically the company operated I believe at a 10% operating margin, I’m just curious that in 2007, on the revenue numbers you were talking about it, can we expect 10% operating margin in that business? Yes Bill, this is Jeff. I think what we mentioned is that because it was a small privately held company, their margins were effectively flat or zero, because obviously they were paying out from their pockets in the form of salaries to the previous owners. At this stage we believe that under a regular model, a typical cruise business such as this could earn about 8-10% margins. We believe over time, because we have a lower customer acquisition cost that we can extend, particularly as we get in 2007 and we start taking the same fixed cost base and spreading it out across a much large revenue base, and we would hope to get that up into around the 15% range of the general guidance in 2007. Okay, but it’s surprising to see that it’s a probably a lot higher than the 8% that’s in our projections, second quarter and third quarter where there are now big cruises. In the second quarter and third quarter there are no big cruises, right, so you said the full year EBITDA margins were 8-10%, so you’re hoping to get them there. The first quarter margins were probably a lot higher than that given that there was a big cruise. Yes David this is Jeff. There were two reasons why normally the first quarter margins are a little bit higher than we would expect in the long run for RSVP. Number one, to the extent we can get them over the year into the 8-10% range that we discussed, that’s correct. There really will be a negative contribution from RSVP in the second quarter and third quarter, where there’s really no revenue coming in; none in second quarter and very little revenue in the third quarter. We also had a slight benefit in the first quarter because we picked up frankly the March time period for RSVP, so we got the revenue from their primary March cruise but didn’t have the expenses for the full quarter. So, yes, they did contribute more than the 8-10% range that we expect for the full year during the first quarter. In the fourth quarter, we also will expect it will be slightly higher in terms of the RSVP contribution as a result of these timing issues. Again we don’t disclose that. We run this business and we’re trying to truly integrate the businesses, so we look at our revenues as advertising, subscription, and transaction, and we’re trying to utilize the cross-platform approach and we’re doing that effectively, so we look at it that way David. Okay, I’m not sure if you can answer this next one then. In terms of the subscription revenues pro-forma, it looks like it was down 4% year over year. I was wondering if you could sort of just differentiate that to get to the underlying growth of the base business. I think you’re seeing there…we all agree that given the recent acquisitions we thought this would be useful information for investors. What you’re seeing there is the impact first of all of the gratis campaign, the biggest piece of staying there. In addition, we continue try and expand the footprint of our subscriber base, we in 2006 versus 2005 have run promotions and so you’re seeing some impact from that. And then, I think also to some extent we’re turning around the LPI business, we’re really getting more out of that business, extracting the value, unlocking the value as we talk about it. Finally, it’s fair to say that as we all know that we stumbled for a while on the technology side and we’ve now picked that up, and there’s probably some lag effect there with the subscriber base. So, we think there’s a lot of strength in the business and really some hope for the future in terms of the subscriptions. Okay, I know part of the plan is, as you said, growing the subscription base there, what is the goal in terms of…you were at 12,700 in first quarter in terms of subscriptions, what’s the goal to get to that next level, where you can raise the prices where you want to for 2007? How many subscriptions do you need to grow to get there? David, this is Jeff. We haven’t put a specific number down on paper. What we’ve said is that…if you look at a lot of major national advertisers, the threshold for them is about $150,000 audible circ. When we bought out and Advocate, we were significantly below that. I think we’ve taken good strides in the first quarter to raise it above that level. Our expectation is that over time, certainly through 2006 and into 2007, we’d like to see these at 175,000 and 200,000 possibly as we move further into 2007. So, we’ll be watching that over the course of the year with a couple of things in mind, both where can we take the rate base but also ensuring that we maintain that overall subscription level. So, we’re making sure that we can continue with the bundling and grow it cost effectively. Those numbers would be each, but I think the real target for us to be getting over the 150,000 level, which we think is really a significant line to cross; yes, we’d like to get both of them higher but we also want to weigh the cost of that and making sure that we’re really getting the advertising rate base increases and that we’re managing the cost side effectively. Okay, did I hear you say in your prepared remarks that you didn’t think there would be any benefits in 2006 from taking the gratis campaign? And then I wondered if you could comment on the shelf of file, if that was just required as part of the selling out or something? Yeah, this is Dan, there would be some mild impact from…so I think as we talked about it, the strategy there could vary from country to country, depends on whether we feel it’s sort of where the real value lies in terms of should we have it be an advertising base market or it should be a subscription base market. So, we’re going to look at that on a market-by-market basis, but we would expect in 2006, to answer question, a mild impact from the transitioning of the gratis campaign. In terms of the shelf, it’s fairly standard for companies to be having a shelf up these days. We obviously don’t comment on financing activities, but we’re $11 million in cash and we felt it was really prudent to have a shelf on file. Hey guys, JMPS and Management. Just a couple of maintenance questions, call it. On your soft assets, your prepaid expenses…again I missed part of the prepared remarks, so I apologize if you went over this, but it looks like they jumped 4X sequentially from 2.5 to 6.5, I’m just wondering what the composition of that jump was? Yeah, what you’re seeing there is the deposits from the cruise for RSVP. So, we will have the long leap times and we take the positives from customers and you will see some dollar fluctuations, as we put deposits on cruise ships and we get deposits from our customers. Jeff this is Jeff. We aren’t breaking up the individual deposits by cruise. You can assume that the process is one of two things, either you put a letter of credit down upfront or you end paying for the deposit over the course of the year. You could imagine our preference of course was to pay it over time, which allows us to match the customer receipts that we receive, the customer deposits against our ship deposits. But as long as we have the appropriate financial capital and as long as it makes sense to charter the cruise and we think we can sell it at a profit, we’ll manage the timing of the various deposits in a way that helps us grow the business. And you don’t have any contractual liabilities for the cruise. For instance, if for some reason you were unable to get the profitable number of individuals, you’re not on the hook for some certain amount? We’re definitely not on the hook for the ship itself. I know depreciating assets, but it’s a different contract. Each contract is different. Obviously we try to get force majeure clauses if there’s some horrible thing like avian flu, but more importantly RSVP has consistently sold out its various cruises. So when they do have contracts that require they’re on the line, they’ve been successful historically in selling out those cruises. We think by coupling their historical success from this with our ability to drive customers at very low cost, that that’s not a significant risk for the business, but of course it is something we watch. Great, this is Lowell. I just like to close my hand and first of all thank you for joining us. We continue to believe, our staff worldwide in addition to leadership and our board that we’re only just beginning to further extend our reach into what we think is an amazing market. We’re a very well positioned business, very much like BET and Univision before us, and we believe we hold a strong early position and we’re capable of reaching millions of potential receptive customers over time. So, we invite you to continue to join us on this journey, and thank you for joining us today. Thank you. Ladies and gentlemen this concludes the PlanetOut First Quarter 2006 Earnings Conference Call. You may now disconnect, and have a good day.

EarningCall_233893

Here’s the entire text of the prepared remarks from AU Optronics’ (ticker: AUO) 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. Executives July 1, 0000 ET Good day Ladies and Gentlemen and welcome to AU Optropnics Corporation Third Quarter 2005 Results Conference Call. The Conference Call will be recorded and webcasted at the request of AUO, any objections please hang up now. A copy of the presentation for AUO third quarter 2005 results announcement can be found and downloaded from its website at www.auo.com under Investors. I would now like to turn the presentation over to your host of today's call, Miss Julie Chen. You may go ahead, ma'am. Thank you. Good morning and good evening to all participants. This is Julie Chen, Senior Manager of Finance for AUO. Joined with me here we have Mr. HB Chen, our President and COO, Dr. Hui Hsiung, the Executive VP, Mr. Max Cheng, the CFO and VP, Dr. David Su, VP, and Miss Grace Wu, the Senior Manager of AUO. We will spend the first part of today's conference call reviewing our prepared remarks which correspond to the slides available on our website. Following this, we will open the floor to take your questions. Now, before we begin, I would like to say that management comments about AUO's current expectations made during this conference call are forward looking statements subject to significant risks and uncertainties, and that actual results may differ materially from those contained in the forward looking statements. The financial statements we are discussing today have been prepared on a consolidated basis in accordance with accounting principles generally accepted in Taiwan, the IOC GAAP. You should be cautioned that these accounting principles differ in many respects from the U.S. GAAP. Information as to those sectors that could cause actual results to differ materially from AUO's forward looking statements may be found in AUO's Annual Report on Form 20F, filed with the United States Securities and Exchange Commission with respect to the year ended December 31 2004, and such other documents as may be filed with AUO or submitted to the SEC from time to time. Except as required by law, we undertake no obligation to update any forward looking statements whether as a result of new information due to an event or otherwise. Now, during the past three consecutive months of strong unit shipments, AUO has delivered again record high revenue for the third quarter of 2005. If I may ask you to turn to slide number three of our presentation material, our third quarter 2005 consolidated income statement on quarter-over-quarter comparison. For the third quarter ended December 2005 AUO's consolidated revenue total NT$59.5b, which is approximately about US$1.8b, represents a 28.7% increase quarter-over-quarter. Net income in the third quarter '05 reached NT$5.8b compared to NT$470m in the second quarter '05. That represents 11 times sequential improvement. For our basic EPS is NT$1.05 per common share. In U.S. dollar $0.32 per ADS for Q3. Consequently, our operating margin also improved from 1.1 to 9.9% in this quarter, and EBITDA margins have been returned to 25% level. And regard to our small and medium size panels, we experienced a very significant growth of 48.7% to total 17.6m we’ve seen this quarter. Compared to the same period of 2004, the panel prices, such as 15 inch, 17 inch, dropped close to 20%, but we were able to deliver almost the same level of operating income. This proves the margin management of AUO this year was very successful. Next slide, slide number 4 please. These show brings AUO's nine months ended September 30, '05, with revenue of NT$144.6b, net income of NT$4.2b and Basic EPS to be NT$0.75 per common share. U.S. dollar $0.22 per ADS. In terms of unit shipment, the nine months ended September 30, 2005 large size panel reached 21.1m, while the small and medium size panel shipment totaled to be about 38m. Compared to the same period a year ago, unit shipment for large size panel grow 58.2%, and for small & medium size panel grow 61.4%. Slide number five, on the balance sheet highlights. We continue to see improvement in our overall inventory efficiency despite a very significant revenue and shipment growth in the Q3 '05 to support the seasonal demand. Inventory in absolute dollar increased moderately from previous quarter. This is mainly to support the increase of the work-in-progress at the Gen 6 fab. However, we did manage to lower our inventory turnover days from 32 days in the second quarter '05 to a record low of 28 days at the end of Q3. Major changes on the liability and shareholder equity during the Q3 '05 are we drawdown our long term loan facility to meet our CapEx requirement and short term loan payment. On top of that, we also raised about NT$15.6b below ADS issuance in July. In addition to the earnings improvement in Q3, our shareholder equity has been increased to NT$144b from NT$122b last quarter. As a result, we can see from the balance sheet highlights these helped AUO's debt to equity ratio to improve from 71.2% to 62.7%, and net debt to equity ratio also reduced from 57.7% to 50.6% at the end of Q3 '05. In regards to our bottom line return to profitability and improved working capital management, I would like to ask you to turn to slide number six, cash flow highlights. During the quarter, AUO was able to bring its operation back to a strong cash inflow stage, mainly from net income of NT$5.8b and depreciation and amortization of NT$8.9b. This was partly offset by increase in net working capital to support the sales revenue expansion and resulted in net cash flow from operation only about NT$11.6. Net cash used in investing activities total NT$22.7b, mainly from the capital standing of NT$21.3b. We expect we will spend about the same level of CapEx in Q4, mainly to support G6 equipment. This shall bring our 2005 total capital expense to be around NT83b. That is approximately US$2.6b. About the same level like year '04. A net balancing total of NT$12b were mainly attributable to increase of NT$2.9b in net debt, and NT$15.6b ADS issuance, offset partially by cash dividend of NT$5.9b. As a result, AUO ended the quarter with a cash balance of NT$17.4b. Now, let us look at in some business analysis. In the Q3, large size panel accounted for about 85% of our total revenue. Slide number seven provides a quick view on the breakdown of large size panel shipment by application. Due to strong growth of TV and notebook in this quarter, the percentage of LCD monitor panel in our business reduced slightly from the 61% to about 59% of our total large size panel shipment in the third quarter. On the notebook panel shipments. Notebook panel shipments remained stable at about 22% of our total large size panel shipments, and then on the TV side we continue to see the percentage contribution to rise from 12% in 2Q '05 to 14% in 3Q '05, and we do expect that TV will continue to rise again in our 4Q as our Gen 6 fab rev up. Lastly, the remaining balance of the 5% sales was supported by general display and audio/video applications involved 3Q and 2Q. Although TV accounted for only 14% of our large size panel shipment today, most of the TVs are, for the large area size. These help the blended ASP trended up nicely. We will discuss this on a later slide. TV: TV in our third quarter improved the most. It is about 68% increase of its absolute revenue sequential comparison. As a result, TV posted 22% of our total revenue in third quarter. In the meantime, Monitor business accounted for about 47% of our revenue in 3Q. For the first time, the Monitor business was poor, below 50% of our total business. This also demonstrated that emerging TV business is becoming the main business driver for the industry and AUO today. Notebook business remains as 14% of our revenue, and audio/video display, which are mainly small and medium size panels, contributed by seasonality and strong penetration in several new applications resulted in a steady portion of our business. As we explained earlier, TV has successfully become the second largest revenue contributor in our Q3 '05 to account for about 22% revenues. This representing a 62% sequential increase, a pretty good growth compared to 18% contribution in second quarter '05. Now, let's move to slide number nine, unit shipment and the blended ASP for AUO's large size panels. The unit shipments of the large size panel increased from 7 million in second quarter '05 to 8 million in third quarter. Blended ASP improved slightly from US$184 to US199. Now, next slide, slide number 10, let's take a look at what supports this ASP increase. The predominance of PC products was cut in by TV products. Noticeably, the ASP of TV improved to US364 from US316. This is due to our TV products is shifting to a larger size. The ASP of PC improved moderately to the around US174 and this is supported mainly by the pricing improvement on some of the PC monitor applications in additional to a better product mix. As a result, the blended ASP of large size panel has a price list, as we have noted on slide number nine. Now, please turn to slide number 10. Let's take a look on the sales of AUO's small and medium size panels. AUO's small and medium size panel from the year of 2002, as you know, small and medium size panels they are more seasonal in nature. Sales in these products, they to turn to peak in third quarter and fourth quarter, and they turn softer in first quarter and second quarters. As a result, at this point in time, we do anticipate the seasonality might take place in Q1 '06. Now, let's take a quick overview on our installed capacity by fab. Slide number 12, our Gen 6 capacity reached 50k monthly input substrate at the end of September. We've planned to reach 60k substrate by end of the year 2005, and we do expect our Gen 6 to be fully ramped up to its 90k substrate on a monthly capacity in Q2 '06. With a ramping of Gen 6, we expect it will continue to improve our cost efficiency, especially for large size LCD TV panel production. As to our third Gen 5 fab, which we call L8C, commencing its commercial production in Q2 '05 has ramped up to 20k substrates monthly capacity by end of September, and we do expect the schedule to be monthly 50k substrates monthly capacity December '05. The schedule will be fully ramping up to 60k capacity by June '06. With this new capacity planning of Gen 6 and Gen 5 from coming quarters, we believe these shall help further our cost competitiveness as well as better deliver of our commitment to our PC and TV customers in the long run. One, we do expect unit shipment for large panels to increase approximately by mid-teens percentage points from 3Q '05. This improvement is limited by the capacity constraints in fourth quarter '05. Two, unit shipment for small and medium size panels are expected to experience seasonality decline from 3Q '05 by approximately low teens percentage points. Three, we also expect blended ASP for large size panels to remain stable compared to that in 3Q '05. This is mainly supported by enhanced product mix. Among the large size panels, we do expect ASPs for PC applications remain stable, and ASPs for TV applications also expect to remain stable in fourth quarter. This end up my presentation today. Thank you very much, and before we open the floor up for questions, AUO's President and COO, Mr. HB Chen would like to give some remarks about our performance. Mr. Chen. AUO has delivered quite good results in our Q3 performance. I think the main reasons are the first is our very timely ramping up for Gen 6 fab and for the new Gen 5 fab to cope with our very high growth and high demand for TV panels and notebook panels. And, of course, our older product lines, notebook monitor and TV, plus the small and medium size panel has a very good growth, and the capacity contribute a lot. And lastly, I believe that we have the best inventory management. As we mentioned here, our inventory even lower than the last quarter. So, with very efficient logistic inventory control we can have a better performance. Secondly, I'd like to highlight that our overall performance in Q3 you will compare to the likes of Samsung and LG Philips. I believe that our operating income and net income is quite comparable to these two big names. And as for Q4, as we mentioned in our outlook, I think AUO team has quite high confidence that we can achieve better our guidance. Thanks. 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_233894

Here’s the entire text of the prepared remarks from VeriSign’s (ticker: VRSN) 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 this VeriSign Incorporated Conference Call. Today's conference is being recorded. At this time for opening remarks I would like to turn the conference over to Mr. Tom McCallum, Director of Investor Relations. Please go ahead. Thank you, operator. Good afternoon everyone. Thank you for joining VeriSign's third quarter 2005 preliminary results call. I'm here today with Stratton Sclavos, Chairman and CEO of VeriSign, Dana Evan, our CFO and Steven Gatoff, our VP of Finance and Treasurer. In a moment Stratton will review Q3's preliminary results and we will open up the call for your question. We would like remind everyone that other than the historical financial data today’s discussion may include forward looking statements and its subject to the risk and uncertainties described in our annual report and other report filed with the SEC. Our preliminary results were released to the business wires after the market closed this afternoon and this call is being webcast live both on our website and at streetevents.com. Final financial results for Q3 2005 will be provided in our regular schedule earnings call on October 19th, call in information for the earnings call will be distributed next week and with that I’d like turn things over to Stratton. Thanks Tom, and good afternoon everyone. As our preliminary result indicates we expect our performance in the third quarter to be mixed with strong demand across our Internet and core communication services offset by a substantial shortfall in revenues from our Jamba and Jamster mobile content business. The combination of factors including seasonality, a lack of hit content and new advertising guide lines and restrictions in several key European markets contributed to drive much higher subscriber return than we had anticipated in the mobile business during the quarter. Stratton said performance in the Internet and core communication businesses coupled with in quarter reductions in marketing and royalty expenses in the mobile content business should allow us to achieve our previous operating income and earnings per share guidance. Specifically we expect total revenues for Q3 to be approximately $410 million versus our previous guidance of $435 to $440 million with Jamba enhanced revenues contributing approximately $115 million versus the previous expectation of $140 million. We also expect operating margins to rise to approximately 23% driving earnings per share of $0.27 consistent with our previous guidance. We are obliviously very disappointed in our inability to overcome the weakness we saw in the Jamba and Jamster European business in particular it appear the lack of new hit content in the seasonally slow period adversely affected our efforts to improve the churn will began to see at the end of Q2. In addition the imposition of new marketing restrictions and guidelines in the UK in September reaccelerated the churn in that market. This led to significant friction in the customer acquisition process that outweighed any positive impact from our customer retention and market expansion initiatives during the quarter. The Q3 emphasizes the market from mobile content has been dramatic in unpredictable swings over the last 12-months, driven by a wider variety of factors. In the first part of the year we saw substantial subscriber growth driven by the popularity of certain content and ____ acquisition enable by our direct response model of fulfillment. Conversely in the later part of the year we have seen accelerated subscriber return driven by of lack fresh content, summer seasonality, and new marketing restrictions and regulations in certain countries. For the short-term trends have been, and will continue to be hard to forecast, we still fully believe in the long-term opportunity in the mobile content enabled by the convergence of mobility and entertainment and in our ability to capitalize on our position as the leading global platform for these services. We expect the market to reach some level of stability in the next 6-months, as normalization of the base in the UK and Germany stabilizes such that expansion into other geographies and new product areas begins to show through. Meanwhile we will continue to manage our marketing expenses carefully as we in parallel strive to build better retention and loyalty program. I should also point out that there were some highlights in the content business in Q3 as well, including the addition of over 400,000 subscribers from new geographies as well as the initial availability of our services to strength customers in United States. Looking in Q4 for the content business and taking into account the September run rate for revenues and assuming continued pressure in the UK and Germany, we are forecasting approximately $90 to $95 million in revenues for Jamba and Jamster. While there could be some upside to this based on the continued ramp up strength additional subscriber growth in new countries and a full slate of premium content releases, slated for the December holiday season. We feel that it is better to assume that our challenges in the UK and Germany will continue to dictate our performance through the end of this year. Given this outlook we would also expect to reduce our marketing expenditures again quarter-over-quarter and we will continue to operate the business profitably. It is also important to point out that based on Q3 booking trend our core Internet and communication services businesses are poised for a strong year-end finish. With these factors in mind our preliminary guidance for Q4 is for revenues of approximately $395 million to $400 million and earnings per share in the range of $0.26 to $0.27. Let me remind you that these guidance numbers are preliminary and we will update this outlook on October19th earnings call. With that let me thank you for your attention and now we will open up the call 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_233895

Good day everyone, and welcome to the New York Times Quarter Four 2005 Earnings Conference Call. Today's call is being recorded. A question-and-answer session will follow today's presentation. At that time if you'd like to ask a question, please press ‘*’ ‘1’ on your telephone keypad. For opening remarks and introductions, I would like to turn the conference over to Ms. Catherine Mathis. Please go ahead. Thank you and good morning, everyone. Welcome to our earnings conference call. We have several members of our Senior Management Team here today to discuss our results with you. And they include Janet Robinson, our President and Chief Executive Officer. Leonard Forman our Executive Vice President and Chief Financial Officer. Scott Heekin-Canedy, President and General Manager of the New York Times, Martin Nisenholtz, Senior Vice President, Digital Operations, Jim Lessersohn, our Vice President of Finance and Corporate Development, Stu Stoller, our Vice President of Process Engineering and Corporate Controller and Tony Benten, our Vice President and Treasurer. Our discussion today will include forward-looking statements, and our actual results may differ from those predicted. The factors that may cause them to differ are outlined in our 2004 10-K and third quarter 10-Q. This presentation will also include a non-GAAP financial measure, and we've provided reconciliations for the most recently comparable GAAP measure in our earnings press release, which is available on our website, www.nytco.com. This conference call is being webcast, and an archive will be available on our web site, as will a transcript, an audio replay will also be available and the directions are in our press release. So with that let me turn the call over to Janet Robinson. Thank you, Catherine and good morning. Today we reported fourth-quarter earnings per share of $0.45 based on GAAP compared with $0.75 in the same period in 2004. In the quarter, we had a charge of $0.15 per share related to the staff reductions we announced in September, and a $0.04 per share charge for the adoption of FAS B interpretation number 47 that relates primarily to the company's lease arrangements. The earnings guidance the company provided in December of $0.45 to $0.47 included an estimate for the staff reduction charge. It did not, however, include the effect of the accounting charge. Including the $0.04 for the accounting charge, earnings came in above the quarterly guidance. Our revenue results came in stronger than we had anticipated. In particular we had very strong performance at the New York Times Media Group where the "Times," the International Herald Tribune and NYTimes.com, all showed significant gains resulting in the group's ad revenues growing by nearly 8%. Generally, there was strength across the group, including some categories that had not done well earlier in the year, such as transportation and telecommunications. Categories that did particularly well in the quarter included financial services, which had strong gains from American Express, Zurich Financial Services and Fidelity. Corporate, which had significant new business, especially from the oil companies, and residential real estate, which saw more advertising as a result of greater inventories of homes to sell. Soft categories included entertainment, which declined as a result of soft box office holdover, and fewer dollars being spent for the sole purpose of qualifying for Oscar nominations. Pharmaceuticals, which had difficult comparisons to last year when Vioxx went off the market and other cox inhibitors stepped up their advertising. Two things were instrumental in helping the "Times" newspaper achieve its results. One was color, the other was new products. As you know during the quarter we increased our color printing capacity by 40%. And advertisers took advantage of it. In the quarter, color advertising made up 34% of the "Times" advertising revenues, up from 31% in the same period of 2004. In addition, we had two new issues of "Teen" manage, our rebranded Sunday supplements. They attracted many new advertisers as well as existing advertisers, particularly in the fashion and cosmetics categories. In total, the new and re-launched teen magazines added $10 million in revenues in 2005. New product development continues at the Times. One example that will launch shortly is "Play," The New York Times sports magazine, which is scheduled to appear four times this year. "Play" will enable us to provide national advertisers with an attractive, new audience of sports participants and enthusiasts. The Times continues to maintain its leadership position and market share, compared to other national newspapers, and to increase it compared magazine competitors. As a result of the investments that we have made throughout 2005, the international Herald Tribune's advertising revenues grew 33% in the quarter as it increased its market share. The New England media group had a difficult quarter. Advertising decreased 4% in the quarter as key categories such as automotive, home furnishings, travel, and department stores declined. The group continues to be affected by consolidation among important advertisers as well as sluggishness in the Massachusetts economy. As part of a comprehensive restructuring aimed at maximizing the potential and the deep market coverage of our New England properties, last month, we named two experienced newspaper executives to new posts. Mary Jacobis, a very talented leader who comes to us from Knight Ridder, will be responsible for the day-to-day operations of "The Globe" and the integration of its print digital operations. Rick Daniels, a 23-year veteran of "The Globe" will be responsible for enhancing the strategic initiatives and business development. At "The telegram" &"Gazette," the Globe's" direct mail subsidiary our joint venture with sports "Metro Boston" and our investment with "New England sports ventures." In addition Michael Zimbalist, who has been President of the Online Publishers Association, has been named to head our company's Research and Development operations. He will also oversee Boston.com. Product development is key to increasing revenues in New England. "The Globe" recently launched a redesigned automotive section and a new style section that will capitalize on the growth in fashion and luxury good advertising. It is expanding our, its weekly shopper to offer advertisers targeted saturation coverage of key suburban markets, and more changes are planned for later in the year. Our Regional Media Group's advertising revenues rose about 4%. New products such as weekly newspapers, magazines, and direct marketing contributed significantly to the improvement. Other revenues increased strongly driven by commercial printing. The company's overall circulation revenues decreased 2%. Trends varied across our properties, circulation revenues declined 1% at the "Times" media group and rose 2% at the Regional media group. At the New England media group circulation revenues decrease 7%, largely due to copy declines. We are focusing on the quality of circulation and on readership measurement at our newspapers. More and more, we find advertising, advertisers are placing greater value on the quality of the circulation and on total audience measurement. There are several circulation developments of note at the "Times." During the quarter, we began printing the "Times" in Toronto and in Houston. The "Times" plans to raise home delivery rates about 4% in New York and across the country, effective February 6. We expect this to result in revenues of about $7 million to $8 million later this year. Since we last raised home delivery rates in early 2002, we have significantly enhanced our coverage of the arts, travel, business, and real estate, and introduced new sections such as Thursday's "Style," Friday "Escape," and our key Sunday "Supplemental" magazine. As part of our efforts to strengthen the relationship between the "Times" and its readers, we recently announced the New Times Points Program, a free loyalty reward program that allows members to earn points for purchases at thousands of participating restaurants, hotels, and online retailers. Points can be redeemed to pay for a "Times" home delivery subscription, merchandise from "The New York Times" store, or gift cards from select advertisers. Since sponsors provide the discounts that allow participants to accumulate points, there is almost no cost to the "Times." And on the revenue side, we believe that this will help with reader retention and boost sales of "Times" photos, books, and other "Times" products. It is a great program. "Times select," our new fee-based product that includes our distinctive columnists an extensive access to the "Times" archives, continues to draw users and now has more than 390,000 subscribers, including online-only subscribers and home delivery subscribers who receive it free of charge, another way we reward our loyal readers. Our web sites and the New Media groups had very strong growth in advertising revenues, up 30% in the quarter, a particularly good showing given the large revenue base for this increase. We continue to be very pleased with the performance of About.com, which we acquired last March. It is consistently among the 10 most-visited sites in the US and is the largest web publisher of original content with 43 million average monthly unique visitors worldwide, up from 35 million when we acquired it last March. In the US alone, About.com averages 29 million unique visitors each month, up from 22 million last March. The improvement in visitors has translated into revenues. In the quarter, About.com's revenues climbed an estimated 51%. All three of its revenue streams, display advertising, cost-per-click advertising, and e-commerce showed strong growth. This was driven by higher rates, and increased spending from blue-chip advertisers. About.com continues to drive traffic to nytimes.com, Boston.com, and our other web sites. It also continues to cross market our sites, further promoting our brands, and extending our reach into readers' homes and offices. With About.com, nytimes.com, and Boston.com, we are able to offer over a million monthly page reviews to the marketplace. And because of About.com's strong performance in 2005, dilution was only a penny a share. This year we do not expect dilution from About.com. In total, our digital businesses generated $198 million in 2005, accounting for about 6% of the company's revenues. This included About.com, nytimes.com, Boston.com, the web sites of our regional and broadcast media groups, and our digital archives. In terms of unique visitors, we are the 10th largest entity on the Internet, a very important selling point with advertisers. As I mentioned before, we are very pleased that Michael Zimbalist is joining us with responsibility for both Boston.com and our research and development groups which will concentrate on new media ventures such as search, video, mobile technology, and eLearning. This is designed to expand our future distribution of our information products, and allow us to stay ahead of the technological and consumer curves in the years ahead. Revenues from our broadcast media group decreased 10% in the quarter, compared with the prior year when the group benefited from $7.5 million of political advertising. During the quarter, we completed our acquisition of KAU-TV in Oklahoma City, which created our first duopoly. Our ownership of KFOR and KAUT is providing us with operating efficiencies and is enabling us to offer our advertisers better ways to reach their audiences in this market. In 2006, we plan to focus on improving the margins of our businesses. By continuing to enhance existing products and to introduce new ones that serve our audiences and advertisers in print, on line, and through broadcast media. This year, we expect advertising revenues across our newspaper properties to be helped by increased rates while mid-term election, the Olympics, and the Super Bowl are expected to contribute to our broadcast media group's revenues. The very strong revenue growth of our internet properties is expected to continue. We plan to aggressively build out our content areas at all our web sites to provide our readers with more content and more features, and our advertisers with additional space with which to promote their brands and products. And while we expect to repossess of the changes we have made in our strength structure in 2005 we will remain disciplined on managing our cost. Let me turn the call over to Len. Thanks, Janet. Total costs increased 12.6% in the quarter. Most the increase came from three items, staff reduction expenses, costs related to About.com, which we acquired in March, and stock-based compensation costs which were greater than in the previous two quarters because of the required acceleration of expensed rewards granted to retired eligible employees in December. Excluding these three items, total costs rose a modest 3.6%, and that was primarily because of higher distribution and outside printing expense, and increased promotion expense in support of our circulation initiatives and higher newsprint costs. Newsprint expense rose 9.1%, with 8% of the increase resulting from higher prices and 1.1% from higher consumption. During the quarter, we complete the conversion of successfully all of our newspapers to lighter weight newsprint as part of records to reduce newsprint costs. This year we expect to save between $3.5 million to $4 million as a result of this step. Excluding staff reduction, About.com, stock-based compensation, and raw materials and DNA non-raw materials caps cost rose 2.7% in the quarter. We are maintaining our focus on expense management in 2006, continuing the systematic review of all of our operations that we began in late 2004. Our goal is to improve efficiency in our operations, and redeploy our resources more effectively to achieve both revenue gains and cost reduction. Some examples of the initiatives that resulted from this review include the consolidation of our half dozen major data centers, the reallocation of work from the advertising sales area to administrative staff in order to increase time available to sell, and the increased utilization of our shared services center by shifting additional work to it from our business units with both net reductions if FTE’s and lower cost per FTE. This year we expect to save approximately $45 million as a result of these efforts. Slightly less than 1/3 is related to the two staff reduction programs we announced last year. At the end of 2005, our headcount was down 2.6% excluding acquisitions. On the same basis, we project another 1% decline by year end. After the completion we estimate total annualized savings from the staff reduction programs of $50 million to $70 million by 2007. The actual savings will depend on the final mix of seniority of the affected employees. We've also in the past instituted a number of changes in our benefit programs for lower costs, and we will continue to reduce costs related to our overall benefit programs. The impacts of these changes is expected to substantially reduce the rate of growth and benefit costs going forward to lower than the rate of inflation. Turning to CapEx under GAAP. The total amount of capital expenditures for our new headquarters for both the company and our development partner must be included on a consolidated basis in our financial statements. In the quarter, total capital expenditures were $75.1 million. Of this amount, our development partner's responsibility was $17.5 million. The balance of $57.6 million was the company's responsibility, including $28.1 million for our portion of the costs for our new headquarters. For the full year 2005, total capital expenditures were $228.7 million. Of this amount, our development partners' responsibility was $53.7 million. The balance of $175 million was the company's responsibility, including $87.1 million for our portion of the cost of the new building. We're committed to bringing this building in on time and on budget. The October issue of "The Harvard business review" included an article written by one of our senior managers, David Thurn, who is our Chief Information Officer, and will also lead the team responsible for designing and building our new headquarters. In it, he describes some of the steps we're taking to ensure we get the business benefits we're seeking in our new headquarters. Over the course of the past year, we did many things to better position us for 2006, both on the revenue and the cost side. As we begin a new year, we will continue to develop new products across our print, our broadcast, and our online platforms to grow the top line. Equally important, we're committed to improving our margins in 2006. And now we'd be happy to answer your questions. If you'd like to ask a question today, please press ‘*’ ‘1’ on your touch-tone telephone at this time. Once again, star one to ask a question today. And we do remind you that if you're on a speaker phone, make sure your mute function is turned off to allow your signal to reach our equipment. Once again everyone ‘*’ ‘1’ to ask a question today, and we will pause for just a moment to give everyone a chance to signal. We go first to Craig Huber with Lehman Brothers. Yes, good morning, thanks. Just two quick questions. One, on stock-based compensation 2006, should we assume $0.02 to $0.03 hit per quarter? I assume this acceleration have in the fourth quarter ‘05 is up repeat next year, in this new year is first question. And then secondly, this $35 million staff reduction charge is it, can you just break it up by the various divisions, this is my second question. Thanks. Yeah, I'll take the stock question. It's going to fall the same way with a little larger in the fourth quarter because of the accounting related to the acceleration for people granted stock options who are of retirement age. Is that $35 million charge for staff reduction charge in the fourth quarter, we just finished, was that all buried in your newspaper line, since with that operating profit line, if there or was it broken out across the various sectors in corporate, thanks. Okay. And is my final question, in your comment in your press release about a slower start to January, can you quantify that at all, if you would please. That's my final, thank you. This is Scott. We're seeing a weak start to January predominantly because of the studio category. The Oscar season is off to a quiet start. January also is the biggest month of the year for us for this category. But beyond that we're seeing relative strength across our base of business. So in some respects, January is similar to what we saw last year where we saw overall strength of business across a core of our base of business, and then one or two or three categories that had weaknesses that were pertaining to their individual business segments. Going down January's a notoriously difficult month to predict historically. While we may be off to a slow start in January, we're reasonably optimistic given the way the year has finished. Hi, good morning, thank you. Could you remind us what was, how much if you look at the 5% rate and rate increase, you expect in the New York Times and 3% in other papers, could you compare that to what you realized in 2005 on those properties. And my second question is, what type of falloff if any it all, would you expect in subscriptions for "The New York Times" with the home delivery rate increase? We fully realized our rate increase last year which was on average 5%. And we've instituted a similar rate increase this year. Might remind you that we accelerated the color premium rate increase to be implemented effective October 1st last year, whereas last in 2005, it was effective January 1st and the second question? We're not expecting a significant falloff. There are two or three reasons for this. One is that this is a very modest price increase relative to those we've done over the past several years. As Janet pointed out, there's quite a few number of value enhancements in the content of the newspaper that we've talked about over the last couple of years, and more to come with the introduction of "Play" magazine this year. The times point program as well as the introduction of time select as a value enhancement to subscribers, also strengthened the value proposition. We also think the rate increase of roughly 4% in light of the inflationary environment that we've been in, and the fact we haven't done a rate increase for four years now, the fairly well understood or recognized increases in newsprint and fuel, I think all those things taken together lead us to believe that we'll see only a very large falloff in volume. Let's say this is Janet. Just to comment in regard to the regional newspaper and "The Globe" as well, they are in the 3% range in regard to the rate increase and they intend on realizing that as they did in 2005. Thank you. If I could just ask one more question. How does the 34% color advertising capacity in "The New York Times," how does that compare to your other properties, and where do you think that 34% can go? And I guess where is the ceiling for that, how much do you expect, I guess at the end of this time next year, where do you think that number could be? Well, at the "Times," I would expect to see growth in the same order magnitude that we've seen last 2 or 3 years. We've seen increases in the quarter premium revenue between 20% and 25% consistently and we expect to realize that again in '06. Yes, hi, there, just three questions. First, on time select, could you break out what percentage are non-subscribers. Second for land on the pension deficit, I saw the cash payment you made. Can you talk about is the pension deficit at the end of '05 going to look materially different than the 358 at the end of '04 then finally for Scott. Movie category's been relatively disappointing, I guess over 18 months now. Is the relationship between, you know, wide releases and the amount of money you're getting breaking down? If so, what do you think the trends look like? Thanks. They're all subscribers. 40% are people, who are subscribing through the online, so they are paid subscribers. The remaining 60% are home delivery subscribers that receive this free of charge, just as a clarification. Paul, it's Len, very hard to make a prediction on where the Pension liabilities are going to be, only because it's dependent on where assets go and interest rates. Right now we're well over a billion dollars on our assets and depending on how the market performances are, our interest rates are, a conservative guess would be roughly the same order of magnitude. It could be a little less or it could be a little more depending on improvement in those for the changes in those two variables. With regard to the studio category, Paul, I'm not sure we've ever really drawn a strong relationship between the number of wide releases and our advertising results. There is a relationship, but there are many other considerations, most especially with quality of product, and whether the product is particularly well suited or fits for our audience. And the results in the fourth quarter last year really bring this point home. There were 14 more wide releases in the fourth quarter of '05 relative to '04, seven more in October, four more in November, three more in December. We had very, very robust growth in October. Close to 20% growth in that category and then we saw very significant declines, low double-digit declines in November and December in spite of the number of wide releases. And all of that has to do with the box office performance, quality of product, and just when the studios seem to be practicing, if the movie doesn't open well, they're not spending to support it. So the number of releases by itself is not a good indicator. May be just a follow up on that, Martin or Scott what percentage of your movie revenues now come through the website? I think it's a 5%, I believe. I don't know that. I can't find out that would be my ballpark guess. Hi, thanks for taking my call. First, you mentioned display advertising for About.com in your prepared comments, what kind of rate increases are you putting through there relative to nytimes.com and Boston.com and are you using any inventory there to about to promote the subscriptions of the "Times" or elsewhere? Thank you. This is Martin. We've had significant rate increases this year with About.com. We've had, on average since we've acquired the business, about 20% across all of the inventory on the site, so that include both the display increases and increases in the price that Google revenue is accruing to the site. On display only, it's been close to 50%. So we've really exercised a great deal of rate leverage since we've acquired the business. On top of that, page views grew 20%. So not only have we grown rate, but we've grown volume, as well. And that's where you get to the fairly robust growth rates that we're talking about with this website. With respect to the other websites, of course there wasn't as much leverage there this year. But we have taken two increases at nytimes.com that account for about 15% RPM, total RPM rate increases, and at Boston.com, it's a similar number between 15% and 20%. So About.com is leading the way in terms of rate leverage but all of the websites are enjoying, you know, rate increases. We took two rate increases at nytimes.com this year. Yeah. We have been cross promoting and we have been putting banner, we've been placing banner buys at About.com for the "Times" as well as placing general web advertising for about.com on nytimes.com, excess inventory. So we've been using both sites to cross promote not only the subscription side of the business, but also the website sides, as well. And by the way, I point out that that number is pretty close to consistently what we've been getting for some time on the website. So it's been a very efficient and low-cost source of subscriptions for the papers. Okay. Sorry Martin, one other question on that. How much increased inventory have you put up on the display side at about? It's not just display side, Paid views up overall increase 23% this year, so the total inventory for the website which of course includes both the Google positions as well as the display positions on a single page increased 23%. Now the rate on the Google side increased much less than the rate on the display side. We don't control the rate on the Google site. It increased around 18%. So the total inventory increased 23%. And that accounts for significant revenue growth. Okay. Got you. One quick question. I think this might be to Scott. But can you talk about the other revenue line in the publishing segment. I think fourth quarter was pretty well below trend line. What was driving that, should we expect that to continue, thank you. There were two things that was driving it. At the "New York Times," we shut down television production facility. We restructured that in the fourth quarter of 2004. So, therefore, the other revenues were not generated at the same level as they were in the prior year. With regard to at Boston, there were a couple things that went on. But mainly it was a lower level at Globe Specialty Products, which is our direct mail. Well, certainly what I would expect with regard to the "Times," that because the television production facility was shut down in 2004, at 2006 will look more like 2005 in terms of other revenues. With regard to the other revenue, I would expect we'd see some improvement. Again an easy one first. Len, did the fiscal year end December 31 or December 25, is some of the other newspapers companies have? December 20th. The hard ball would be four days prior to that you did the guidance. What sort of change, so quickly the fourth end higher four days later just seemed a little peculiar. You've had the last two weeks, and I think of the month, I think what it does is just illustrates how difficult it is in the short term to, to predict. We assumed that the steps towards look like December of last year. And instead, December came in extremely strong in the last couple of weeks, took everybody by surprise. And certainly on the you've had, the impact of the transit strike, which we really didn't have a clue as to how that might have affect us. And on the accounting side, that was really a change in accounting that occurred with the last-minute guidance that we hadn't counted on when we issued our release. Thanks. Could you tell us at this point what the top five employees of "The New York Times" company made in 2005 versus 2004. I have to go back and look at the proxy. So you'll have to bear with us for a minute while we do that. We've not yet filed our proxy statement, but we would expect to do so, I believe sometime in February. And that numbers will be available then. Okay. And lastly CapEx, if I did the math right, looks like it's going up on just sort of the core maintenance in '06 versus '05. Any particular projects? We're projecting roughly in a $100 million to $150 million range for our CapEx, which is really where we started the year, every year. This year we have one big project, what we call our FAP project in which were essentially replacing systems at "The globe" and the "Times" on advertising and circulation. It's a three-year project that's beginning in '06. So that's certainly the single biggest item. Given our history over the years, I would expect us to come in on the non-building CapEx at the lower end of the range. Yeah, thank you. A couple questions. One, can you give us maybe I missed it. But on "The international herald tribune" what the losses were and give us some color on what your outlook is as you now have full control of the asset and what you think we should be looking for in 2006. And then secondly, if you could just give us some color and an update on the stake you took in the free publication, the status of that I believe an antitrust suit and how that business is progressing, as well. Thank you. No, That's not good. If you could give on the free publication, the freebie you guys took a stake in the Boston area, how that's doing. And then what your thoughts are on that business. And then I believe there was an antitrust, some sort of issue that came up with that just any sort of color on that, as well. Sure, Fred. This is Janet. The IHT had a very good year. They are steadily improving, and they are particularly improving in regard to advertising revenue. In the second quarter, third quarter and the fourth quarter, they were up 30% and 33% respectively. So for the year, they ended advertising up close to 17%. Their growth was predominantly in the luxury consumer goods area, but they did very well on travel, in financial services, and also in technology. So we are seeing some strong market share improvement, as well. Particularly against the business magazines and time, in fact. What we are seeing in regard to metro is very strong performance, particularly in the later part of the year. They had, I think their first million-dollar month, in fact, in the September timeframe. They are steadily increasing in regard to circulation. Their circulation, in fact, grew 10% in 2005. They are working very cooperatively with "The globe" staff in regard to selling display advertising, and of course classified is a very important part of their growth in the advertising arena, as well. With regard to the antitrust suite investigation that went on with metro Boston, basically that , we provided all the information, and there was no further inquiry on it. That was , that occurred, I think, sometime last Spring, Fred. Okay, thank you. Just a followup on IHT. I mean, it sounds like those are great metrics, Janet. But what were the actual losses, and where do you think you'll shake it out given the growth and, obviously, restructuring efforts there? I mean, will it end up be material? Yeah. We don't break out the operating performance of the IHT separately. It's part of "The New York Times" media group. What we have done just to comment a little bit further in regard to the IHT is not only, you know, In a consistently improved the product which we have done for two years now, we have also cooperatively worked in regard to the sales efforts with the staff of "The New York Times," really in covering a lot of cooperative group buy that's have grown quite dramatically and particularly in 2005. We also should note that because of the strong performance on the European reader business survey and the Asian business readers' survey, that has helped our standing in regard to the advertising community with the IHT. We also have very strong efficiency and productivity moves, just as we have at our other newspaper properties, in place at the IHT, to improve their overall performance. Hi, couple of questions here. Just want to go back to the December numbers for a second. How much of the December strength do you think was due to advertisers fulfilling their contract for the year, and/or sort of releasing their contract or their budgets before the year end? And I'll stop for now. This is Scott. I wouldn't attribute our performance in December to those considerations. Throughout the year, I talked about the three or four categories that were offsetting our strengths in our base business. Telecom, travel, tax, and the aGATT business. Both travel and Telecom turned into the positive category in the fourth quarter and came on strong in December. Color came on strong for us because of the additional capacity. And the broad-based strength that we've been seeing all year just really came to ahead. We saw it begin in mid September. It carried through October, November, and in December. So I don't think we believe that spending out of budget was a consideration there. Real estate was a category that came on strong through the whole second half of last year. And that was a big factor in December, as well. And that's not a category where people are spending out there their budgets that you're suggesting. Great. Second question is I wonder if you could update us on what impact you are seeing from the Fed rated main merger or what you're expecting. Thanks. The with regard to the "Times," the announcement that Lord and Taylor is up for sale is we see as a positive because remains to be seen what the ultimate disposition is. But we believe it to be a positive factor that suggests that Lord and Taylor will remain as a brand in the marketplace. And will continue to spend with us. The overall Federated strategy turning nameplate stores around the country into Macy's also placed to our strength as a national newspaper that is the only vehicle that is positioned to carry this kind of advertising. In regard to the regional newspapers, they are not affected at all. In regard to Boston, with the closing of Filene's which will take place in the February timeframe, there will be an effect in regard to our reduction on revenues from Federated. That said, the location of Filene's at the downtown crossing is an ideal side for other retailers and, in fact, many retailers are interested are rumored to be very interested in that property. Such as Target, such as Nordstrom's, such as Ikea, as well. In addition, of course, there are Lord and Taylor stores in the Boston area, as well. I think that is very similar to what Scott said in regard to whether the nameplate, of course, will continue, who will buy them and the investments they will make in that marketplace. But in regard to the Filene's location, it will be very interesting to see what retailer does buy that location, and, indeed, take advantage of the traffic there. Great. Just one last question. Could you update us on how big the entertainment was life studio I should say movie category is for the "Times" in 2005. Thanks. The studio category declined for the year in low single digits. Almost all of that decline came in the fourth quarter, which I've talked about. And at the end of the year the studio category is about 12%, 13% of our revenue base for 2005. Yeah. Two questions for Janet. I guess now for a couple of monthly ad reports, you've mentioned strength and help wanted in Boston, and that is a category that can really dominate that paper when it gets going. Are you is that encouraging you that maybe the trend in help wanted has turned there, or is it too Early to tell? Then I've got a followup on national circulation. I think it's too early to tell, Doug. We are pleased with what we've seen in the performance of help wanted in Boston this year. The strength of what they've been able to really put in the marketplace with the brand called Boston Works has really worked nicely for them. And we are encouraged to see that, you know, continuing in 2006. But again, I think it's a little early for us to make that prediction. Okay. And then there's been some discussion in the press about weakness in circulation. The "Times" sort of in the local markets, as you roll out these new print centers around the country, can you talk about the trends in your national, how you define national circulation, sort of out of New York, thanks. Uh-huh. I'm going to allow Scott to answer that question in regard to the national growth. Let me just comment a little bit further in regard to the help wanted in Boston. One of the things that we've under taken in Boston is to make sure that we have diversified the categories more and more and more. At one time, Doug, help wanted was an unhealthy percentage, in fact, of what the ad revenues were in Boston. It was close to the 30% range. It is much lower now, and needless to say, the diversification particularly in the national categories in Boston really does help them in regard to creating much more of a balanced approach or a balanced commitment from all of the categories. With regard to the definition of our national circulation, all of the circulation outside of the 39 counties that make up our major metropolitan area add up to our national circulation. For the last several years, we've seen a steady, ongoing growth as a result of our national expansion strategy. The media coverage that, perhaps, you referred to with regard to our circulation trends in New York, those we've seen small declines over many years. But a large decline in the year 2003. And I think that in hindsight that may represent a delayed reaction some of the price increases we did in 2001 and 2002. But I'd like to draw the distinction that we talk about quite a bit in point of the distinction here between paid circulation as an indication of purchase behavior and then other audience measures such as readership as an indication of readership behavior, which is what is important to our advertisers. Over the past five years, our reader ship in the New York Metropolitan area has been stable, and a key demographic segments, the aflaunt segments it's been growing. So while we have seen declines on the paid behavior, the purchase behavior, it indicates to us that as people are changing their purchase habits, they're still reading the "Times." So I think for the "Times" in particular, you need to look at both the audience metric, the readership metrics, and our circulation results and keep in mind that's a net paid number that indicates purchase behavior. Just to add a little bit to that. While post articles focused on shifts and circulation it notably admitted some important facts regarding "The New York Times" circulation. During the week, the "Times" outsells every other paper in Manhattan and in the NDM suburbs. And on Sunday which gives you more of a telling picture of where each paper's readers actually reside, the Manhattan circulation for the "Times" is twice that of "The Daily News" and three times that of "The post." The "Times" can claim its leading positions despite the aggressive pricing that certainly has gone on in this marketplace. But just specifically outside of the 39 counties, are you seeing the kind of growth that you hope to see and you have often referred to 60,000, 75,000, and sort of request for the "Times" nationally, and are you beginning to fill those, that capacity with these new plans? The volume of unfulfilled orders because we don't have the distribution capability. It remains relatively stable. At any given point in time, we have anywhere from 50,000 to 70,000 orders on file. Maybe half of those are within the last 12 months. At any point in time, 5,000 to 10,000 of those high priority in that we're actively working on trying to route those. As you may recall, about seven years ago we announced our intention to grow the daily national circulation by a quarter of a million and Sunday by over 300,000. We're seven years into that. And we're right on schedule. We've got at the end of last year, we are 69% of the way to the daily goal, 76% of the way to the Sunday goal. It's also important to note that the copies out side of New York are more profitable than the copies inside the NBM, as well. So the deliberate move on our part to really increase the national circulation was in direct correlation to us increasing the profitability of the company, and certainly returning shareholder value. Hi. I was going to ask a question on '06 costs. You mentioned savings of $45 million, and then a newsprint savings of $3 million. Is the $45 million includes the $3 million? Or is newsprint separate from the other savings you mentioned, Len? I hate this to be a wise-guy question. But there's been some discussion, I believe even in your editorial pages, about the "Editorial" "Position" at the New York Times. Do any advertisers complain about that? Or is that an advertising issue at all? No, it is not, Ed. It's amazing how much support we get from our advertisers in regard to the quality of the journalism, of course, that we represent in the industry. And in regard to the editorial positioning of the newspaper, they certainly are respectful of the voice, the clear voice that the editorial page has. It's also important to note that when indeed you're setting an agenda which our editorial page does, that many advertisers realize the importance of what the "Times" represents in regard to editorial opinion. Couple of questions. First let’s about home delivery prices, I was wondering if you have plans to also alter a newsstand at some point, as well. I think, it's been a couple years. I remember, that was right since you have done that. And then online side the $198 million, obviously I can back out the About.com fairly easily. But it seems like a higher number than what I had been sort of calculating based on your gains that you described since you used to report “New York Times” Digital. So I was wondering, is that balance off of the 198 is comparable to your numbers that you used to report relative to "The New York Times" digital. Then finally, just if you have a new investment dollar today, you know, as you sort of prioritize across online, new print sites, color capacity, debt reduction, share repurchases, where would you prioritize that dollar to go? Thanks. Regarding the $198 million -- this is Martin. It's not comparable to the old "New York Times" digital number because it's inclusive of the regional media group and broadcast media group numbers, as well. This is Len. I'd give you a simple answer, which is every investment we make is driven by return. And we look to go for the highest return investments. And that might be color capacity in one year, it might be a digital investment in another year. I think it's, at the end of the day, it's driven entirely by return. We obviously like our investments in color, as Scott has indicated. That's been a huge payoff. And certainly our investment in About.com has been a huge payoff, as well. I'd also point out that our investments in New England sports ventures have been a great investment for us. So, it's all at the end of the day driven by return. I guess what I'm trying to understand is the prioritization between growth perhaps and risk. You know, obviously you have to assess the risk in that return. Well, again, I think, you know, risk is in the eyes of the beholder. Many people viewed our investment in About.com as a highly risky investment. We didn't. We believed that it was a business that would generate great growth for us. So we're obviously mindful of balancing risk versus investment. And that's captured in how we make our projections when we look at an investment. And the return that comes with it. Thanks. Len, earlier you mentioned the transit strike. I was wondering can you give us a sense of how the transit strike in New York impacted both advertising and circulation in the quarter. In the end there was no measurable impact. I think what Len was referring to previously was the uncertainty of the impact as we were thinking about the guidance. Okay. And then another question. On the regional media group, advertising slowed a bit in December. Do you see that trend continuing, or are you going to start cycling against department stores and Telecom throughout 2006? We don't see, in January we're seeing the regional newspaper off to a solid start. There are categories that are performing very, very well, for them help wanted and real estate in particular. There is a little bit of softness in department stores, and some of the retail sectors, but in reality, other categories are more than making up for that. And it's very, very early in the year, you know, for us to judge how the year, of course, will progress. But as you know, the regional newspapers, the smaller market newspapers have performed very well in 2005. And we really see that continuing into 2006. Well, thank you for taking the question. I was just wondering. In terms of the 5% ad rate hike that you with "The New York Times," I was wondering, if you see any pushback, especially in the local area, given that you've had weakness in local circulation. And then secondly, I believe, I had in my notes that you raised display rates at About.com at 80%. And I was wondering if I had the number wrong or if you didn't get the full effect of that rate increase. And secondly, in that presentation, I don't know that you mentioned what the rate increase might be for 2006. I was wondering if you can identify that. The "Post" article or any other news coverage about circulation is always a reason to open a rate discussion in the eyes of some advertisers. But those discussions reflect what I've described as our view of the marketplace that our audience remains strong, and that’s growing in the key demographics that are important to our advertisers. And that circulation is a measure of some other things. With respect to the About.com, I'm not precisely sure where the 80% came from. It may have been a point in time. Let's distinguish between a CPM rate, which in some categories and in some instances has been raised significantly versus the total rate per page, which is the RPM rate that we've reported today. The RPM rate, again on the display side for the year, was 48%. So just to clarify that, that's rate per 1,000 pages delivered on CPM'S. Yeah. I mean, we continue to expect to see leverage both on rate and volume in 2006. You know, obviously don't want to be completely specific here, but I think there's significant room to run at about in both lines. Thank you. My question regards, return on equity. Do you maintain, or do you currently have a formal ROE target or range over the next three to five years that you're looking to hit? We set goals internally on a number of metrics including ROE, but we don't release that information publicly. It's one of a half a dozen metrics that we use in our planning budgeting. This may be, you may not be able to answer this, as well. When I look over the last three, four, five years, ROE has been kind of in the low 20% range. Is that a reasonable guide to use, or might it differ materially from that? Well, I think it's impacted from where our earnings have been over the last few years. And I think looking at ROIC, which is something that we pay considerable attention to, is an important metric to look at. Yeah. I mean, when you get the full impact of staffing but we will have some staffing continually into, staffing reduction continuing into the first quarter. So, what I was giving you was an apples-to-apples comparison. Well, 45 million related to a variety of cost savings from process mapping, of which about 1/3 was related to staffing. Hard to give you a tight number, because it really depends on the seniority of people and the timing of when they take it. So, I'm perfectly comfortable with giving you a range at the conclusion. But I'm a little uncomfortable trying to get pin down to given, a given year. At this time, there are no further questions. I'd like to turn it back to Ms. Mathis for some closing remarks. Thank you for joining us today. We appreciate your attention. And if there are any other questions, give me a call. Bye now.

EarningCall_233896

Here’s the entire text of the prepared remarks from QLogic’s (ticker: QLGC) 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]: Welcome to the QLogic Corporation second quarter fiscal year 2006 Earnings Conference Call. Just to reminder you today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. H.K. Desai, the Chairman, President and Chief Executive Officer. Please go ahead, sir. Good afternoon and welcome to QLogic's second quarter fiscal year 2006 Earnings Conference Call. I am H.K. Desai, CEO and President and with me is Anthony Massetti, Senior Vice President and Chief Financial Officer. Today, Anthony will begin with the review of the second quarter financial results, and I will continue with the general discussion of the state of our business. After that, we will open the teleconference for questions. Anthony. By now all of you should’ve seen our press release and associated financial information. And in addition reviewing our financial results, some of the comments today will include forward looking statements regarding the future events and our projections of the financial performance of the Company, based on our current expectations. These comments contain significant risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements. We refer you to the documents that QLogic files with the SEC, specifically our most recent Forms 10-K and 10-Q's. These documents identifying important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update any of the information contained in any forward-looking statements that we make today. Today's conference call is being webcast, and a replay will be available for 12 months on the QLogic website at www.qlogic.com under investor relations. An audio replay will be available through November 2nd, by calling (719) 457-0820, passcode 9154830. Please be aware that if you decide to ask a question, it would be included in both our live transmission as well as any future use of the recording. Copyright law and international treaties protect this conference call report. Unauthorized reproduction or distribution of this report or any portion of it may result in civil and criminal penalties. Any recording or other use or transmission of the text or audio for today's call is not allowed without the explicit written permission of QLogic. In our second quarter earnings press release, issued earlier today, we reported both GAAP and non-GAAP results. During fiscal year 2006, there was no difference between the GAAP and non-GAAP results. During fiscal year 2005, there was a relatively minor difference due to merger-related stock compensation charges. All of the references we will make today relates to the non-GAAP results for the periods noted, unless otherwise stated. As announced in late August, we entered into a definitive agreement to sell our hard disk drive controller and tape drive controller business to Marvell Technology Group for $225 million. We expect this transaction to close by the middle of the third quarter. As a result of this transaction, we’ve presented the financial results of this business as discontinued operations and the financial statements for all periods included in our earnings press release. Our discussion today will focus on the financial results from continuing operations, unless otherwise noted. Our revenue in the second fiscal quarter ended October 2, 2005 was a record $119 million, an increase of 16% from the same quarter last year and 3% sequentially. Our revenue from SAN infrastructure products, which are comprised of HBAs, switches and silicon, grew 21% to $110.5 million from $91.1 million recorded in the second quarter of last year. Sequentially, revenue from the SAN infrastructure products grew 3% from the June quarter. The increase in our revenue from SAN infrastructure products was primarily driven by HBA revenue growth of 22% from the comparable quarter last year and 4% sequentially. Our switch revenue grew 52% from the same quarter last year and was flat sequentially. Our revenue from management controllers decreased 33% to $7 million from $10.5 million recorded in the second quarter of last year. Sequentially, our revenue from management controllers increased 2% in the September quarter. As we have discussed in previous earnings conference calls, we expect revenue from management controllers to decrease over time. Other revenue, which is comprised of royalties and service revenue, was $1.5 million in the second quarter. Our September quarter gross margin of 70.6% decreased from 71.4% recorded in the second quarter of last year and was consistent with the June quarter. The declining gross margin compared to the same period last year was due to product mix and was within our expectations. Consistent with our previous guidance, we expect our gross margin during the next 12 to 18 months to be over 65%, depending on product mix. During the September quarter, we experienced an ASP reduction on like-for-like products in our HBA business of approximately 1.5%. This is consistent with the amounts experienced in prior quarters and within our expectations. Next, I would like to cover second-quarter operating expenses. Total operating expenses were $41.2 million in the second quarter, up 13% from the $36.4 million reported in the same quarter last year. On a sequential basis, operating expenses was up 4% from $39.5 million reported in the first quarter. Engineering expenses in the second quarter increased 11% to $21.4 million versus a year ago and decreased as a percentage of revenue from 18.8% to 18%. On a sequential basis, engineering expenses in the second quarter increased 5%. We will continue to support existing and future technology development with engineering expenses as a percentage of revenue ranging from 16% to 19%. Sales and marketing expenses in the second quarter increased 20% from a year ago to $15.6 million, and increased as a percentage of revenue from 12.7% to 13.1%. On a sequential basis, sales and marketing expenses increased 3%. We expect that future sales and marketing expenses as a percentage of revenue will range from 11% to 14%. G&A expenses in the second quarter of $4.2 million were flat versus a year ago and decreased as a percentage of revenue from 4.1% to 3.5%. G&A expenses were up $0.3 million sequentially. We expect our future G&A expenses as a percentage of revenue will range from 3% to 4%. We continue to focus on improving efficiency in our operating expenses while investing in critical new development programs for existing and new technologies. In the September quarter, QLogic generated an operating profit of $42.8 million, an increase of 17% versus last year. The second quarter operating profit margin of 36% increased over the second-quarter level of last year of 35.8%. On a sequential basis, operating profit increased $0.8 million. The operating profit margin of 36% in the September quarter decreased from 36.3% in the June quarter. Interest and other income was $6.1 million in the second quarter, an increase of $1.9 million versus a year ago and consistent with the June quarter. The increase in interest and other income from the prior year was primarily attributed to higher average cash and investment balances and favorable interest rate changes. The income tax rate declined to 37.7% during the second quarter, compared to 41.2% in the June quarter, primarily due to the favorable resolution of a routine tax examination during the quarter. The annual income tax rate for the remaining two quarters and the full year of fiscal year 2006 is expected to be approximately 39% to 40%. Our second quarter income from continuing operations increased 12% to $30.5 million from $0.34 per diluted share from the second quarter of last year, when the Company recorded income from continuing operations of $27.2 million or $0.29 per diluted share. Our income from continuing operations as a percentage of revenue in the second quarter was 25.6%, compared to 26.6% reported in the same quarter last year. On a sequential basis, income from continuing operations increased $2.2 million, from $28.3 million reported last quarter, primarily due to the decline in income tax rate. Our net income, which includes results from discontinued operations for the second quarter, increased 14% to $43 million or $0.48 per diluted share from the second quarter of last year, when the Company recorded net income of $37.7 million or $0.40 per diluted share. On a sequential basis, net income increased $1.2 million from the $41.8 million reported last quarter. Our second quarter diluted net income per share, which includes discontinued operations, was $0.03, above the high end of the forecasted range of $0.42 to $0.45 per share provided during our first quarter conference call. This represents the 41st consecutive quarter of profitability for Qlogic. Our financial position continues to be strong, especially with regard to our cash flow. During the second quarter, we generated $31 million of cash from continuing operations. The Company's cash and short-term investment balance was $634 million at October 2, 2005. During the second quarter, we repurchased $247 million of our common stock on the open market. In October, we repurchased an additional $103 million of our common stock, thereby completing the current $350 million stock repurchase plan announced in August 2005. The total number of shares for the $350 million stock repurchase was 10.4 million shares. Since fiscal year 2003, we’ve repurchased a total of $550 million of the Company's common stock under programs authorized by our Board of Directors. Second quarter receivables of $64.4 million were up $5.4 million from the $59 million at the end of the first quarter. The DSO rate in the September quarter was 49 days, compared to 47 days in the June quarter. With a growing trend toward hub arrangements with our OEM customers and greater contribution from our distribution channel, we continue to expect upward pressure on our DSO performance. Based on our current customer and channel mix, we expect DSO in the future will range between 45 to 55 days. Annualized inventory turnover of 5.5 turns in the September quarter is consistent with the June quarter. Inventory at the end of the quarter was $25.2 million, an increase from the $24.9 million at the June quarter end. Our long-term outlook for our core business remains favorable. Based on a foundation of design wins in existing markets, as well as the emerging SMB and other markets, we expect to see sequential growth in our revenue for SAN infrastructure products. As previously expected, we believe that our revenue from management controllers will be flat to slightly down. Therefore, we expect total revenue in the December quarter to be in the range of $121 to $125 million. Due to the potential variation of product and technology mix, we expect gross margin for the December quarter to be in the range of 69% to 70%. Considering the above revenue and gross margin expectations, combined with plant operating expenses, infrastructure investments and continued higher tax rate, the current outlook is to achieve diluted earnings per share from continuing operations of approximately $0.32 to $0.35 in the December quarter. Actual results for future periods may differ materially, due to a number of factors, including those outlined during the course of this conference call, in the Company's filings with the SEC and the disclaimer statement at the end of our second quarter fiscal 2006 earnings press release. I would now like to turn over this conference call to H.K. Desai, our CEO and Chairman and President. [H.K. Desai, President, Chairman, CEO] Thank you again for joining us today in our second-quarter earnings conference call. I am pleased to announce QLogic's 41st consecutive quarter of profitability and a new record for revenue from continuing operations. The revenue for the second quarter ended October 2, 2005, which excludes the results of the discontinued hard disk drive controller and tape drive controller business, was $119 million, up 16% year-over-year and 3% sequentially. Our second quarter diluted earnings per share for continuing operations was $0.34, which was an increase of $0.05 over the year-ago quarter, an increase of $0.03 sequentially. As indicated in our August 29th investor call, the SAN infrastructure components market is anticipated to grow at a compounded annual growth rate of 20% to 25%, achieving a TAM of $3.6 billion in 2008. Moving forward, we will concentrate our focus on this higher growth market. For the second quarter, our revenue from SAN infrastructure products, which is comprised of HBAs, switches and silicon, was $110.5 million. The SAN infrastructure product revenue grew 21% from the year-ago quarter and 3% sequentially. In the second quarter, revenue from our non-strategic management controller products was $7 million. Other revenue, which includes royalty and services, was $1.5 million in the second quarter. QLogic continues to expand its SAN storage customer footprint with Fibre Channel and iSCSI HBAs. Total Fibre Channel and iSCSI HBA port shipments, which exclude Fibre Down products for blade servers, grew 36% from the year-ago quarter and 5% sequentially. Our HBA product revenue grew 22% over the year-ago quarter and 4% sequentially. According to Gartner's most recent Fibre Channel SAN components report, combined Fibre Channel and accelerated iSCSI SAN components revenue will experience compounded annual growth rate of 19% over the next three years. We are very well positioned to benefit from this growth opportunity. Over the last several years, our Fibre Down silicon business has provided strategic advantage that we leverage to increase our HBA market share. With 4-Gig technology, we have started transitioning from providing Fibre Down silicon products to providing mezzanine cards for blade servers. We have achieved three design wins for blade server mezzanine cards at major OEMs. The replacement of Fibre Down silicon with the mezzanine cards will result in an overall net increase to revenue. We anticipate that this transition will take place over the next 12 to 18 months. The footprint for QLogic's Fibre Channel switch products also continues to expand. In the second quarter, port shipments of our blade switches and SANbox 5000 series of switches, compared to the year-ago quarter, grew 61% and 119%, respectively. On a sequential basis, port shipments of our blade switch and SANbox 5000 series switches grew 8% and 18%, respectively. QLogic's SMB switches or 3000 series are also gaining acceptance. Although we did not ship 3000 series last year, the sequential port growth for this product family was 21%. Our expanded footprint has resulted in a 52% increase in revenue from the year-ago quarter. Switch revenue was flat sequentially from the previous quarter. This was due to our transition at our OEMs from legacy SANbox2, 8 and 16-port platform to our new SANbox 3000 and 5000 series. The ASP per port for the SANbox 3000 and 5000 switches is approximately 50% lower than the products they replace. Our continuing strength in the channel, combined with our expansion into the leading OEMs, should continue to drive revenue growth for these SAN infrastructure products. The channel business continues to be an important growth driver for QLogic. The channel accounted for 26% of our SAN infrastructure product revenue in the second quarter. Overall, channel revenue for the SAN infrastructure product was up 52% year-over-year and 13% sequentially. We will continue to enhance our support model to deliver the highest levels of customer satisfaction for our expanding worldwide channel business. In the second quarter, we announced an agreement with Lucent to provide global support in key regions with local language and local time zone support. This demonstrates our ongoing commitment to our channel partners and customers. Now, let me review some of our recent announcements. Yesterday, we announced that QLogic will acquire Troika Networks for $36.5 million in cash. OEMs have indicated that they have seen a growing need for cost-effective virtualization solutions. The acceleration technology we are acquiring with Troika will be integrated into entry-level and mid-range virtualization platforms from QLogic that will host leading OEM and ISPs software solutions targeted at this market. One of the things driving QLogic's market share expansion is our comprehensive support of operating systems that drive storage-centric applications. Last quarter, we announced that QLogic's SANblade Fibre Channel HBAs, SANbox switches and SANsurfer software will now support Mac's OS X. Providing SAN connectivity to Apple's Xserve G5 servers and Xserve RAID subsystem present additional opportunity for QLogic to extend our market share growth. Although slow to evolve, iSCSI continues to attract market attention. As a leading provider of SAN host interconnects, we expanded our solutions portfolio by announcing the first iSCSI mezzanine card for the IBM eServer BladeCenter. The iSCSI mezzanine card, which started shipping last quarter, is followed by powered by QLogic's single-chip, high-performance, TCP and iSCSI Offload Engine. According to IDC, QLogic remains the leading supplier of blade server embedded switches in 2004. QLogic maintained its number one positions in embedded Fibre Channel switch market share, with 68.5% of revenues and 64.4% of ports shipped. Despite heavy competition, QLogic's high quality, advanced technology and brand recognition has allowed us to maintain a significant share of this rapidly growing market. This past quarter, IBM announced the availability of the industry's first fully enabled 4-Gig SAN solution for blade servers. Developed with BladeCenter alliance partners QLogic and McData, IBM's blade offering now provides customers new levels of price, performance and flexibility. The new IBM BladeCenter 4-Gig offering features QLogic's Fibre Channel mezzanine card, the QLogic 4-Gig switch blade and McData 4-Gig switch blade. In second quarter, we announced that our SANblade 4-Gig Fibre Channel HBAs have been qualified by EMC as E-Lab tested. The new HBAs will be used to connect EMC CLARiiON and Symantec's network storage systems to servers with high-performance PCI-X 2.0 and PCI Express slots. QLogic is leading the way to 4-Gig Fibre Channel deployment with end-to-end 4-Gig solutions. We announced the expansion of QLogic's global support services. Enabled by our strategic relationship with Lucent Technologies, QLogic now provides global support services with in-region local language, telephone and e-mail support, as well as on-site service programs. QLogic global services are available in the following regions, Europe, Middle East and Africa, Asia-Pacific, Latin America, Japan and North America. In summary, our continued growth in Fibre Channel and iSCSI HBAs and Fibre Channel switches, along with our expansion into iSCSI to Fibre Channel routers and the virtualization platforms will allow us to increase our footprint in the expanding SAN infrastructure market. Thank you, operator. We will now 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_233897

Here’s the entire text of the prepared remarks from 24/7 Real Media’s (ticker: TFSM) 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 morning, ladies and gentlemen, and welcome to 24/7 Real Media's third-quarter 2005 results conference call. Operator Instructions I would now like to turn the conference over to Noah Schankler, Director of Corporate Development. Please go ahead. Thank you. Hello and welcome to 24/7 Real Media's third-quarter results conference call. On the line today are Chairman and Chief Executive Officer David J. Moore and Chief Financial Officer Jonathan Hsu, as well as General Counsel, Mark Moran. Before we begin, the Company would like to remind you that it will be making forward-looking statements regarding future events and future financial performance. The Company makes these statements as of November 3, 2005 and disclaims any duty to update them. You should be aware that actual events and results might be materially different from such forward-looking statements. Please refer to the Company's most recent 10-K and 10-Q for a discussion of risk factors that could materially affect the Company's actual results. Throughout this conference call, the Company may present both GAAP and non-GAAP financial measures. Non-GAAP financial measures such as pro forma operating income may exclude charges associated with amortization of intangible assets, stock-based compensation and depreciation. A he supplemental schedule to the Company's earnings release provides a reconciliation of non-GAAP to GAAP financial measures. All non-GAAP financial measures are provided as a complement to the Company's GAAP results, and the Company encourages investors to consider all measures before making an investment decision. You may find copies of the Company's SEC filings, its earnings release, including a reconciliation of non-GAAP and GAAP financial measures, and a replay of the webcast of this conference call at www.24/7RealMedia.com. At this time I would like to turn the conference call over to David Moore, Chairman and CEO of 24/7 Real Media. Dave, please go ahead. Thank you, Noah, and good morning, everyone. Once again I'm pleased to have the opportunity to report on another strong quarter for 24/7 Real Media. The momentum we achieved during the first half of the year was maintained in the third quarter, enabling us to generate exceptional operating results with strong sequential and year-over-year growth throughout the Company. Q3 revenue of 35.1 million exceeded our guided range of 32 million to 33 million, driven primarily by a significant increase in the adoption of our search engine marketing managed services offering during the quarter. Pro forma operating income of $0.05 per share was a considerable improvement over the 0 per share reported for this period last year. Cost containment and sales, marketing and administrative expenses continued to reflect the operating leverage inherent in our operating model. The ability to allocate these resources to our forward-looking technology development efforts without compromising our commitment to positive results for our shareholders allowed 24/7 Real Media to continuously improve upon our leading technology platform. I'm very pleased to announce that as of this morning 24/7 Real Media is once again listed on the NASDAQ National Market, ending three years on the small cape market. This listing more appropriately reflects the continued growth and cash flow generated by our operations and signals to our shareholders the seriousness of our efforts to become the market bellwether of our extended sector. The third quarter also witnessed the formation of a landmark strategic partnership between 24/7 Real Media and Dentsu, Japan's largest and most prestigious advertising agency. Headquartered in Tokyo the joint venture K.K. 24/7 Search will bring together 24/7's operational and technological SEM expertise and Dentsu's local market clout, along with a client roster of over 6000 advertisers. The joint venture, which is 51% owned by 24/7 Real Media, is led by Jay Woo Chung, head of our Asian operations. Utilizing besides D&A the only global SEM platform employing Japanese keywords to address the Japanese paid search market, our shared goal for this JV is to become the definitive choice for any advertiser looking to tap into this fast-growing marketplace. It bears repeating that the Japanese market for online advertising is second only to the U.S. marketplace in annual dollars spent. And the allocation to paid search has been growing even more rapidly in that country than it has here in the United States. Estimates for 2005 are for total search spending in Japan of about 550 million, growing to over $1 billion annually in 2008. Currently nearly half of all advertisers running the paid search campaign are doing so without the assistance of an agency or an SEM service provider such as K.K. 24/7 Search. This represents a tremendous opportunity for a new company to develop a proprietary client list beyond that initially contributed by Dentsu. To that end, I'm pleased to report that we have had great success in our efforts to bring on board some of the brightest individuals currently involved in the relatively new Japanese SEM market. The JV has recently moved into its new downtown offices and with the assistance of locally deployed 24/7 Real Media employees is building out the ideal business offering for this market. Now with any new business initiatives, there will be some hurdles to overcome through 2006, but internally we all recognize the long-term importance of this market to 24/7 Real Media and are committed to superior execution. Jon will provide some financial color on the joint venture during his comments later this morning, but I would like to emphasize that our Pacific Rim venture is just the most recent example of 24/7 Real Media's management team executing upon it strategic roadmap for growth and profitability. I will now turn the call over to Jonathan Hsu who will take you through the financial results for the quarter. Jon? I would like to begin by stating that 24/7 Real Media is in its best financial shape ever. Cash flow from operations during Q3 was a record $4.9 million. Our balance sheet continues to strengthen, providing 24/7 Real Media with good financial flexibility to pursue operational and strategic goals such as the formation of our joint venture with Dentsu. Let me now review our financial results in more detail. Total revenue for the third quarter ended September 30, 2005 rose 69% to 35.1 million from third-quarter 2004 revenue of 20.8 million and climbed 4% sequentially from the strong results posted during the second quarter of 2005. We achieved pro forma operating income of 2.3 million for the third quarter or $0.05 per diluted share. GAAP not net loss for the third quarter of 2005 was .8 million or $0.02 per share compared with a loss of 1.7 million or $0.04 per share in the year ago period. Media Solutions revenue, which includes revenue from the 24/7 Web Alliance and other media services, climbed 29% to 15.5 million in the third quarter of 2005 from 12.1 million in the same period a year ago. Gross margins were sequentially stable at 32.4% and in line with the guided range of 30 to 32%. Search Solutions contributed $13.7 million to revenue in the third quarter of 2005, up 234% from 4.1 million in the same quarter of 2004. Blended gross margins in the segment were 27%, reflecting a significant outperformance in the lower margin full-service SEM work performed during the quarter. Technology Solutions revenue rose 26% to 5.8 million in the third quarter of 2005 from 4.6 million in the same quarter of 2004 as we continued to capture market share gains from some of our peers and grow overall impression. Gross margins for the segment were 82.9%. Beginning with this most recent quarter, 24/7 Real Media is consolidating the financial results of our 51% owned subsidiary, K.K. 24/7 Search, and our reported filings. 100% of the revenue and costs from the venture will be reported in our 24/7 Search division with Dentsu's 49% share of the after-tax earnings or losses stated as minority interest on the consolidated income statement. Moving forward, our stated guidance beginning with yesterday's release and this call will include expected results from operations of the joint venture. Despite the tremendous opportunities presented by the Japanese market, I would note that the impact on our consolidated results for 2006 will be tempered by the startup nature of the joint venture. We expect the joint venture to contribute between 5 and $10 million to revenue and gross margins consistent with our other global search operations. During this year long startup phase, the joint venture will have a neutral impact to our overall Company's fiscal year 2006 pro forma operating income. I would now like to update Company guidance for anticipated fourth-quarter and full-year 2005 and 2006 financial results. The Company expects revenue in this fourth quarter of between 36.5 and 37.5 million, the midpoint of which represents an increase of 35% over fourth quarter of 2004 revenue of 27.5 million. The Company expects diluted pro forma operating income per share in the fourth quarter of 2005 to be $0.06 per share. Based on these expectations for Q4, the Company currently anticipates full-year 2005 revenue to be in the range of 134.5 million to 135.5 million, the midpoint of which represents an increase of 58% from revenue of 85.3 million in 2004. The diluted pro forma earnings per share guidance for the year is now $0.18. Based upon the inclusion of K.K. 24/7 Search and our updated outlook for overall operations, we are increasing guidance for 2006 at this time. We are currently anticipating revenue for full-year 2006 in the range of 175 to 185 million with diluted pro forma earnings per share of $0.30 to $0.32. 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_233898

Good morning, my name is (Renee). And I will be your conference facilitator today. At this time I would like to welcome everyone to the Garmin Third Quarter Earnings 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 star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. Thank you. Ms. Polly Schwerdt, you may begin your conference. Good morning. We would like to welcome you to Garmin Limited’s 2005 third quarter earnings call. Please note that a copy of the press release concerning this earnings call is available at Garmin’s Investor Relations site on the Internet at www.garmin.com/stock. Additionally this call is being broadcast live on the Internet and replay of the web cast will be available until November 26, 2005. A telephone recording will be available for 24 hours after this call. And a transcript of the call will be available on the web site within 48 hours at www.garmin.com/stock under the events calendar tab. This earnings call includes projections and other forward looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, earnings, market shares, product introductions, future demand for our products, and our plans and objectives are forward looking statements. The forward looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10K for the fiscal year ended December 25, 2004 filed with the Securities and Exchange Commission. Attending on behalf of Garmin Limited this morning are Dr. Min Kao, Chairman and CEO; Kevin Rauckman, Chief Financial Officer; Cliff Pemble, Director of Engineering; and Andrew Etkind, General Counsel. The presenters for this morning’s call are Dr. Min Kao and Kevin Rauckman. At this time I would like to turn the call over to Dr. Kao. Good morning. From the press release issued this morning, you can see that we again experienced another record quarter. There were many significant accomplishments since our last earnings report: x We recorded 26% growth in our aviation business, and 31% growth in our consumer business. Sales remained strong in all regions, led by the European region’s 54% increase in revenue. x More than 700K Garmin products were shipped in the 3rd quarter of 2005, a 31% increase over the 3rd quarter of 2004. We shipped our 13 millionth unit during the quarter - a significant benchmark of the strength of the Garmin brand. x The response to our portable navigation devices has been especially strong, resulting in a triple-digit increase in the sales of automotive product line. x The introduction of C-series, i-series, StreetPilot 2720 and M3, not only provides industry leading features such as real-time traffic and text-to-speech function that speaks street names, but also offers the consumer significant choice on price, form factor, functions and capabilities. This large product portfolio allows us to reach a broad spectrum of retail channels. For instance, x Our very popular C-series is distributed by most mainstream electronics retailers including Circuit City, Best Buy, Office Depot, CompUSA, Staples, Fry’s and many outdoor retailers such as BassPro, Cabela, and REI. x The nuvi “personal travel assistant” that was introduced very recently, combines navigation, language translator, travel guide, MP3, audio book, and other features, all in one very elegant, and easy-to-use device, is the latest Garmin innovation, which creates a new category for the mobile market. x Our market position in the automotive and mobile space has also been strengthened by the many partnerships that were made during the quarter, which include: x Our partnership with Sprint/Nextel to offer Garmin Mobile - our entry into the wireless navigation arena, which provides voice turn-by-turn navigation on cellular handsets with a true moving map function which is an industry leading accomplishment. x Our tier-one OEM relationship with Honda, which provides a custom designed GPS navigation module on the 2006 Honda Gold Wing motorcycle. x In the aviation market, we completed our 1st autopilot and radar certifications, which are very significant accomplishments making Garmin the only general aviation provider that can offer all essential cockpit technologies in a single, highly integrated system. x Finally, as a part of our continuing effort to expand our XM offerings, we introduced the GPSMap 396 and 376, which offer pilots and mariners real-time weather information on portable devices. These products are industry firsts and have been received extremely well in their respective markets. x As a part of our growth strategy, we acquired MotionBased Technologies, which provides exciting web-centric functions to Garmin’s current and future customers through a community-based portal. This acquisition enhances Garmin’s location- based technology portfolio and we expect that it will contribute to our mobile business in the long term. x On human resources, we added over 60 new associates company-wide, including 21 new engineering associates, bringing our research and development group to over 660, and to approximately 2,800 total employees worldwide. x With regard to facilities, I am pleased to report that our manufacturing facilities have been running well and successfully delivered the many new products that were introduced year to date. We expect to acquire a new facility in Taiwan in the next few months in order to meet the anticipated increasing demand in 2006 and beyond. Additionally, as a part of our marketing initiative, we are planning to expand our European facility. As we look forward, we anticipate continued success for the remainder of the year. Consumer awareness and interest in GPS continues to grow, which is clearly reflected in our financial results. While aviation and portable automotive product lines currently lead Garmin’s growth, we also see growth opportunities in marine, outdoor, and fitness product lines as we continue to develop new products and expand each product category. Additionally, we continue to explore additional rental car relationships and automotive and motorcycle OEM opportunities. The introduction of Garmin Mobile with Sprint/Nextel also set the stage for Garmin to expand its technologies into the wireless navigation market. The demand for portable navigation devices continues to show a significant expansion, particularly in Europe, and we believe we are positioned to take advantage of this development. In order to capitalize on these opportunities, our marketing team has committed to a significant holiday season advertising campaign around the globe. We will be investing millions of dollars to promote the Garmin brand through extensive TV, radio and print ads. In the aviation market, we continue to be pleased with the strong growth displayed by this business segment. Over 1000 aircraft equipped with Garmin’s revolutionary G1000 integrated cockpit are in the field, and the number will continue to increase as certification on additional airframes continues. In summary, we are very pleased with our results. In light of our strong third quarter results, we have updated our financial guidance to include higher revenue and EPS for fiscal 2005. With that, I would like to turn the call over to Kevin to discuss our financial results and the updated fiscal year 2005 guidance. Well thanks Min and good morning everyone. I’d like to quickly walk through the third quarter financial results and also update everyone on the year to date results. And then end, as Min just mentioned, on our updated guidance that we just came out with this morning in the press release. So to first talk about the third quarter and Garmin’s third quarter revenue reported this morning was $251.3 million up 30% from the year ago. Our North American revenue came in at $163.0 million up 21% from $134.4 million. Our European revenue was $75.6 million up 54% from $49.0 million. And our Asian revenue increased 25% to $12.7 million. The gross margin during the quarter decreased 620 basis points to 51.5% from 57.7% a year ago and down 140 basis points sequentially from the second quarter of this year. But the 51.5% was in line with our earlier expectation. Operating margin was 33.9% compared to 39.8% in the third quarter of ’04 but was up 20 basis points sequentially from the second quarter of 2005. We reported net income of $102.5 million excluding the foreign currency gain that we mentioned in the press release our net income was $72.9 million. We also reported earnings per share for the quarter of 94 cents. This was 67 cents per share excluding the foreign currency gain. So earnings per share for the third quarter increased 52% from the year ago quarter excluding foreign currency the increase was 16%. Our total unit fill for the quarter increased 31% to 708,000 units. This compares to 540,000 units in the third quarter of ’04. As I said we reported gross margin of 51.5% compared to 57.7% a year ago. The gross margin results are within the range of our expectations for the quarter and for the year. You may want to be reminded that in the third quarter of ’04 those results were abnormally high due to extremely high favorable product mix, favorable raw material costs a year ago. We had very low product transition costs in that quarter. And we’d also just begun shipping a G1000 for the first quarter a year ago. Looking at the margins side segment, our consumer gross margin during Q3 of this year was 46.7% and our aviation gross margins during the third quarter came in at 66.5%. We continue to experience strong acceptance of our new product approximately 44% of our third quarter sales were generated from products that have been introduced within the last 12 months. Garmin achieved an operating profit during the quarter of $85.2 million which is an operating margin of 33.9%. This is a decrease of 590 basis points compared to the third quarter of ’04. During Q3 SG&A as a percentage of sales decreased 70 basis points to 9.6% of sales from 10.3% of sales in the year ago quarter. This is a 22% increase in dollars over Q3 of ’04 and it was driven primarily by increased advertising, increased finance and IT expenses, increased call center expenses, and other administrative expenses during the period. Our R&D during Q3 increased 40 basis points to 8% of sales from 7.6% of sales during the third quarter of ’04. This is a 37% increase over the prior period and this increase came primarily to the – due to the hiring of our new engineering staff, an increase in the engineering program costs. We did hire 21 new engineers during the period over the – affects Q2 of ’05 and actually hired just under 100 engineers and engineering associates since a year ago, September 2004. We now employ a total of 662 engineers and engineering associates around the world. Overall our total operating expenses as a percentage of sales decreased 20 basis points to 17.6% from 17.8% in the prior year period. I’m sure you saw that we experienced a $36.4 million foreign currency gain during the quarter as the U.S. dollar strengthened compared to our Taiwan dollar from $31.36 at the end of June to $33.19 at the end of September. This is nearly a 6% change of foreign currency. The majority of our company’s consolidated foreign currency translation gains or losses results from the translation into new Taiwan dollars at the end of each reporting period of the significant cash, receivables, and payables held in U.S. dollars by our company’s Taiwan subsidiary. This translation is required under GAAP because foreign currency as a subsidiary is new Taiwan dollars. To remind everyone, there is minimal cash impact from this foreign currency translation and we expect that the Taiwan subsidiary will continue to hold the majority of its cash in U.S. dollars. We also reported interest income during the third quarter of $4.7 million compared to $2.4 million a year ago. We are currently earning approximately 4.2% pre-tax return on our marketable securities and approximately 2.9% of our total cash balances on a consolidated basis. The effective tax rate during the third quarter came in at 18.7% close to our earlier guidance of 19.4% and about 130 basis points below our third quarter of ’04 rate of 20.7%. We expect that our effective tax rate for 2005 will remain at the year to date rate of approximately 19.1%. Looking at the segments the consumer revenue during the third quarter was $190.7 million and represents a 31% increase over third quarter of ’04. Our consumer segment during the period was 76% of our total revenues and we saw growth across both recreation and automotive produce lines but especially within our automotive produce line where we experienced triple digit growth during the quarter. Our consumer gross margin, as I said, decreased to 46.7% in the quarter from 55.9% a year ago. This was strongly influenced by the product mix within the segment as the automotive produce line became a much larger percentage of our overall consumer segment. In the future it’s our goal to take advantage of the automotive growth opportunity by offering products at a very attractive price in order to drive both revenue and EPS growth. If we continue to be successful with this automotive growth strategy, we could see a more significant change in our margin. Our consumer operating margin decreased 9.2 percentage points down to 30.9% from 40.1% a year ago. This was driven by the reduced gross margin that I just spoke about and increased R&D expenses partially offset by lower SG&A expenses as a percentage of sales. Our aviation revenue during the quarter increased 26% to $60.6 million compared to $48.1 million in Q3 of ’04. Our aviation business therefore was 24% of the total company. The revenue increase within the aviation segment is due to continued shipments of the G1000 cockpit, our other panel met products, and strong shipments of our portable aviation products such as the recently introduced GPSMAP 396 product. Our aviation gross margins increased to 66.5% from 63.1% a year ago primarily due to the favorable product mix within this segment. And our operating margins within the aviation segment were 43.2%. This is an increase of 4.1 percentage points compared to 39.1% in Q3 of ’04. So the overall operating margin within aviation is increase is due to improved gross margins, reduced SG&A and R&D expenses as a percentage of sales. We did experience strong unit growth within both the consumer and the aviation segments during the period. Looking next at the balance sheet, our cash and investments at the end of the quarter increased up to $702.3 million, marketable securities make up $369.7 million of this total cash position. Our accounts receivable balance was $151.8 million at the end of Q3 and represents an increase of $41.7 million from $110.1 million at the end of 2004. And we saw in Q2 our shipment linearity during the third quarter was back end loaded into September which caused the higher receivable balances in the quarter. Our date of sale outstanding of AR is 60 days at the end of Q3. This compares to 44 days a year ago. We also have seen strong cash flow in October as we have now collected a significant amount of the September sales during the early part of Q4. Our inventory increased to $173.2 million at Q3 ’05 comparing to $160.3 million at the end of Q2 of ’05. As expected our inventory days of supply metric remained essentially flat with the second quarter of this year at 121 days. We experienced the following inventory changes during the quarter. Raw materials decreased $2.8 million to $54.1 million and represents about 35 days of inventory. Our work in process at assemblies decreased $2.2 million to $32.2 and represents 22 days of inventory. Our finished goods increased $17.0 million to $98.8 million and this represents 64 days of inventory. Our overall inventory reserve decreased down to $11.8 million during the quarter. We will continue to focus on our supply chain management during the remainder of 2005 and definitely into 2006. On cash flow for the business, our cash flow from operations was $85.9 million during the third quarter of ’05. Free cash flow generated was $81.2 million. And again we define free cash flow as operating cash less capital expenditures. Our cash flow from investing during Q3 was $40.9 million use of cash. Cash flow from financing was $12.9 million use of cash. And overall our CAPEX for the quarter was $4.7 million. Looking next at our year to date financial results, the year to date revenue now stands at $708.5 million at 31% growth over 2004. Our year to date gross margins as we discussed in the press release this morning has come in at 52.6%. Operating income year to date, $240 million and net income of $224.1 million. Our GAAP diluted EPS is now $2.05 which compares to $1.45 in ’04. This 41% increase in EPS includes a $23.8 million FX gain in the year compared to a half a million gain during ’04. So earnings per share results excluding the foreign currency stand at $1.88 per share again a 31% increase compared to the prior year. Breaking down our revenue on a year to date basis by geography, our North American revenue is $449.7 million a 22% increase. Europe year to date is now up 50% at $223.3 million. And our Asian revenue has seen a 42% increase up to $35.5 million. The consumer segment, consumer revenue is $538.4 million year to date a 29% growth rate over 2004 and makes up 76% of our business. The aviation revenue is now $170.1 million through the third quarter of ’05 a 37% increase when compared to year to date ’04. And overall both our consumer and aviation units combined, we’ve shipped just under two million units at $1.99 million a 26% increase from 1,587,000 year to date ’04. Our year to date operating profits of $240 million were 33.9% of sales. SG&A increased as a percentage of sales to 11% from 10.3% a year ago. Our SG&A dollars have increased 39% compared to 2004. Excluding the restructuring costs and legal settlement that we discussed in the second quarter on a year to date basis, SG&A has now increased 31%. Going forward we expect to see higher advertising costs especially in the fourth quarter as a result of our strategic plan to promote the Garmin brand in the consumer market both in the U.S. and increasingly in Europe. Now Garmin Limited will pay a 50 cent per share dividend for all shareholders of record as of December 1, 2005. The payment will be made on December 15 in 2005 and will require approximately $54 million use of cash. Under our share repurchase plan, Garmin during the quarter purchased 352,000 shares for a total use of cash of $14.7 million. For year to date during 2005, we have now purchased 638,000 shares for a total use of cash of $26.7 million. There now remain 2.3 million shares that are available to purchase under our 3 million share repurchase plan. And finally I’d like to give a little bit more detail on our updated fiscal year 2005 guidance. As you saw we’re – we have now moved from representing our numbers in millions to billions. And we are expressing that our full year guidance will be $1.0 billion to $1.02 billion for the full year which is a 31 to 34% growth rate. Our gross margins for the year should come in at 51 to 52%, operating margins 32 to 33%. Therefore our net income range will be between $276 and $282 million excluding any foreign currency. And our earnings per share expectation is now $2.53 to $2.58 which is a 22 to 25% bottom line growth. This assumes an outstanding diluted share count of 109.2 million and overall our CAPEX expectations for the full year just about $30 million. So that’s our update on the financials. I would welcome any questions. We have a Q&A line open. So feel free to join in.

EarningCall_233899

Here’s the entire text of the Q&A from Linear Technology’s (ticker: LLTC) Q3 2005 conference call. The prepared remarks are in a separate article. 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]: Craig Hettenbach with Wachovia Securities. [Q – Craig]: Thanks. Great quarter, guys. Within the area of handheld palm management, can you just discuss if you would have looked back a year ago on some of the designs you guys were getting, really how that market is playing out and how it's proliferated over the last year into new applications. Just a little more detail on handheld power. [A – Lou DiNardo]: This is Lou DiNardo. I think if you look back a year to your question we were engaged with one major handset manufacturer with one IC in the battery charging space. Today as Rich mentioned in his comments we are engaged with four of the top five manufacturers in the world. Battery charging, by safety circuit and now we have authentication IC, moving forward with higher level of integration and differentiated technology based on process as well as I think it's both that we have gone wider and deeper and for us being that it's a relatively new business dramatic quarter-over-quarter-over-quarter growth, it is really a nice experience. [Q - Craig]: Great. And can you also discuss the design of those products over the last year or two, the progression you made in process technology, a little more detail there? [A - Lou DiNardo]: I think one of the things that allows us to differentiate ourselves from what you might consider the prime competitors in this space is that we have a very skilled design team. They operate with the process that we developed ourselves, which is 0.6-micron process. We are migrating to 0.25-micron process. To be able to deliver the kinds of features and functionality that we do in the battery charging as well as the higher levels of integration for charging the LDL circuits and synchronous spot regulators that we have in the low quiescent current arena really speaks to being able to use fine line CMOS processes with adjunct analog capabilities to differentiate ourselves both in performance as well as price. [Q – Craig]: Great. And then if we switch gears to industrial end market, it looks like it's in line with normal season trends. As we go into next year, if you can just talk about some of the design momentum you have there. It's a little longer design in time. But just how things are going with industrial. [A – Mohan Maheswaran]: This is Mohan Maheswaran. Let me talk about a couple of the areas in industrial. One specific area is the video area; we have very strong design momentum in the video KVM space. As you know, we have released a number of new products this year in that segment including cross point switches, delay lines, video muxes and we are seeing a lot of traction with those new products in the KVM space. In addition, the areas of interface products we have recently announced the RS 45-- KVM IC -- 15KB product and that's getting great traction also. We have a number of other areas in the video space, the number of product areas of DCPs, real time cloaks and in general most of these product areas are getting a lot of traction. [A - Rich Beyer ]: I would like to We expand a little bit on that. We introduced a pretty good range of high performance general purpose products in the beginning of '04 and throughout '04 and we began to get design wins on those products in late '04 and early '05. As you know, those are not product from design win to production is a 30 day or 60 day cycle which could be the case of a cell phone or optical driver or desktop core regulator. Those products we tracked very carefully how many design wins we got and when they went into production and we are seeing the ramp of those design wins that we won a year ago or nine months ago. [Q – Doug]: Hi guys, great quarter. If you could, could you comment if the book-to-bill in the third quarter was above the second quarter? [A - Rich Beyer]: We said in the second quarter that the book-to-bill was very, very strong. And all we will say again is the book-to-bill in the third quarter was very, very strong. [Q – Dough]: Right. Can you help out a little bit for me on the expected seasonality as we move out of sort of this strong build period for the high end consumer towards the end of December and into the March quarter. Are you expecting to see, should we be thinking that revenues could go backwards? Or is your new product momentum going to carry through into Q1? [A - Rich Beyer]: We think that while we have got quite strong momentum, there is no question that with more than 50% of our business in the consumer space and in the computing space that we at least are modeling that we will see some reduction in Q1 to Q4 levels. It's conceivable obviously that the strength of new design wins in some of the platforms could see a better performance than where we are currently anticipating. Our expectation is against the backdrop of a strong Q4; Q1 is likely to be down modestly. [Q – Dough]: And then building on that I know that you have some cost reduction efforts that are expected to go in and drive gross margins expand gross margins throughout '06. How should we think about that occurring? Should we model a decline in revenues? [A - Rich Beyer]: I think that we'll be able to see a modest improvements in gross margin in Q1 even if revenues come down modestly. We have talked about the major drivers of gross margin expansion in 2006, being product mix. Some of these industrial products that we talked about as well as improvements that we made in our applications specific products bringing them to finer geometry and so forth. We also talked about the waver partnerships and the consolidation we were doing in back end assembly and test as well as depreciation. Those things will kick in we think we will see modest improvement in gross margins in Q1 and we hope that we can achieve steady improvements in gross margin throughout the course of the year. [Q – Dough]: Great to hear that those are on track. Could you comment on the moment of bookings that you have seen throughout the last quarter and then as we enter the first month of the December quarter. [A - Rich Beyer]: The momentum has been very strong. We began to see real strength in bookings already back in Q2. We told you we had very solid book-to-bill in Q2 and that continued very steadily through July, August and September. Nothing's changed since we closed the quarter. [Operator]: Thank you, sir. Ladies and gentlemen, in order to allow time to answer as many questions as possible, we do ask that you to limit yourself with one question with one follow-up question. [Q – Ross Seymour]: Hi guys congrats on a strong quarter generally speaking of the 13% growth, can you just talk about how that broke down between seasonal uptake which is relatively normal versus the new product traction that you are obviously seeing. [A - Rich Beyer]: I will touch with this with Lou DiNardo. I will touch on those products that fall under the power management part of the puzzle. Certainly there is a seasonal uptick that we experienced in the computing business. Frankly, I think our notebook acceleration is better than what we would see or what we anticipate given that we have continued to gain share in the existing platforms that are in production today. Our handheld business again on a relative typical technicality I think we have over performed and achieved and that's by going wider and deeper into a handheld. And when we say handheld, we should qualify that we use that as had a broad definition for MP3 players, handheld devices such as cellular phones and PDAs as well as blue tooth headsets and a wide variety of portable digital electronics. This is not a seasonal up tick. This is a significant expansion in the account base a broadening and deepening of our product portfolio. [Q – Ross Seymour]: Great, and maybe a follow-up for Dave. You did a good job holding the Op Ex flat in absolute dollars this quarter. How should we think about when that needs to go up maybe by some sort of revenue target when we expect to see the Op Ex in absolute dollars start to increase a little bit? [A - Dave]: In the fourth quarter I indicated that it’s going to be relatively flat with the second quarter. I would anticipate it not going up very significantly. What we are trying to do is drive to the model of 17% to 18% R&D and 14% to 15% SG&A. And so we are modeling to keep operating expenses in check so that we can get to that level. [Q – Ross Seymour]: Great. One quick last one. MP3 players, the wins you have there with the video drivers, is that just for MP3 players that show video or does a collar screen actually need that chip in it as well? [A - Dave]: Yeah. The video amplifiers we have were designed so that the video can be displayed on a large screen. So it's really for driving over a video cable. These amplifiers have very small footprint and very low power and run directly off the batteries and they basically sit inside these MP3 player that can be in cell phones and games and driving video quality out to a display. [Q – Craig Ellis]: Thank you, and congratulations on the quarter. First for Lou and Mohan Maheswaran, it looks like both of you are doing well and gaining market share in your respective businesses. Are we at a point where you have reached a plateau and growth is going to be good going forward but probably on more seasonal levels? Or do you have good visibility into design ends that will continue to produce the market share that will give you above seasonal average growth? [A - Lou ]: I think the point of view have I from running power management business is our goal is overachieve. And we provide guide on a quarter-by-quarter basis which is I think pretty much the way our industry runs. I won't reach out beyond what Rich has done here for the company on a quarterly basis. But we have reconstituted power management business, computing is an important part of our business that we will continue to be an important part of our business. Our notebook expansion is really rather dramatic. Our handheld expansion is dramatic. Our participation in the industrial space for power management. Mohan touched on the video arena and some other industrial applications, power management into the industrial space and into the communications environment are some extent a new landscape. So as we move forward beyond broadening and deepening our handsets or cellular business, the broadening and deepening of our overall power management place I think really holds for high prospects. [A - Mohan]: Yes. Let me add to that. I think in all the segments that we are in, we have been in today, not only is there opportunity to bring more analog single processing content into those segments but all of them are also driving new market applications. As they take a display as an example of that, we have seen most of the TFT-LCD paneling being built more monitors and notebooks and moving to LCD TVs as the demand for LCD TVs moves up there is a drive for better control of some of the gamma curves and picsel control to drive better resolution of those TVs and that drives more demand for programmable buffers, high quality control of the decom amps and ECP control, analog front ends. So I think it's really at a point where we are seeing a demand in the segments continue to increase but the momentum of new products of those markets driving more content for us. [Q - Craig Ellis]: Okay , great. Now I will take another crack at a longer-term question either for Dave or Rich. The company's got a gross margin targeted 50% to 60% you are truly clearly making very good progress. Can you give us some of your views on what the factors are that could take you to that 58% either on a nearer term basis or for more of a longer term basis, what the risks are I guess said differently. You clearly have three or four drivers that you laid out earlier which would seem to get you there next year. What might be the risks that would preclude you from doing that? [A - Rich Beyer]: Yeah I think the single biggest risk is that the overall industry really slows down. We don't see any evidence of that. It's not happening to us as you have seen from the results. But to a certain extent the ability to continue to expand the gross margin does have to do with continued effective utilization of our internal production resources as well as advantages that we get from volume, from our suppliers outside. But I’d rather answer it by a positive. We have very, very specific steps that we have launched and we have articulated about changing the product mix, about improving the gross margins of every single one of our 41 product families and every one of the product managers works fastidiously to do that quarter on quarter. We are forging these partnerships with our foundry partners that are going to yield better WAFER prices in 2006. We were forging ahead with consolidation of our test suppliers, which is getting us lower assembly end test prices for our products. And finally our fab light strategy will allow us to reduce the depreciation next year. All of these factors are in motion and some of them were contributors to what we consider to be a pretty strong improvement in gross margin in this quarter, a quarter in which the consumer in computing businesses in fact grew at a very, very hefty clip. So that's why I indicated I think, we can continue to expand gross margins in Q1 and hopefully steadily throughout next year. If the market craters, then we have to rethink how fast we get to the target. But we are relatively confident that's not going to happen. [Operator]: Thank you, sir. Again, ladies and gentlemen, as a reminder we request that you limit yourself to one question and one follow-up order to allow much time as possible to answer everyone's question. [Q – Tore Savonburg]: Good afternoon. Two questions. First of all, I'm not sure you are willing to disclose this, but how many new products have you introduced year to date and where were you at the same time a year ago? [A - Rich Beyer]: I don't want to comment on the specific number, but we are ahead of a bit ahead of the rate we were at last year. The quality of the new products introduced are extremely powerful. We have the things that Lou and me have talked about have talked about the tremendous success we are seeing in all manner and form of handheld devices. The success we are seeing in all kinds of display products. The notebook product that Lou's organization brought out earlier in the year are really hitting on all cylinders. Our optical products continue to cause us to be the absolute major player in the DVD market and that promises to continue. Our general-purpose products are really getting traction as a matter of fact our general-purpose products were up very nicely in absolute terms from Q2 to Q3. So, the quality of the products that we are introducing is just really stellar. [Q - Tore Savonburg]: Very well and can you just give us a general update on manufacturing how much is now in turnovers is external and current utilization rates and perhaps can you maybe just list your foundry suppliers again so we are updated on that. [A - Rich Beyer]: Okay, internal versus external this quarter we were about 50% internal, 50% external. And utilization this quarter was about 80%. [A - Rich Beyer]: External partners that we have, IBM, AMI and Philips in North America and we have TSMC and UNC charter outside of the United States, then we have other smaller boutique foundries awesomely and test. It's Carson and U.N. some and amp core and chip pack are the major ones and some smaller ones that are isolated products here and there. [Q – Cody]: Thanks, guys. Just let me add my congratulations. Speaking on that question of distribution, maybe more broadly across the entire channel you made a comment in your prepared remarks about the health of the overall demand. Maybe you can talk about what visibility you believe you have to that level of health, how do we keep from seeing some pockets of phantom inventory as we push toward the holidays that crop up in some of these markets? [A - Rich Beyer]: Cody, we have got very good insight into all of our distributors. North America, Europe, Japan, and all parts of Southeast Asia. They give us their inventory ending inventory reports every month. We can get them actually more frequently than that. But as senior management team, we look at them at the end of every single month and look at their shipments out at the end of every month. So, we have very good insight into what's going on in the distributors. Now, if a end customer were to horde product, we don't necessarily get inside into that. Some of our major OEMs we have tight relationships with and we do have insight into what their inventories are. From a distribution standpoint, we have very, very good insights and that's why we made the comment that we did. That they have made the comment that he did that knowing that these inventories remain lean and healthy for the demand that we were seeing at the moment. [Q – Cody]: Great, thanks. And then maybe just some anecdotal granularity. You have so many different end markets, so many different moving parts now, so many parts that seem to be doing very well. Could you give some stratification or some ranking in the areas where you believe you have been most successful with market share gains, both maybe just on an absolute share gains but also in your strategy of growing your dollar content persistently. Doing it in a lot of places you can get down to the ones where you think you are doing the best with? [A –Lou DiNardo ]: This is Lou DiNardo. I think your prelude to the question probably touches on maybe one of the real facets of our strategy that has allows us to perform at the level we do. So many end markets that we play to that the diversity is what alloys a company in a high performance analog business to maintain consistency in both profitability as well as revenue performance. That being said, it's difficult for us to not point to the high end consumer space, whether it's products that come out of analog signal processing group or products that come out of the power inning arena, the high end consumer whether it's handhelds whether it will optical storage, the high end consumer businesses in general are just phenomenal growth stories for us. The ability to deliver leading edge products on fine line CMOS processes that are differentiated both by process as well as a fantastic group of design engineers. It's just a story that we have to keep circling back to. [Q - ]: Congratulations on a great quarter. Two follow-ups and one to kind of go directly to, what we were talking about in high end consume there are. When we were thinking about the growth we saw, you give us a sense of weighing it between the handheld and display and if you saw one stronger than the other and the display, specifically anything granular about it either buffers or anything just across the board? [A - Rich Beyer]: Rather not get into that level of granularity. Suffice it to say, both the handheld business as well as the display business just grew very, very strongly for us in the quarter. And the display business, but we see obviously more constant to initial larger display. So it become an very high end LCD TV, we could be talking about as much as five to six to seven dollars of content whether we talk about a monitor or display that's going into a notebook or the content may be in the two to three dollar range. But we are just seeing ECPs in these displays. We are seeing the DC to DC converters in the displays. Some of the more traditional buffer amplifiers but many displays we are seeing the higher power programmable buffer amplifiers being designed in. It is just a pretty broad based success story that we had with virtually all the major LCD panel manufacturers in the world. [Q - ]: Okay, terrific. Thanks. And then the second follow-up and you gave a list of a lot of the positive specific items about gross margin improvements. Clearly it's not just mix in terms of product lines or divisions because you are shifting away from what we may traditionally think as a communications. If we were to think about potential mix improvements within say consuming or consumer and computing, will we see something there where we see a mix toward better profitability parts as well? [A - Rich Beyer]: Yes. Yes. Part of our efforts underway is in the business to find a higher level of integration. To find ways of delivering similar functionality on lower geometry and we had a certain amount of success in that area, we are seeing growth in display and the some of the products that the go into the handheld space. We are absolutely focused, we want all of the end market segments to, the products in the four end market segments to find ways of enhancing gross markets in the product families and we have substantive efforts to do that. [Operator]: Thank you, sir. As a reminder we request that you limit yourself to one question and one follow-up in order to allow as much time as possible to answer everyone's question. [Q – Steve]: Thank you. I was wondering if you could comment a little bit on whether some of the success you are seeing is more related you think or relative to just releasing more products than competitors or better sales force now. What will be the factors that you think are driving faster growth without competition? [A – Mohan Maheswaran]: I think there is a lot of new products that are coming out with but I think it's back to Rich's point. The products are targeted are specific applications base. We spend a lot of time looking at we bring more value to those markets and some cases we can change the direction of that customer in those markets and application space. So I think that's largely it. But it is continuous push on new products and more new product and then execution both in the development of the process is also in the sales channel. Constituted a large discipline in the company that allows us to really get focused on that execution at the back ends [Q - Steve]: Great that sort of is the follow-up on that, with the products you have out there, is it the new products are you going head to head with competition in winning designs? Or is it a lot of the fact that as you mentioned you are changing the direction of the company because you innovated so much that you are such compelling solution that they have to switch over? [A - Rich Beyer]: I wish we never saw competition out there and our life would be easier. But, I would say that, Steven, in most cases we are seeing formidable competition. We are finding that we understood the application just a little better or our sales people and FAEs did a little bit better job and so forth. I would like to take your question and say we in fact had a superb group of engineers who developed and launched the products as well as a superb group of sales people and FAEs who have found a way to balance selling applications specific products that go into high volumes as well as general purpose products that can enter low volumes and it's just an incredibly strong team of people so that this success is going head to head in virtually all areas where we brought out new products there are incumbents in there that are serving the markets in the past and they are fine companies so we just are not winning everything, but we were winning a little mover than our fair share. [Q - Michael]: Thanks a lot. On the profitability side, either gross or operating, however you want to look at it. You have a lot going on structurally or product-wise some point of which you go sort of add some products, you put out the 6862 but some level where it gets tougher to really drive the incremental profitability and a lot less you do structurally or with product mix? [A - Rich Beyer]: Michael, We think that the 58 to 62 is a very reasonable range for us to get to. It's not easy at all. But we believe that it's clearly within our purview to do it and we think we can do it again if the market is decent market next year in the 2006 time frame to get into at least the low end of that range. The operating margins we think we can get are Op Ex in line as a result of the growth that we are doing. We will need to continue to add people to continue to drive it. But we don't think target modal that we have given at least the low end of the target model is something that we require is super human. Getting above 60% and moving beyond that, we aren't prepared to say that's going to be an easy thing to do. Nor that the business model will in fact afford us to go higher than that. But we will say that's not a possibility. At the moment we think it's imminently doable to get up into the range of the success model that we articulated. [Q – Michael]: That's helpful. And then on the kind of landscape out there in analog. Obviously you are the more successful but there are a lot of companies expanding in our markets right now. You guys are one of the few that successfully pull off acquisitions in the past. As you go from being a long time ago was a niche player to being a more broad and bigger analog player, is acquisition still big acquisition big material? Is acquisition a thought process for you guys and what's your view on the overall industry's use of acquisition? [A - Rich Beyer]: We are one of the unique companies. And we prove than we can do acquisitions. Our company started acquisitions in the wireless land space and built up business there and then we did Ormantech, and then Zicor, we did _____ and we have been very successful at them. Most companies are very concerned about it. The clash of cultures, the ability to integrate different design teams and processes and so forth. We proven, it can be done. It doesn't necessarily it's the right thing for others. Will we keep it as part of our overall strategic arsenal, yes, we will. We don't have anything right now that we think is, imperative that we do. We think about these things all the time. But the moment we think with more than 40 product families we have the great portfolio products and we aren't lacking of anything that causes us to feel like we won't continue to feel successful. But we will keep the option of acquiring product families, design teams, product lines that could augment what we are doing as something that we consider in the future. We don't see any dramatic changes in terms of our competition of feeling differently about their willingness to do acquisitions. [Q - Joe Osha]; Hi, folks let me with my voice of praise here. First in terms of the notebook core regulator business, it seems like that must be an area where you are seeing some particularly strong progress. Is that true? And if so, are you seeing any kind of particularly aggressive pricing there? Is it pretty much just tracking like you expect? [A – Lou DiNardo]: Thank you for the praise. The core regulator business and notebook space is definitely one of the stars that we see in the line today. It's basically a proprietary technology that we have implemented for next generation platforms. We have great successes in North America as rich said with the OEM community the ODM community in Asia and we are gaining traction and having our first design wins for next generation platforms in Japan. But I think we need not overlook the peripheral regulators as well as the lithium Ian battery charging notebook application as well. It's an environment where success breeds success. When you have the world's best core regulator that I believe we do have with the next generation platform, the sales force efficiency and leverage in account start to have a multiplying effect. So the ability to sweep up the peripherals and the ability the battery charger, really all plays well together. [Q – Joe Osha]: Okay. That's great. Thank you. And then just a housekeeping question, I saw you guys accelerated vesting of options which is probably a good idea. Could you maybe give us some insight into what that acts best quarterly run rate will look like for FAS 123, financing. [Q - Raymond Charles]: Thanks. You guys have a long of strong momentum in notebook. Hearing more and more from some of the incumbents in the space that they are reducing their exposure in this segment because that the margins are less compelling and I was wondering if you could touch on who you are running up against in the notebook space and longer term do the margins in this business stack up in line with your long-term goal for the company? Thank you. [A - Rich Beyer]: I think relative to our competition I won't talk about specific competitor or any specific competitors, I would say they may be exiting the space and that may not be at their choice. Certainly it's still a very competitive landscape. I think there is a great deal of differentiation yet to be had add in the notebook platform. Unlike the history thus gone desktop, I think that's changing as well with differentiation where it's still attainable. The notebook platform you have a moving target. The notebook platform is not defined by any one particular vendor, mother boards. So the notebook platform moves as the display size and capability moves as the hard drive capacity and peripheral components move. So with that say lack of stability in what the platform looks like, the power rails and power requirements are dynamic and changing. That affords one the opportunity to differentiate and continue to earn gross margins that are commensurate with that differentiation. So competition if it's bailing that's good. If they are getting pushed out, that's better. [Q - Raymond Charles]: Okay. And just on the gross margin for that business, fairly consistent with the company's overall margins? [A - Rich Beyer]: We don't comment on any particular product line and gross margin. But I think Rich characterized it well, anything we target for the company at this juncture is seeking to obtain our model as an overall company. We don't break it down by any particular product line. [Q – Rick Schaefer]: Hi, guys. I have a couple questions. First is, in TV you had a lot of success on the LCD TV side. Can you give us any idea, some kind of guidance on this big is LC TV for you guys a business in terms of for percent of sales, just some kind of an idea. And maybe comment on the exposure you have with maybe the top five or six OEMs out there, not naming names or anything, but are you overweight any particular guys. And then part of that question also is, if you have a really nearly complete products suite now in LCD TV, especially now with the ambient light sensor and everything. The one the piece I think is missing or that I think is missing is the CCL back light inverter. Is that something that you guys are going to do in-house? If you did it in-house is it something you can license that technology. Is this something you wouldn't need license. You can either acquire the technology or develop it yourself? [A - Rich Beyer]: Okay, Ricky, you got in 17 questions in one question. Not bad. Let's answer the ones we want. [A - Rich Beyer]: The display part of the business look, it's part of the overall high performance consumers. The high performance consumer this quarter was 28%. So handhelds, optical storage and handheld devices make that up. Suffice it to say it's not more of a display business isn't more than 10% and it's predicated on buffers and VCD to converter and PCP and real time clocks and a lot of front ends. We are positioned with, I'm not sure the top five OEMs are but we are positioned with them, whoever they are. Because, we are with all the major guys in Japan, in Taiwan and in Korea in a major way. We don't believe there is much risk in that business because it shifts so diversified. It doesn't mean we were at every platform that Samsung makes and it doesn't make that every one of our products is in an LG Phillips platform and so forth. So it's less than 10% of our business overall. But it's across a broad line of suppliers and in every one of the systems there is a different break down. And then what are some of the other areas that we are not involved in, look, our strategy is to try to add more and more content. We don't want to preannounce product areas that we are going into or not going into. So I don't want to comment specifically on anything mentioned. Suffice it to say, if we think there is value that our customers need and we think we can deliver that value and differentiate ourselves but we will seriously take a look at it. So I think who more activities such as we talked about this, the low dropout regulators offer more contents for handhelds and ambient sensor offer more content for displays we will keep moving down the strategy. Broadening of the product portfolio and deepening the content in target markets are two of the overall arching strategies that we were pursuing. [Q - Ricky Schaefer ]: And just a quick desktop question, you talked about being half the market for core regulators now, you talk about the percent of sales, the desktop represent for you guy or give us an idea a ballpark and comment I guess how does Intel's move to do core affect you guys at all? Just curious. Thanks a lot. [A - Rich Beyer]: This is Lou again. We aren't going to comment on what percent of our sales is in the desktop arena. I have watched this story unfold now for five quarters with the company. And the questions become fewer and fewer as we become more diversified as a power management play and high performance analog company in general. So I think at this juncture to comment on the specifics of the participation desktop has in our business is really not appropriate. But computing in general is still very large business for us and strong business for us. Whether it be desktops where again I think there are levels of differentiation as one can attain a desktop performance moves to Mobile core as desktop moves to levels of performance that outstrip what we have done in previous generations, server architecture are becoming denser and more complex and notebook architecture is very dynamic. Computing business is a good business for us and it's here to stay. [Q – William Louis]: Thank you, could you talk about what your lead times are like if you have seen that stretch out at all and what your terms requirement is for the fourth quarter compared to the third quarter? [A – Dave Zinsner ]: Sure, This is Dave lead times are still in the 4 to 6 range though there are pockets of product families where there are a little higher than that and the turns for a bit less than 40%. [Q – William Louis]: Okay, can you give color potentially where you might see pockets of a little bit beyond the average? [Q – William Louis]: Okay and then for Q4, what would you say given the new mix of your business would be normal seasonality compared to your guidance? And do you have a view on where the, if there is performance compared to the normal seasonality. Will it be in both seasonality and computing and are there any thoughts there? [A -Rich ]: Let me try that. Our expectation if we just apply normal rules of thumb associated with seasonality is that in Q4 the communications industry would be relatively modest growth if any. And that they would start to accelerate again if Q1 and Q2. We will see lower or no growth in Q3 and Q4 we absolutely expect the computing business and the high end consumer business to show continued signs of growth in Q4. Having said all that, I could say the same think, I would say the same thing and I will say the same thing in Q3 that we expected that industrial and communications to be flattish and the other two to grow and all four of them grew. So we were still planning on seeing that seasonal flat to down in communication and in industrial and the strong up in consumer in computing but we proved to be conservative on that score in the most recent quarters. But it is the way we are planning the quarter. [Q – Louis Hardy ]: Thank you. Nice job with the quarter. Just for Q4, with regards to your bookings dollars, would you expect booking dollars to grow sequentially? [A – Dave Zinsner]: We aren't sure. We are not sure. We started the quarter off very strongly. It's a little tough to say. Buff by the time we get to December, the bookings will clearly be, I mean the backlog should clearly be in hand for the Christmas billed and whether or not we start to see bookings associated with Chinese new year hitting us and so forth is, we aren't sure. We can't say categorically that bookings will be an absolute basis this quarter. [Q – Louis Hardy ]: Just on your internal factory utilization, can you give us a sense what that might be in Q4 and since I think you mentioned DSL and the comp space will be down a little bit, I'm interested in the product that might offset any decrease production in that area. [A – Dave Zinsner]: Yes, this is Dave. We were actually expecting utilization to be similar to what they were or what it was in the third quarter. [A -RichBeyer ]: And what might in fact fill the DSL business is some of the parts that we do for the desktop business, continue to be made in Bombay. Some of the general purpose products that are getting real traction and we have brought up a Zicor process in the middle of this year that is now in production. So we have got things that we think will allow us to continue about that same rate. [Operator]: Thank you. Ladies and gentlemen, this does conclude the Q&A session of today's call. I would like to turn this presentation back to Mr. Rich Beyer for further remarks. Thank you, I would like to re-iterate this was a really fine quarter and everybody at Intersil can be very proud. This is the, but another step in the process of Intersil becoming a very, very powerful and a very high performing and performance analog company. This broad base streak is very impressive. It's across so many markets and it's across so many product families. It's the fourth quarter in a row that we have let me say three quarters in a row we have outperformed our peer group. This quarter we were amongst the first analog company to announce so I can't make that statement until we see the results of others, but so far the players that have been discussing their performance have not shown 13% sequential growth or 24% year on year growth in their business. We really think that we created a model that is a powerful high growth model and we demonstrated that we continue to expand gross margin and operating margins and we think this is the beginning of let's say the early stages of a journey to be a truly great analog company and we think we are well on our way and will very well positioned for this to continue for the next several years. Thanks very much for your interest. We look forward to seeing investors and colleagues at some of these future financial conferences and we will see you all go in about 90 day. Thanks, operator.